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-134135-04 date date ------- -------- -------------------------- -------------------------------------------- --------------------------------------------- legend oldco --------------------------------------------------- newco manageco state a b dear --------------- sec_1361 of the internal_revenue_code facts the information submitted states that oldco is a state corporation that elected to be treated as an s_corporation for federal tax purposes for business reasons oldco wants to restructure by undertaking the following transactions this responds to a letter dated date requesting rulings under sec_368 and ---------- step i the shareholders of oldco will form newco as a state general_partnership newco will file an election to be classified as an association_taxable_as_a_corporation for federal_income_tax purposes newco will file an election to be taxed as an s_corporation within the meaning of sec_1361 the shareholders of oldco will contribute all the stock of oldco to newco in exchange for all the partnership_interest in newco these partnership interests are hereinafter termed stock as a result of newco’s step ii election to be treated as a corporation for federal tax purposes newco will immediately make an election to have oldco treated as a qualified_subchapter_s_subsidiary qsub within the meaning of sec_1361 step ii step iii step iv step v step vi newco will form another company manageco as a single member state a limited_liability_company that is disregarded as an entity separate from newco in accordance with sec_301_7701-3 of the procedure and administration regulations step vii step viii oldco will convert from a corporation to a limited_partnership under newco will contribute to manageco a of its stock in oldco state law pursuant to this state conversion manageco will become the general_partner of oldco holding a a partnership_interest and newco will hold the limited_partnership_interest in oldco the b partnership_interest step ix oldco will immediately elect to be treated for federal tax purposes as an association_taxable_as_a_corporation oldco makes the following representations a for valid business purposes oldco an s_corporation incorporated under the laws of state is undertaking steps i through ix above in order to achieve a state law change the state change so that it becomes a successor entity newco that will constitute a limited_partnership under state a law but that in accordance with sec_301_7701-3 will elect to be treated as a corporation for federal tax purposes b all federal tax elections for instance elections in steps ii iii v and ix above will be effective as of the time of the state change so that c d e f g h i newco will never exist as a partnership for federal tax purposes and ii the pretransaction assets of oldco will never be considered as being owned by more than one entity for federal tax purposes immediately following the state change newco will have exactly the same assets and liabilities as those held by oldco prior to the transaction the only exception to the prior sentence is the possibility that a small amount of oldco cash will not be transferred because it will be used to pay expenses of the transaction this oldco cash not received by newco will constitute less than one percent of oldco’s pretransaction net assets the oldco shareholders are receiving nothing in the transaction except a stock interest in newco for each oldco shareholder the fair_market_value of the stock interest in newco received by the shareholder see step iv above will be approximately equal to the fair_market_value of the oldco stock surrendered by the shareholder in the transaction immediately following the state change the oldco shareholders will own the entire stock interest in newco and they will own their newco stock interest solely by reason of their ownership of oldco stock immediately prior to the transaction any expenses properly allocable to the oldco shareholders will be paid_by them and will not be paid_by oldco newco or manageco newco has no plan or intention to redeem or otherwise acquire any of the newco stock interests newco partnership interests issued to the oldco shareholders in the transaction oldco is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 following the completion of step iv steps v through ix will be undertaken as expeditiously as business conditions permit k newco will have fewer than owners none of which would be ineligible to hold stock in an s_corporation and state law does not require different rights to distributions or liquidation proceeds among the owners of newco corporation that newco’s partnership_agreement will not create a second class of stock we have been asked to rule that newco will be eligible to be treated as an s i j and whether newco can elect to treat oldco as a qsub we have also been asked to rule that the transaction qualifies as a reorganization under sec_368 law sec_368 provides that the term reorganization means among other sec_1361 defines an s_corporation as a small_business_corporation for sec_1361 identifies an ineligible_corporation as any corporation which is things a mere change in identity form or place of organization of one corporation however effected which an election under sec_1362 is in effect sec_1361 defines the term small_business_corporation to mean a domestic_corporation that is not an ineligible_corporation and that does not a have more than shareholders b have as a shareholder a person other than an estate and other than a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock a a financial_institution which uses the reserve_method of accounting for bad_debts described in sec_585 b an insurance_company subject_to tax under subchapter_l c a corporation to which an election under sec_936 applies or d a disc or former_disc ineligible_corporation if percent of the stock of the corporation is owned by the s_corporation and the s_corporation elects to treat the corporation as a qsub separate corporation and that all assets liabilities and items of income deduction and credit of a qsub shall be treated as assets liabilities and such items of the s_corporation corporation may elect to treat an eligible subsidiary as a qsub by filing a completed form to be prescribed by the service the service prescribes that qsub status may be elected through a form_8869 sec_1_1361-3 provides guidance on when a qsub election will be effective sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and sec_1361 defines a qsub as a domestic_corporation which is not an sec_1361 provides that generally a qsub shall not be treated as a sec_1_1361-3 of the income_tax regulations provides that an s based solely on the facts and representations submitted we conclude that thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that in the absence of an election to be classified as an association a domestic eligible_entity with a single member will be disregarded as an entity separate from its owner if it has a single owner conclusions newco will be eligible to be treated as an s_corporation newco’s partnership_agreement will not create a second class of stock and newco is eligible to treat oldco as a qsub furthermore provided that each of the three following conditions is met condition a at the time of the state change all necessary elections are made by oldco newco and manageco so that immediately following the state change these three state law entities will be considered a single entity that is treated as an s_corporation for federal tax purposes condition b throughout the transaction once oldco is acquired by newco in step iv above there is no time when the various state entities constitute more than a single entity for federal tax purposes condition c at the time of the state change there is no intent by oldco newco manageco or the persons owning these three entities to change their federal tax status so that these three state law entities would cease to be treated for federal tax purposes as a single entity taxable as an s_corporation we rule as follows newco will not recognize any gain_or_loss on the receipt of the assets and steps i through ix will constitute a corporate_reorganization under sec_368 and f no gain_or_loss will be recognized by oldco upon the exchange of its of assets and liabilities for newco stock pursuant to steps iv and v sec_361 and sec_357 liabilities of oldco in exchange for newco stock under steps iv and v sec_1032 the basis of those assets in the hands of oldco immediately prior to steps iv and v sec_362 transaction will include the period during which such assets were held by oldco sec_1223 newco’s holding_period for the oldco assets it holds as a result of the the basis of the oldco assets in the hands of newco will be the same as the oldco shareholders will not recognize any gain_or_loss on the the basis of the newco stock received by each oldco shareholder will be exchange of their oldco stock for partnership interests in newco treated as newco stock pursuant to step iv sec_354 the same as such shareholder’s basis in the oldco stock surrendered in the exchange sec_358 each oldco shareholder’s holding_period in the newco stock received will include the period during which the shareholder held the oldco stock exchanged therefor provided the oldco stock surrendered was held by such shareholder as a capital_asset on the date of the exchange sec_1223 closing of the tax_year and oldco’s taxable_year continues in the name of newco sec_381 and sec_1 b - a the reorganization under sec_368 and f does not result in a except as specifically set forth above no opinion is expressed concerning the this ruling is directed only to the taxpayer s requesting it sec_6110 federal tax consequences of the facts described above under any other provision of the code in particular no opinion is expressed or implied as to whether oldco is a valid s_corporation prior to the proposed transactions furthermore no opinion is expressed on the effect that any modifications in newco’s partnership_agreement would have under sec_1361 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 sincerely letter is being sent to oldco’s authorized representative enclosures copy of this letter copy for sec_6110 purpose-s carolyn hinchman gray senior counsel branch associate chief_counsel passthroughs and special industries


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc psi - plr-114044-00 date date legend partnership agency project x dear this letter responds to your authorized representative’s letter dated date and subsequent correspondence submitted on behalf of partnership requesting an extension of time to identify buildings as part of a multiple-building project under sec_42 of the internal_revenue_code pursuant to sec_301_9100-1 of the procedure and administration regulations partnership did not identify each building in the project as part of a multiple- building project under sec_42 on line 8b of form_8609 low-income_housing_credit allocation certification for its taxable_year ending on x sec_42 provides that the term qualified_low-income_housing_project means any project for residential_rental_property if the project meets the requirements of sec_42 or b whichever is elected by the taxpayer the project meets the requirements of sec_42 if percent or more of the residential units in such project are both rent-restricted and occupied by individuals whose income i sec_50 percent or less of area_median_gross_income the project meets the requirements of sec_42 if percent or more of the residential units in such project are both rent-restricted and occupied by individuals whose income is percent or less of area_median_gross_income sec_42 provides that for purposes of sec_42 a project will be treated as consisting of only building unless before the close of the 1st calendar_year in the plr-114044-00 project_period as defined in sec_42 each building which is or will be part of such project is identified in such form and manner as the secretary may provide sec_42 provides that following the close of the 1st taxable_year in the credit_period with respect to any qualified_low-income_building the taxpayer shall certify to the secretary at such time and in such form and in such manner as the secretary prescribes such other information as the secretary may require in the case of a failure to make the certification required by the preceding sentence on the date prescribed therefor unless it is shown that such failure is due to reasonable_cause and not to willful neglect no credit shall be allowable by reason of sec_42 with respect to such building for any taxable_year ending before such certification is made under sec_1_42-1t a taxpayer is required to complete the form_8609 on which a housing_credit_agency made the applicable housing_credit allocation and submit a copy of such form_8609 with its federal_income_tax return for each year in the compliance_period sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i 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 in this case good cause has been shown and the requirements of sec_301_9100-1 and sec_301_9100-3 have been met accordingly based on the above law and the representations submitted partnership is granted an extension of time to identify each of the buildings in the project as part of a multiple-building project under sec_42 by filing within days from the date of this letter for all open taxable plr-114044-00 years amended form 8609s low-income_housing_credit allocation certification that include the intended identification on line 8b the amended form 8609s are to be filed with the service_center where partnership files its returns in addition a copy of this letter along with copies of the form 8609s should be sent to the director compliance area small_business and self employed division michigan avenue stop no detroit mi a copy of this letter is enclosed for this purpose no opinion is expressed or implied regarding the application of any other provisions of the code or regulations specifically we express no opinion on whether partnership’s low-income_housing project otherwise qualifies for the low-income_housing tax_credit under sec_42 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file a copy of this letter is being sent to partnership's authorized legal_representative sincerely yours s paul f kugler paul f kugler associate chief_counsel passthroughs and special industries enclosures copy copy of letter


tax_exempt_and_government_entities_division department of the treasury internal_revenue_service washington d c 5e-t eppa ty uniform issue list nov legend taxpayer a taxpayer b company c amount d date e date f month g date h ira x ira y dear this is in response to your request submitted by your authorized representative dated for a waiver of the 60-day rollover requirement in sec_408 of the internal_revenue_code the code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer b maintained ira x with company c taxpayer b died unexpectedly on date e at the age of taxpayer a is the surviving_spouse of taxpayer b and is the beneficiary of ira x following taxpayer b’s untimely death taxpayer a had to administer the estate and handle the family finances taxpayer b had always handled the couple’s finances company c provided taxpayer a with a beneficiary claim statement the claim statement did not indicate that it was for a distribution from an ira taxpayer a mistakenly assumed that ira x was simply a life_insurance_policy and not an ira she chose the lump sum payment offered as an option on the beneficiary claim form on date f taxpayer a received amount d taxpayer a promptly deposited amount d into an estate account she had established at her local bank during month g taxpayer a began the preparation of herfllliltax return and consulted a local_tax preparer at that time taxpayer a learned that the distribution she had received from company c was not a life_insurance payment but was in fact a taxable_distribution from an ira with the help of her daughter taxpayer a withdrew amount d from the estate account and deposited amount d into ira y on date h based on the above facts and representations you request that the service waive the 60-day rollover requirement with respect to the distribution of amount d because the failure to waive such requirement would be against equity or good conscience sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money or any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money or any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the secretary_of_the_treasury may waive the 60-day requirement under sec_408 and d of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 r b provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented by taxpayer a demonstrates that because of the unexpected death of her husband and confusing information provided to her by company c concerning the distribution of amount d she did not roll over amount d into her own ira within the required 60-day rollover period therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount d provided all other requirements of sec_408 of the code except the 60-day rollover requirement are met with respect to such contribution amount d which was deposited into ira y on date h will be considered a rollover_contribution within the meaning of sec_408 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations that may be applicable hereto this ruling is directed solely to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent ‘ a copy of this letter has been sent to your authorized representative in accordance with a power_of_attorney on file in this office if you have any questions regarding this ruling you may contact hrkkkerererrereererreerereeerererekereerreeeererer sincerely yours devel frtbig ren donzell littlejohn manager employee_plans technical group enclosures notice of intention to disclose deleted copy of this letter


t c summary opinion united_states tax_court paul j and allen c prinster petitioners v commissioner of internal revenue respondent docket no 15675-07s filed date paul j and allen c prinster pro sese michael w berwind for respondent gerber judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure this opinion shall not be treated as precedent for any other case respondent determined for an income_tax deficiency of dollar_figure and an accuracy-related_penalty under sec_6662 of dollar_figure at trial respondent moved to amend the pleadings in order to seek a deficiency of dollar_figure and a sec_6662 penalty of dollar_figure the issues for decision are whether to grant respondent’s motion to amend the pleadings whether payments that paul prinster mr prinster and his attorney received from his former employer are excludable from petitioners’ gross_income under sec_104 whether petitioners are entitled to deductions for travel meals entertainment and listed_property expenses claimed on their return and whether petitioners are liable for the sec_6662 accuracy-related_penalty background some of the facts have been stipulated and are so found the stipulations of facts and the attached exhibits are incorporated herein by this reference petitioners resided in california when they filed their petition portions of the record have been sealed at the request of petitioners the controversy underlying this case involves the termination of mr prinster’s employment mr prinster believed the firing to be wrongful and thereafter he suffered mental distress he also experienced hyperlipidemia hypertension and other ailments which he believed to be caused by that mental distress petitioners hired an attorney mr lyon who represented mr prinster in the controversy mr lyon filed suit against the employer the employer paid dollar_figure to settle mr prinster’s claim in at mr prinster’s request dollar_figure of that amount was paid directly to mr lyon the employer accordingly issued mr prinster and mr lyon forms 1099-misc miscellaneous income in the respective amounts paid to each of them mr prinster asked mr lyon whether the settlement was taxable and was advised that it was not because it was attributable to personal injuries petitioners timely filed a joint form_1040 u s individual_income_tax_return for the tax_year they did not report any of the former employer’s payments as income they did report dollar_figure of income on schedule c profit or loss from business from mr prinster’s educational service business they also claimed schedule c expenses of dollar_figure for meals and entertainment dollar_figure for travel dollar_figure for vehicles machinery equipment and dollar_figure for car and truck expenses on date respondent issued a notice_of_deficiency in which he determined that petitioners had an income_tax deficiency of dollar_figure for their tax_year in calculating the deficiency respondent assumed that the income petitioners reported on their schedule c dollar_figure was attributable to the payment from the former employer dollar_figure and thus mistakenly believed that petitioners had underreported that payment by dollar_figure respondent disallowed petitioners’ schedule c expenses for lack of substantiation and other items were disallowed as a result of computational limitations respondent also determined a sec_6662 accuracy-related_penalty of dollar_figure petitioners filed a petition with the court on date respondent has conceded that petitioners have adequately substantiated dollar_figure of schedule c rent or lease expenses however during preparation for trial respondent discovered that the dollar_figure payment from the employer to mr lyon was related to the payment the employer made to mr prinster respondent also learned that the dollar_figure of schedule c income petitioners reported was not from mr prinster’s former employer respondent subsequently moved to amend his answer to conform to the proof to seek an increased deficiency and an increased penalty that accounted for all of the payments from the employer discussion i respondent’s motion to amend the pleadings a party may amend a pleading only by leave of the court and leave shall be given freely when justice so requires rule a when issues not raised by the pleadings are tried by express or implied consent of the parties the court may allow such amendment of the pleadings as necessary to cause them to conform to the evidence presented at trial rule b prejudice to the other party is a key factor in deciding whether to allow an amendment to the pleadings see 98_tc_383 petitioners stipulated for purposes of trial that mr prinster’s former employer paid him a total of dollar_figure at trial respondent moved to amend the pleadings to conform with the evidence regarding the payments respondent seeks an increased income_tax deficiency and an increased sec_6662 accuracy- related penalty for petitioners’ tax_year the notice_of_deficiency placed petitioners on notice that respondent considered the payments from the employer to be includable in their gross_income the extent of the payments including the payment to mr prinster’s attorney was known to petitioners when respondent issued the notice_of_deficiency the amendment to the pleadings does not cause prejudice to petitioners because they knew the correct amount of those payments and of the potential for tax_liability accordingly respondent’s motion to amend the pleadings will be granted 2the stipulation renders moot respondent’s burden of proving the increased deficiency under rule a ii sec_104 exclusion sec_104 provides an exclusion_from_gross_income for damages received on account of personal physical injury or physical sickness to qualify under sec_104 as amended and in effect for amounts received after date taxpayers must show the underlying cause of action was based upon tort or tort type rights and the damages were received on account of personal physical injuries or physical sickness 515_us_323 sec_1_104-1 income_tax regs a tort-based claim the sec_104 requirement that petitioners’ claim arise from a tort or tort type rights obligates us to examine state law because state law determines the nature of the claim venable v commissioner tcmemo_2003_240 affd 110_fedappx_421 5th cir under california law an employer’s right to fire an at-will employee is limited by public policy considerations tameny v atl richfield co p 2d cal at- will employees may recover tort damages from employers if they can show they were discharged in contravention of fundamental public policy id pincite to prevail employees must show that important public constitutional or statutory interests were contravened silo v chw med found p 3d cal mr prinster did have a tort-based wrongful termination claim against his employer he alleged his termination violated the public policy concerning making false statements false statements accountability act of u s c sec_1001 holmes v gen dynamics corp cal rptr 2d ct app whistleblowing cal lab code secs and west supp cal govt code secs west supp refusal to commit illegal acts cal lab code sec west b physical injury or physical sickness for payments made after date congress amended sec_104 to limit the exclusion to amounts received only for physical injuries or physical illness small_business job protection act of publaw_104_188 sec 110_stat_1838 to determine whether the payment received was for a physical injury or sickness we must again examine the taxpayer’s underlying claim connolly v commissioner tcmemo_2007_98 the determining factor is the payor’s intent or dominant reason for making the payment vincent v commissioner tcmemo_2005_95 this is generally determined by reference to the stated reasons for the payment and the accompanying factual setting 98_tc_1 knoll v commissioner tcmemo_2003_277 generally courts have respected the allocation made when it is an arm’s-length agreement made in good_faith stadnyk v commissioner tcmemo_2008_289 see 79_tc_680 affd without published opinion 749_f2d_37 9th cir petitioners contend that mr prinster suffered physical sickness in the form of headaches vomiting diarrhea hypertension hyperlipidemia and diabetes mr prinster’s ailments are not of the type contemplated by sec_104 emotional distress is not treated as a physical injury or physical sickness except to the extent of amounts paid for medical_care attributable to the emotional distress sec_104 flush language physical manifestations of emotional distress such as fatigue insomnia and indigestion do not transform emotional distress into physical injury or physical sickness connolly v commissioner supra in lindsey v commissioner tcmemo_2004_113 affd 422_f3d_684 8th cir the taxpayer also suffered from hypertension and stress-related symptoms and we held that these symptoms related to emotional distress rather than physical sickness absent proof of medical_care expenses petitioners have not demonstrated any physical injury or physical sickness that gives rise to the sec_104 exclusion furthermore petitioners have not sufficiently shown that mr prinster’s ailments resulted from his termination the record reflects that mr prinster had already been suffering from hyperlipidemia and the record further suggests that mr prinster’s posttermination symptoms could also have been the product of his diet and lifestyle the record thus fails to establish the cause of mr prinster’s sickness petitioners also failed to demonstrate that the payments from his employer were for physical injuries though the sealed portion of the record indicates that the payments were for alleged emotional and related physical injuries there is no specificity about the amount if any that could be allocated to either in the absence of a basis for allocation we presume the entire amount is not excludable see 35_f3d_93 2d cir connolly v commissioner supra sodoma v commissioner tcmemo_1996_275 affd without published opinion 139_f3d_899 5th cir c payment to mr lyon petitioners contend that mr prinster received only dollar_figure from his employer and that the dollar_figure paid directly to mr lyon should therefore not be included in petitioners’ gross_income gross_income includes all income from whatever source derived unless specifically excluded sec_61 sec_61 is broadly interpreted but exclusions from income are narrowly defined commissioner v schleier u s pincite a taxpayer cannot exclude economic gain from gross_income by assigning that gain in advance to another party because gains are taxed to those who earn them 543_us_426 281_us_111 mr prinster’s former employer agreed to pay him dollar_figure petitioners were entitled to the dollar_figure and the dollar_figure payment therefore belonged to petitioners accordingly petitioners cannot avoid the incidence_of_tax on that payment simply because that portion of the settlement was redirected to mr lyon the cause of action generating the dollar_figure payment belonged to mr prinster mr lyon was owed the amount of dollar_figure by mr prinster for legal services rendered to mr prinster moreover mr prinster and his employer agreed that each party shall bear his or its own costs and attorneys’ fees the employer made the dollar_figure payment directly to mr lyon solely because mr prinster requested it to do so the transaction is thus treated as if mr prinster had received the payment from his employer and then paid that amount over to mr lyon the fact that mr prinster arranged to have his employer make a portion of the payment directly to mr lyon does not change the result accordingly we hold that petitioners must include in their gross_income the dollar_figure paid_by the former employer even though a portion was paid to mr lyon d conclusion although petitioners have demonstrated that mr prinster had a tort-based claim they have not established that any of the payments from his employer were for physical injury or physical sickness petitioners therefore cannot exclude these payments from their gross_income iii schedule c expenses deductions are a matter of legislative grace and taxpayers bear the burden of establishing entitlement to claimed deductions rule a 503_us_79 taxpayers are required to maintain adequate_records to establish the amount of their income and deductions sec_6001 sec_1_6001-1 e income_tax regs when a taxpayer establishes that he has incurred deductible expenses but is unable to substantiate the exact amounts we generally can estimate the deductible amount if sufficient evidence exists to provide a rational basis for the estimate 39_f2d_540 2d cir 85_tc_731 however sec_274 prohibits us from estimating a taxpayer’s travel entertainment and listed_property eg automobiles and other_property used for transportation_expenses 50_tc_823 affd per curiam 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date to deduct the items in dispute all of which are subject_to strict substantiation requirements petitioners must substantiate either by adequate_records or by sufficient evidence corroborating their own statements a the amount of each expense b the time and place the expense was incurred c the business_purpose of the expense and d the business relationship to them of each expense incurred sec_274 beale v commissioner tcmemo_2000_158 expenses subject_to sec_274 requirements may be substantiated by adequate_records where the taxpayer maintains an account book a diary a log a statement of expenses trip sheets or similar records prepared contemporaneously with the expenditure supplemented by other documentary_evidence sec_1_274-5 income_tax regs sec_1_274-5t temporary income_tax regs fed reg date substantiation by other_sufficient_evidence requires the production of corroborative evidence in support of a taxpayer’s statement specifically detailing the required elements sec_1_274-5t temporary income_tax regs fed reg date mr prinster has failed to substantiate his schedule c expenses the only evidence supporting the deductions he claimed is his testimony that the expenses were incurred he did not produce adequate_records or other_sufficient_evidence to corroborate that testimony and he therefore has not established the amounts of these expenses with the exception of the dollar_figure of rent or lease expenses that respondent has conceded mr prinster is not entitled to deductions for his schedule c expenses iv sec_6662 penalty sec_6662 and b and imposes an accuracy- related penalty of percent on the portion of an underpayment attributable to negligence disregard of rules or regulations or a substantial_understatement_of_income_tax negligence includes any failure to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs an understatement is substantial if it exceeds the greater of percent of the tax required to be shown on the return for the taxable_year or dollar_figure sec_6662 85_tc_934 petitioners had a substantial_understatement_of_income_tax because their tax_liability was understated by dollar_figure petitioners were also negligent in that they failed to properly substantiate their claimed schedule c deductions petitioners contend they should not be liable for the sec_6662 penalty on the portion of the deficiency attributable to the payments from mr prinster’s former employer because mr lyon advised mr prinster that the payments were not taxable sec_6664 provides a defense to the sec_6662 penalty for any portion of an underpayment where reasonable_cause existed and the taxpayers acted in good_faith in determining whether a taxpayer reasonably relied in good_faith on professional advice all facts and circumstances must be considered including the taxpayer’s education sophistication and business experience sec_1_6664-4 income_tax regs generally the most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax_liability sec_1_6664-4 income_tax regs mr prinster asked his attorney mr lyon whether the settlement was taxable mr lyon incorrectly advised that it was not taxable because mr prinster’s ailments were considered physical injuries petitioners are not tax sophisticated and they relied on mr lyon’s advice it is generally reasonable for the taxpayer to rely on an attorney’s tax_advice as to a matter of tax law and the taxpayer is ordinarily not required to challenge that advice 469_us_241 here the reliance was in good_faith and it was reasonable for petitioners to rely on their adviser’s advice on the transaction sec_1_6664-4 income_tax regs accordingly petitioners are not liable for the sec_6662 penalty on the portion of the underpayment attributable to their failure to report the dollar_figure settlement with respect to petitioners’ claimed schedule c expenses however petitioners were negligent in failing to maintain proper substantiating records and are liable for the sec_6662 accuracy-related_penalty we leave to the parties the computation of the correct amount of the sec_6662 penalty to reflect the foregoing an appropriate order will be issued and decision will be entered under rule


internal_revenue_service number info release date index number ---------------------------- -------------- ------------------ ------------------------ department of the treasury washington dc person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b1 - genin-144160-04 date january taxpayer -------------- dear ------------------ this responds to the recent letter from your representative in which it was requested that we recognize taxpayer’s election to be an s_corporation effective date revproc_2003_43 applies to qualified taxpayers requesting relief for a late s_corporation_election on or after date or pending with the service on that date a taxpayer who has not filed a tax_return for the first year in which it intended to be an s_corporation must request relief under revproc_2003_43 within months of the due_date of the taxpayer’s first tax_return a taxpayer who has filed a tax_return for the first year in which it intended to be an s_corporation must request relief under revproc_2003_43 within months of the due_date of the taxpayer’s first tax_return requests for relief under revproc_2003_43 are filed at the location designated in the instructions to form_2553 please see revproc_2003_43 for the procedural requirements for filing an s_corporation_election under the revenue_procedure revproc_2003_43 is available at http www irs gov if a taxpayer does not meet the requirements in revproc_2003_43 it generally must request relief for a late s_corporation_election through a private_letter_ruling announcement copy enclosed provides guidance on seeking relief for late s_corporation elections the procedures for requesting a private_letter_ruling are set out in revproc_2004_1 copy enclosed in addition revproc_2004_1 requires taxpayers to submit a user_fee along with their ruling_request the standard user_fee for a private_letter_ruling is dollar_figure however taxpayers with gross_income of less than dollar_figure million on their tax_return for the most recent 12-month taxable_year qualify for a reduced user_fee in the amount of dollar_figure if you qualify for the reduced fee you must include a statement certifying your gross_income for the last 12-month taxable_year otherwise the higher fee will apply if you decide to submit a formal request for a private_letter_ruling please review appendix b of revproc_2004_1 and be certain to include all required procedural statements also include the proper user_fee and any documents that substantiate your intent to be an s_corporation from inception please refer your request to our office by adding the following to the address attn cc pa t p o box ben franklin station washington dc direct to cc psi room please contact -------------------------at --------------------- not a toll-free call we hope that this information is helpful to you if you have additional questions s dianna k miosi sincerely dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries enclosures announcement revproc_2004_1


t c memo united_states tax_court melissa s spranger petitioner v commissioner of internal revenue respondent docket no filed date melissa s spranger pro_se bric r skinner for respondent memorandum findings_of_fact and opinion carluzzo special_trial_judge this case was heard pursuant to the provisions of sec_7443a of the internal_revenue_code_of_1986 as amended and in effect at the time the petition was filed and rule sec_180 sec_181 and sec_182 of the tax_court rules_of_practice and procedure unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for respondent determined a deficiency in petitioner's federal_income_tax in the amount of dollar_figure the issue for decision is whether petitioner is entitled to various deductions claimed on a schedule c included with her federal_income_tax return the resolution of this issue depends upon whether during petitioner's dog breeding activity constituted a trade_or_business within the meaning of sec_162 findings_of_fact some of the facts have been stipulated and are so found petitioner filed a timely federal_income_tax return on that return petitioner computed her taxable_income and federal_income_tax liability in accordance with the cash_receipts_and_disbursements_method of accounting at the time that the petition was filed she resided in omaha nebraska during petitioner was employed as a building official inspector by the city of gross pointe woods michigan her work schedule was somewhat irregular however she routinely worked between and hours per week she received and properly reported wage income in the amount of dollar_figure from this employment as of the date of trial petitioner had been involved in breeding and showing pomeranian dogs for over years her interest in pomeranian dogs arose when she was only years old for federal_income_tax purposes in she and her former husband began reporting income earned and expenses paid in connection with this activity on schedules c included with their federal_income_tax returns petitioner and her former husband separated in and were divorced in from through the date of trial petitioner never realized or reported on a federal_income_tax return a net profit from the activity the income and expenses with respect to the activity reported on petitioner's federal_income_tax returns from through inclusive are summarized in the following table year income bxpenses net_loss s dollar_figure dollar_figure big_number big_number big_number big_number big_number on her schedule c petitioner reported the following items income dollar_figure bxpenses advertising sec_891 depreciation big_number insurance big_number interest big_number repairs big_number supplies big_number tax travel etc big_number other big_number big_number net_loss big_number during petitioner owned dogs some of the above expenses related to the maintenance including feeding grooming and veterinarian services of those dogs the dogs were kept in an addition to petitioner's residence that was constructed for that purpose the dollar_figure of income petitioner reported on the schedule c consists of a single stud fee dollar_figure and the sale of one puppy dollar_figure stud fees and puppy sales are the only ways in which petitioner expected to generate income from her dog breeding activity dog breeders gain recognition for themselves and their dogs by entering their dogs in shows sanctioned by the american kennel club and sponsored by various organizations dogs that have successfully competed in shows attract customers interested in obtaining stud services or purchasing puppies from dogs owned by the breeders during petitioner entered only five of her dogs in various shows the shows were held at various locations in different states some shows were scheduled in clusters over a three or four-day period typically petitioner was required to pay a fee to enter her dogs ina show the shows did not award cash prizes to the winners as explained above the financial reward for winning came in the form of enhancing the winner's reputation for breeding purposes which in turn resulted in more demand and higher fees for the breeding services of the winner petitioner traveled to the dog shows with an associate in petitioner's fleetwood motor home petitioner purchased the motor home in for dollar_figure on the schedule c included with her return petitioner indicated that the motor home was used exclusively in her dog breeding business petitioner also owned a ford bronco that was purchased in for dollar_figure on the schedule c included with her return she indicated that percent of the usage of the bronco was attributable to her dog breeding activity petitioner used the bronco to commute to her job with gross pointe woods a distance of over miles from her residence petitioner did not keep a separate set of books_and_records for her dog breeding activity some of the expenses relating to the activity were paid from a personal joint checking account that petitioner maintained with her former husband she also kept copies of receipts for some of the expenses related to her dog breeding activity because of complications related to her divorce petitioner cannot locate the relevant check registers or any receipts since only five of petitioner's dogs generated any income petitioner did not maintain any records that tracked income and expenses attributable to a particular dog she did not develop a business plan for the year in issue or for any other year petitioner never consulted with any professionals in order to develop a strategy that would allow her to profit from her dog breeding activity nor did she alter her practices from one year to the next in order to increase the likelihood for profit petitioner never had her dogs appraised and she did not insure them relevant for our purposes in the notice_of_deficiency respondent disallowed the net_loss reported on the schedule c respondent explained the disallowance as follows it is determined that the schedule c loss pertaining to your dog operations was not incurred in transactions entered into for profit therefore the loss of dollar_figure shown on your return is not allowable opinion deductions are a matter of legislative grace a taxpayer who claims a deduction must identify the specific statute that allows for the type of deduction claimed and demonstrate that all of the requirements of the statute have been satisfied 503_us_79 292_us_435 although not expressly referred to by petitioner it is clear that in this case petitioner relies upon sec_162 in support of the deductions here in dispute in general sec_162 allows a deduction for all ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business the term trade_or_business is not precisely defined in the internal_revenue_code or the regulations promulgated thereunder however it is well established that in order for an activity to be considered a taxpayer's trade_or_business for purposes of sec_162 the activity must be conducted with continuity and regularity and the taxpayer's primary purpose for engaging in the activity must be for income or profit 480_us_23 consistent with the manner in which petitioner reported the income and expenses attributable to petitioner's dog breeding activity on her federal_income_tax return she argues that she engaged in that activity during with the intent to make a profit and therefore the activity constitutes a trade_or_business she further points out that her return for taxable_year was examined and respondent allowed her to treat the dog breeding activity as a trade_or_business respondent argues that petitioner's dog breeding activity did not constitute a trade_or_business during because petitioner did not engage in that activity with the requisite intent to profit consequently according to respondent petitioner is only entitled to deduct the expenses related to petitioner's dog breeding activity as allowable under sec_183 the test of whether a taxpayer conducted an activity for profit is whether he or she entered into or continued the activity with an actual or honest objective of making a profit 94_tc_41 78_tc_642 affd without opinion 702_f2d_1205 d c cir sec_1_183-2 income_tax regs although a reasonable expectation of profit on taxpayer's part is not required the profit objective must be bona_fide as determined from a consideration of the surrounding facts and circumstances keanini v commissioner supra pincite dreicer v commissioner supra pincite 72_tc_411 affd without published opinion 647_f2d_170 9th cir 45_tc_261 affd 379_f2d_252 2d cir whether petitioner engaged in her dog breeding activity with an actual and honest objective of realizing a profit must be redetermined year-to-year taking into account all of the relevant facts and circumstances golanty v commissioner supra pincite sec_1_183-2 and b income_tax regs more weight is given to objective facts than to petitioner's statement of her intent 72_tc_659 sec_1_183-2 income_tax regs respondent's determinations with respect to other years if any may be taken into account but are not conclusive the following factors which are nonexclusive should be considered in the determination of whether an activity is engaged in for profit the manner in which the taxpayer carried on the activity the expertise of the taxpayer or his or her advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer's history of income or losses with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayer and elements of personal pleasure or recreation sec_1_183-2 income_tax regs no one factor is determinative in and of itself and our conclusion with respect to petitioner's profit_motive does not depend upon merely counting up those factors that suggest the presence of a profit_motive and comparing the number to those factors that indicate the opposite sec_1_183-2 income_tax regs taking into account the above factors and considering the facts and circumstances relating to petitioner's dog breeding activity as discussed more fully below we are not persuaded that during petitioner engaged in that activity with the intent to profit that is necessary to consider the activity a trade_or_business for purposes of sec_162 the activity did generate gross_income however not all income producing activities constitute trades_or_businesses within the meaning of sec_162 cf commissioner v groetzinger supra pincite for the year in issue the great majority of expense deductions attributable to petitioner's dog breeding activity were related to the fleetwood motor home and bronco that petitioner owned deductions for the fixed costs of the those vehicles including depreciation interest and insurance totaled dollar_figure deductions for the marginal costs attributable to those -- - vehicles including repairs maintenance and actual travel_expenses totaled dollar_figure the marginal costs alone exceeded the income from the activity by a factor of we are particularly influenced by petitioner's failure to consider the extent of stud fees and puppy sales necessary to cover not only the costs of operating the motor home and truck but the other expenses related to the activity as well she did not develop a business plan or prepare a break-even analysis nor did she record the particular income earning history of any of her dogs so that the profit potential of the activity could be better evaluated the following portion of petitioner's cross examination demonstrates the complete lack of the type of planning that is indicative of an activity engaged in for profit q prior to the time when you began deducting losses for your dog activity did you ever prepare a business plan a no sir q between and -- well until now have you ever prepared any profit or loss statements other than a final tallying for your tax returns a no sir q did you ever prepare a break-even analysis or any projections of what you might have to earn to make a profit a no q did you prepare any budgets for the activity a no sir q okay just based upon your history of losses in the activity how much would you have to earn this year to make a profit on the activity as a whole a with the prior years and losses qo yeah a i would have no idea off the top of my head qo during and subsequent years for the business did you keep any records that would show the expenditures made with respect to any individual dog a no sir qo okay did you make any attempt since and subsequent years to apportion the expenses to determine how much each animal was costing you a no sir since only five of petitioner's dogs generated any income although she owned dogs during and deducted the costs of maintaining all of those dogs petitioner has an obvious interest in owning raising and showing pomeranian dogs however we find that during the year in issue her interest which developed when she was a child was personal in nature and not based upon the necessary profit_motive that would allow for the activity to be considered a trade_or_business within the meaning of sec_162 of course deriving personal satisfaction out of an activity does not necessarily indicate the absence of an intent to profit however where the possibility for profit is small given all the other factors and the possibility for gratification is substantial it is clear that the latter possibility constitutes the primary motivation for the activity smith v commissioner tcmemo_1997_503 citing burger v commissioner t c memo sec_1_183-2 income_tax regs weighing the personal pleasures derived from petitioner's involvement with her dogs against the profit potential that could result from her breeding activity we are satisfied that the breeding activity was conducted more for the purpose of subsidizing the costs of maintaining and showing her dogs than for profit our conclusion on the point is further supported by the history of losses_incurred by petitioner since she began treating the activity as a trade_or_business for federal_income_tax purposes w here losses continue to be sustained beyond the period which customarily is necessary to bring the operation to profitable status such continued losses if not explainable x may be indicative that the activity is not being engaged in for profit sec_1_183-2 income_tax regs during petitioner deducted a dollar_figure loss attributable to her dog breeding activity since when petitioner began reporting the income and expenses attributable to her dog breeding activity she has never realized a profit over a 4-year period starting in expenses exceeded income by almost dollar_figure during that period annual income ranged from a low of dollar_figure to a high of dollar_figure the magnitude of annual and cumulative losses compared to the low levels of income generated strongly indicates that petitioner did not conduct the activity for profit smith v commissioner supra burger v commissioner supra because petitioner's dog breeding activity was not an activity engaged in for profit the activity cannot be considered a trade_or_business for purposes of sec_162 therefore she is only entitled to deduct the expenses_incurred in that activity in accordance with sec_183 it follows and we hold that respondent's determination in this regard is sustained to reflect the foregoing decision will be entered for respondent


t c summary opinion united_states tax_court derek w somogyi petitioner v commissioner of internal revenue respondent docket no 6433-11s filed date derek w somogyi pro_se chong s hong for respondent summary opinion dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the years at issue petitioner’s additional tax due was paid before the issuance of the notice_of_deficiency respondent issued a statutory_notice_of_deficiency to petitioner for and in which he determined accuracy-related_penalties under sec_6662 of dollar_figure and dollar_figure respectively the issue for decision is whether petitioner is liable for accuracy-related_penalties under sec_6662 for and some of the facts have been stipulated and are so found the stipulation of facts and the exhibits received in evidence are incorporated herein by reference petitioner resided in california when the petition was filed background petitioner has a bachelor of science degree in mechanical engineering petitioner worked with andersen consulting as a management consultant on large system implementations using software from oracle or sap a german software company between and or petitioner then went to work for teton village sports until and then with wilson properties-3 llc wilson from until for the period through petitioner was also an independent_contractor for fusion consulting fusion petitioner was the contractor responsible for testing and training in relation to the implementation of sap software petitioner received dollar_figure during for his work with fusion and wilson in petitioner received dollar_figure for his work with wilson and his previous work for fusion at the inception of petitioner’s work as an independent consultant petitioner’s friends suggested that he incorporate his business early in petitioner’s friends recommended that he talk to the tax doctor corporation tax doctor operated by a person representing himself to be dr lawrence murray murray petitioner spoke with murray and members of murray’s staff petitioner’s discussions with murray and his staff consisted mostly of a bit of a sales pitch they explained how they would handle his tax_return preparation what the tax savings would be and the structure they would use murray proposed setting up two corporations and preparing petitioner’s individual and corporate federal_income_tax returns murray explained to petitioner that one corporation would be operational and the other would focus on management petitioner was unsure at trial which corporation was the operations entity and which was the management entity under the agreement with murray petitioner would pay the tax doctor as a fee for setting up the structure the amount of the tax savings generated by the use of the structure petitioner paid the tax doctor about dollar_figure to carry out the proposal petitioner received no guaranty or written opinion letter from the tax doctor on the efficacy of the proposed structure regarding his tax_liability petitioner did not ask murray or his staff about the legality of their proposal before agreeing to use it petitioner did discuss the tax doctor’s proposal with his certified_public_accountant c p a petitioner described the proposal and told her that under the plan he would pay the tax doctor about dollar_figure which he would then deduct the following year his c p a told him that she was willing to incorporate his business activity but she would not do what the tax doctor had proposed because it was very aggressive petitioner despite the advice of his c p a decided to accept the proposal of the tax doctor petitioner did not present the tax returns prepared by the tax doctor to his c p a or any other tax professional for consideration petitioner filed his form_1040 u s individual_income_tax_return showing taxable_income of zero nev edel one of the corporations the tax doctor formed for petitioner filed a form_1120 u s_corporation income_tax return for the fiscal_year ending fye date nev edel reported gross_receipts of dollar_figure total income of dollar_figure and total deductions of dollar_figure the largest single deduction was dollar_figure for contracted services smoge corp the other corporation the tax doctor formed for petitioner filed a form_1120s u s income_tax return for an s_corporation smoge corp reported total income of dollar_figure and total deductions of dollar_figure the largest single deduction was dollar_figure for contracted services petitioner testified that the dollar_figure in gross_receipts nev edel corp reported was the income he earned from fusion consulting petitioner had the tax doctor prepare form sec_1040 and 1120s for and although that was not required under the original deal petitioner paid a flat fee of dollar_figure for the preparation of the three returns for each of the years and as a result of respondent’s examination of petitioner’s returns for and petitioner agreed to pay additional individual income_tax of dollar_figure for and dollar_figure for murray was prosecuted and convicted in of federal crimes associated with the preparation of his own returns and the returns of others discussion sec_7491 imposes on the commissioner the burden of production in any court_proceeding with respect to the liability of any individual for penalties and additions to tax 116_tc_438 trowbridge v commissioner tcmemo_2003_164 aff’d 378_f3d_432 5th cir in order to meet the burden of production under sec_7491 the commissioner need only make a prima facie case that imposition of the penalty or addition_to_tax is appropriate higbee v commissioner t c pincite respondent determined that for and petitioner underpaid a portion of his income_tax because of negligence or disregard of rules or regulations and that there was a substantial_understatement_of_income_tax sec_6662 and b and imposes a penalty on the portion of an underpayment_of_tax attributable to any one of various factors including negligence or disregard of rules or regulations and a substantial_understatement_of_income_tax negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code see sec_6662 sec_1_6662-3 income_tax regs a substantial_understatement includes an understatement_of_tax that exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 sec_1_6662-4 income_tax regs petitioner reported tax_liabilities of zero for and zero for petitioner’s actual tax_liabilities were dollar_figure for and dollar_figure for there were substantial understatements of petitioner’s individual income_tax for both and since the understatement amounts will both exceed dollar_figure which is greater than of the tax required to be shown on both returns because there are substantial understatements for and the court need not decide whether the underpayments are due to negligence the court concludes that respondent has produced sufficient evidence to show that accuracy-related_penalties under sec_6662 are appropriate for and sec_6664 provides that the accuracy-related_penalty under sec_6662 shall not apply to any portion of an underpayment if it is shown that there was reasonable_cause for the taxpayer’s position and that the taxpayer acted in good_faith with respect to that portion 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 the pertinent facts and circumstances sec_1_6664-4 income_tax regs sec_1_6664-4 income_tax regs specifically provides circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of all the facts and circumstances including the experience knowledge and education of the taxpayer the most important factor is the extent of the taxpayer’s effort to assess his proper tax_liability for the year sec_1_6664-4 income_tax regs petitioner argues that he was tricked into an improper tax strategy he testified that he relied in good_faith on the representations and résumé of murray indicating that murray was a competent and honest professional petitioner emphasizes that he has acknowledged the discrepancy and paid the tax for and the general_rule is that a taxpayer has a duty to file a complete and accurate tax_return and cannot avoid that duty by placing responsibility with an agent 469_us_241 88_tc_654 in limited situations good-faith reliance on the advice of an independent competent professional in the preparation of the tax_return can satisfy the reasonable_cause and good_faith exception boyle u s pincite 94_tc_473 reliance on the advice of a professional tax adviser however does not necessarily demonstrate reasonable_cause and good_faith sec_1_6664-4 income_tax regs all facts and circumstances must be taken into account sec_1_6664-4 income_tax regs the advice must be based upon all pertinent facts and the applicable law sec_1_6664-4 income_tax regs the advice must not be based on unreasonable factual or legal assumptions sec_1_6664-4 income_tax regs the advice cannot be based on an assumption that the taxpayer knows or has reason to know is unlikely to be true id when a transaction has obviously suspect tax savings it should put a reasonable taxpayer under a duty_of inquiry to make a good-faith investigation of the underlying viability financial structure and economics of the transaction roberson v commissioner tcmemo_1996_335 aff’d without published opinion 142_f3d_435 6th cir see also 440_f3d_375 6th cir aff’g tcmemo_2004_279 990_f2d_893 6th cir a reasonably prudent person would have asked a qualified_tax adviser if this windfall was not too good to be true aff’g donahue v commissioner tcmemo_1991_181 petitioner holds a bachelor of science degree in engineering and has worked as an independent_contractor for various businesses petitioner admitted at trial that murray was not a competent professional but was instead a criminal petitioner testified that murray through the tax doctor told him that setting up two corporations would save him dollar_figure from his otherwise dollar_figure tax_liability for the first year in fact petitioner reported zero individual income_tax for and and his subchapter_c_corporation reported zero income_tax for fye date and among the facts and circumstances to be considered when determining whether a taxpayer reasonably relied in good_faith on tax_advice is the taxpayer’s purposes for entering into and structuring a transaction in a particular manner sec_1_6664-4 income_tax regs petitioner did not testify to any business_purpose for using the tax doctor structure during his testimony petitioner seemed unable to describe how the tax doctor structure would work other than that one corporation was for operations and the other was for management petitioner did not appear to be able to describe how the tax doctor structure was able to negate his federal_income_tax liabilities for and he also did not recall any specific questions he may have asked the tax doctor about the line items on his income_tax returns for and and he added that he did not ask the tax doctor whether the proposed structure was legal for tax purposes the general_rule in the court_of_appeals for the ninth circuit to which this case would be appealable were it appealable is that a taxpayer cannot negate the accuracy-related_penalty through reliance on the promoter of a transaction or on other advisers who have a conflict of interest 471_f3d_1021 9th cir aff’g tcmemo_2004_269 see also 94_tc_637 aff’d without published opinion 956_f2d_274 9th cir and aff’d without published opinion sub nom cowles v commissioner 949_f2d_401 10th cir courts have repeatedly held that it is unreasonable for a taxpayer to rely on a tax adviser actively involved in planning the transaction and tainted by an inherent conflict of interest 135_tc_199 a tax adviser who has a financial stake in the transaction has a conflict of interest pasternak v commissioner f 2d pincite canal corp v commissioner t c pincite petitioner testified that he was assured that murray through the tax doctor could save him dollar_figure in tax in the first year and that those savings would be petitioner’s fee to the tax doctor for the structure and for the preparation of petitioner’s first year’s returns using the structure because the tax doctor’s fee was to be determined by petitioner’s putative tax savings it was in the financial interest of the tax doctor to compute large tax savings petitioner knew or should have known that since the tax doctor controlled the preparation of the tax returns that would determine the tax doctor’s own fee there was the potential that the fee might be more important to the tax doctor than reporting petitioner’s proper tax_return positions that turns out to have been the case petitioner testified that he did not discuss the tax returns prepared by the tax doctor with any other tax professional petitioner testified in respect of murray’s advice that i never felt that i needed to second-guess his tax structure he said this despite the fact that he had discussed murray’s advice with his c p a who advised him that she could not do that and that it was very aggressive the advice of the c p a who had no financial stake in the outcome of petitioner’s return positions should have put petitioner on notice that additional scrutiny of murray’s advice was required the court concludes that petitioner a college graduate with some business experience relied on the tax_return advice of an adviser who had a financial interest in the return positions he recommended to zero out substantial income without a clear understanding of how that could be legally accomplished and ignored the cautionary advice of his c p a in the process petitioner’s reliance on the tax doctor’s advice was not reasonable and in good_faith as to either year respondent’s determination that petitioner is liable for the accuracy-related_penalties under sec_6662 for and is sustained to reflect the foregoing decision will be entered for respondent


id office uilc cca-310203-09 -------------- number release date from ------------------- sent wed pm to ------------------------ cc subject re follow-up questions - 872-i and tmp the partnership is not a party to the tefra proceeding in any event so you don't really need a representative for the partnership as an entity any indirect_partner can sign a disclosure waiver for purposes of our seeking any partnership information we can also collect partnership information from whatever source available you will just need to be more creative without have a central contact point under pae enterprises v commissioner we can also designate an indirect_partner as tmp------------------- -------------------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------


internal_revenue_service appeals_division marrows rd newark de date-jec 29vu810033 certified department of the treasury uil code taxpayer_identification_number person to contact employee id number ter fax refer reply to in re exempt status tax years last day to file a petition with the united_states tax_court you did not establish that you were operated exclusively for exempt purposes as required by sec_501 of the internal_revenue_code you have not established that your income did not inure to the benefit of private individuals and shareholders which is prohibited b y sec_501 you have not established that you are not operated for the benefit of private interests contributions to your organization are not deductible under sec_170 you are required to file federal forms u s_corporation income_tax retum for the year and all subsequent years states court of claims or the district_court of the united_states for the district of columbia must be filed before the ninety-first day after the date this determination was mailed to you contact the clerk of the appropriate court for rules for filing petitions for declaratory_judgment to secure a petitian form from the united_states tax_court write to the united_states tax_court second street n w washington d c you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals procedures etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations or extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this final adverse determination of your exempt status as required by code sec_6104 lf you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely safe pre c z charles f fisher appeals team manager


t c memo united_states tax_court gail carlette dixon petitioner v commissioner of internal revenue respondent docket no filed date held r's determination that p had unreported income from her sole_proprietorship as an income_tax preparer in the amounts of dollar_figure dollar_figure and dollar_figure for the and taxable years respectively is sustained held further r's determination that p is liable for the additions to tax under sec_665l1l a i r c and a i r c for the and taxable years is sustained gail carlette dixon pro_se daniel j parent for respondent memorandum findings_of_fact and opinion nims judge respondent determined deficiencies and additions to tax for and with respect to petitioner's federal income taxes as follows additions to tax_year deficiency sec_6651 a sec_6654 a dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number unless otherwise indicated all section references are to sections of the internal_revenue_code in effect for the years in issue all rule references are to the tax_court rules_of_practice and procedure all dollar amounts are rounded to the nearest dollar after concessions made by petitioner the issues for decision are whether petitioner had unreported gross_receipts from her sole_proprietorship as determined by respondent for her and taxable years whether petitioner is liable for the addition_to_tax under sec_665l1 a for the failure_to_file timely tax returns for the years in issue and whether petitioner is liable for the addition_to_tax under sec_6654 for the failure to pay estimated income taxes for the years in issue findings_of_fact at the time the petition was filed petitioner resided in sacramento california petitioner did not file income_tax returns for her and taxable years and failed to make estimated_tax payments during these years respondent mailed the notice_of_deficiency on date for petitioner's and taxable years among other things respondent made adjustments to petitioner's income by increases of dollar_figure in dollar_figure in and dollar_figure in this was done by reconstructing petitioner's income from available records during and petitioner operated a tax preparation business known as dixon tax returns as a sole_proprietorship petitioner also provided notary and property management services petitioner employed individuals to assist her in her business---an office manager and tax_return_preparers in the notice_of_deficiency respondent allowed business_expense deductions for wages paid to petitioner's employees in the amounts of dollar_figure dollar_figure and dollar_figure for the and taxable years respectively on date the united_states executed a search warrant of petitioner's business_premises approximately boxes of records were seized the boxes included copies of petitioner's business income receipt books rediform books notary journal and copies of client tax returns prepared by petitioner the client tax returns prepared by dixon tax returns included petitioner's name and identification_number as the paid preparer after the criminal proceedings and after being reviewed by respondent's revenue_agent john donovan agent donovan the boxes were returned to petitioner in date petitioner was convicted of counts of violating sec_7206 for aiding_and_abetting the filing of false income_tax returns petitioner was incarcerated at a federal correctional institution in dublin california for months as a condition of her supervised release from imprisonment petitioner was ordered to file her and federal_income_tax returns immediately respondent's service_center prepared a preparer inventory listing pil of returns which listed all tax returns prepared by petitioner in and a pil was not available for because petitioner's records were unavailable the pil included sufficient information to determine whether a particular return prepared by petitioner was a form 1040ez a form 1040a short_form or a form_1040 which included a schedule a or schedule c long form the pil also included the name and social_security_number of the taxpayer the type of form prepared and the amount of tax owed the pil matched the actual copies of client tax returns which were seized from petitioner's business during petitioner prepared at least big_number short forms and at least long forms during petitioner prepared at least big_number short forms and at least long forms a 40-percent increase in returns prepared during petitioner prepared more than big_number tax returns during and petitioner generally charged dollar_figure for the preparation of a short_form and dollar_figure for a long form during petitioner generally charged dollar_figure for the preparation of a short_form and dollar_figure for a long form petitioner's notary journal which covers the period from date to date includes the amount of the fees paid for petitioner's notary services the notary fees from january through date totaled dollar_figure petitioner's rediform books were incomplete they did not include records for all of the months of and petitioner's rediform books for include ‘it should be noted that the stipulation of facts states petitioner's notary journal covers the period from date to date however the actual notary journal covers the period from date to date date amount to dollar_figure to big_number to big_number to big_number to big_number total big_number petitioner's rediform books for include date amount to dollar_figure to big_number to big_number to big_number to big_number to big_number to big_number to big_number total big_number petitioner's rediform books for include date amount to dollar_figure to big_number total big_number deposits into petitioner's bank accounts during january february march april and may of and are similar to the income and business activity shown in petitioner's rediform books the receipts as shown in the rediform books for days in early february compare in each year as follows date february 4th n a dollar_figure dollar_figure february 5th dollar_figure big_number big_number february 6th big_number big_number february 7th big_number n a n a total big_number big_number big_number percentage increase n a percent percent petitioner earned nearly all of her tax preparation income between january and april of each year during petitioner's criminal proceedings petitioner and her attorneys were informed that they could examine her seized records or take them back at anytime petitioner retrieved her records sometime in and placed them in storage in sacramento california petitioner did not get the records out of storage until date when petitioner satisfied storage fees in arrears in petitioner lent penisimani lomu and hakeai faanunu dollar_figure bearing percent interest petitioner was paid dollar_figure and dollar_figure in interest during and respectively during and petitioner paid to john giovanzana dollar_figure dollar_figure and dollar_figure respectively in rent for business_premises pincite university avenue east palo alto california during petitioner paid siri brothers dollar_figure in rent for business_premises pincite donohoe street east palo alto california petitioner was evicted on date respondent has allowed a deduction for rent expense in the amounts of dollar_figure dollar_figure and dollar_figure respectively for petitioner's and taxable years opinion rt unreported income the first issue is whether petitioner had unreported gross_receipts from her sole_proprietorship as determined by respondent for her and taxable years respondent determined that petitioner had unreported gross_income from her tax preparation and notary business of dollar_figure dollar_figure and dollar_figure in and respectively petitioner did not file a trial memorandum or brief in this case however based on her testimony at trial petitioner seems to assert that respondent's determination is arbitrary respondent may use an indirect method to reconstruct a taxpayer's income where the taxpayer has failed to provide adequate_records substantiating her income see eg 348_us_121 respondent's method of income reconstruction is presumptively correct and will be affirmed as long as it is rational in light of all surrounding facts and circumstances see 116_f3d_1309 9th cir 643_f2d_1383 9th cir affg per curiam tcmemo_1979_3 petitioner bears the burden of proving that respondent's method of income reconstruction is unreasonable see palmer v irs supra pincite courts have approved methods of reconstruction which project or extrapolate the taxpayer's income from a limited amount of information see eg 796_f2d_303 9th cir affg tcmemo_1984_601 745_f2d_541 9th cir affg tcmemo_1982_371 in this case the only records available to reconstruct petitioner's tax preparation and notary income were petitioner's rediform books notary journal and copies of client tax returns prepared by petitioner agent donovan determined that petitioner had dollar_figure and dollar_figure in unreported income from her tax preparation business for her and taxable years respectively this amount was derived by first multiplying the number of short and long forms disclosed by the pil by the appropriate charge disclosed by the rediform books which totaled dollar_figure and dollar_figure pil totals for petitioner's and taxable years respectively agent donovan then totaled the gross_receipts shown in the rediform books rediform totals in the amount of dollar_figure for the taxable_year agent donovan compared the pil total of dollar_figure to the rediform total of dollar_figure and determined that tax_return preparation income was dollar_figure for the taxable_year agent donovan compared the pil total of dollar_figure to the rediform total of dollar_figure and determined that tax_return preparation income was dollar_figure -- - for petitioner's taxable_year respondent determined that petitioner had dollar_figure of unreported tax preparation income a pil for petitioner's taxable_year was unavailable however the record indicates that petitioner prepared at least big_number returns in agent donovan testified that dollar_figure was a result of increasing his figure of dollar_figure of unreported tax preparation income from by percent yielding dollar_figure rounded down to dollar_figure agent donovan derived the factor of percent by using the percent increase in the comparative days of receipts for the month of february in and and reducing the percentage to percent to account for the fact that petitioner's tax preparation business ceased on date under these circumstances we conclude that respondent's method of reconstructing petitioner's and tax_return preparation income is reasonable therefore respondent's determination that petitioner had unreported tax preparation income of dollar_figure dollar_figure and dollar_figure for and respectively 1s sustained respondent also determined that petitioner had unreported notary income of dollar_figure dollar_figure and dollar_figure in and respectively petitioner's notary journal which covers the period from date to date includes the amount of the fees paid for petitioner's notary services the notary fees from january through date totaled dollar_figure to determine petitioner's notary income for her taxable_year agent donovan multiplied the dollar_figure of notary income as disclosed in the notary journal by two resulting in dollar_figure and then rounded down to dollar_figure to determine notary income for petitioner's taxable_year agent donovan increased dollar_figure dollar_figure multiplied by two by percent based upon the percent increase in the number of returns prepared from and and the imputed 61-percent tax_return preparation revenue growth from to resulting in dollar_figure and rounded up to dollar_figure agent donovan determined that petitioner's notary income increased by percent in resulting in dollar_figure rounded down to dollar_figure agent donovan derived the multiplication factor of percent by using the 31-percent increase in the comparative days of receipts for the month of february in and and reducing the percentage to percent to account for the fact that petitioner's tax preparation business ceased on date we uphold respondent's method of reconstructing petitioner's notary income because it is rational in light of all surrounding facts and circumstances see palmer v irs f 3d pincite therefore respondent's determination that petitioner had unreported notary income of dollar_figure dollar_figure and dollar_figure for and respectively is sustained based on the foregoing we sustain respondent's determination that petitioner had unreported income from her sole_proprietorship in the amounts of dollar_figure dollar_figure and dollar_figure for the and taxable years respectively il addition_to_tax under sec_6651 a respondent determined additions to tax for failure_to_file timely tax returns under sec_6651 in the amounts of dollar_figure dollar_figure and dollar_figure for and respectively sec_6651 provides for an addition_to_tax of percent per month for each month or part of a month for which a return is late the aggregate not to exceed percent a taxpayer has a nondelegable duty to file a timely return but can avoid the addition_to_tax for failing to do so by affirmatively showing that the delinquency was due to reasonable_cause and not due to willful neglect see sec_6651 the taxpayer bears the burden of proving both that the failure did not result from willful neglect and that the failure was due to reasonable_cause see 469_us_241 if the taxpayer does not meet this twin burden the imposition of the addition_to_tax is mandatory see 32_tc_479 affd 283_f2d_227 8th cir petitioner has failed to file her and income_tax returns petitioner testified that she was too distraught over her husband's death on date to file her tax_return she further testified that she was under a lot of stress was under a physician's medical_care and was taking a lot of medication in light of the fact that petitioner prepared big_number client returns in we conclude that petitioner's failure_to_file her income_tax return was not due to reasonable_cause and therefore the addition_to_tax is properly imposed petitioner's and income_tax returns were due on date and respectively by her testimony petitioner seeks to imply that she was unable to file her and income returns on time because the irs had her business records the record shows that the united_states executed a search warrant of petitioner's business_premises on date where approximately boxes of records were seized however during petitioner's criminal proceedings petitioner and her attorneys were informed that they could examine her seized records or take them back at anytime thus petitioner had ample opportunity to access her business records moreover even after petitioner retrieved her records in she failed to file her income_tax returns the fact that petitioner has not filed her returns even with full access to her records indicates a lack of causal relationship between petitioner's failure_to_file and the irs's seizure of her business records under these circumstances we conclude that petitioner's failure_to_file her and income_tax returns was not due to reasonable_cause and therefore the addition_to_tax is properly imposed tii addition_to_tax under sec_6654 a respondent determined additions to tax for under sec_6654 for underpayment of estimated federal_income_tax this addition_to_tax is mandatory absent a showing by petitioner that one of the several statutorily provided exceptions applies see 75_tc_1 petitioner has made no such showing respondent's determination is therefore sustained to reflect the foregoing decision will be entered for respondent


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 plr-142799-09 date april ty --------------- legend a company rrsp tax years year year year dear ---------------- ------------------ ------------------------ ---------------------------- ----------------------------------- --------------- ------- ------- ------- this is in reply to a letter dated date requesting an extension of time under sec_301_9100-3 for a to elect the provisions of revproc_2002_23 2002_1_cb_744 for tax years the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the requested rulings it is subject_to verification on examination the information submitted for consideration is substantially as set forth below plr-143208-09 facts a a u s citizen and resident established a canadian registered retirement savings plans rrsp in year at all times during a’s ownership of the rrsp he was not aware that he had to make an election to defer u s taxation on income accrued in his rrsps based on article xviii of the united states-canada income_tax convention the treaty in year a engaged the services of company to prepare his returns for year and all subsequent tax returns and relied on company with respect to his personal income_tax matters and the preparation of his federal_income_tax returns attachments and elections related to such returns in year company reviewed its files and discovered that it had not informed a of the need to make an election to defer income_tax under article xviii of the treaty after a was notified of the need to make an election to benefit from the treaty he immediately took action to request an extension of time to file an election under sec_301_9100-3 as of the date of this ruling_request the internal_revenue_service has not communicated with a in any way regarding his rrsp ruling requested a requests the consent of the commissioner of the internal_revenue_service for an extension of time under sec_301_9100-3 to make an election pursuant to revproc_2002_23 to defer u s federal income_taxation on income accrued in his rrsp as provided for in article xviii of the treaty for tax years law and analysis sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the rules 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 -1 b provides that an election includes an application_for relief in respect of tax and defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government plr-143208-09 in the present situation the election provided in revproc_2002_23 is a regulatory election within the meaning of sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant a an extension of time provided that a satisfies the standards set forth in sec_301_9100-3 based solely on the information submitted and representations made we conclude that a satisfies the standards of sec_301_9100-3 accordingly a is granted an extension of time until days from the date of this ruling letter to elect the provisions revproc_2002_23 for tax years as provided in sec_301_9100-1 the granting of an extension of time is not a determination that a is otherwise eligible to make the above-described election pursuant to section dollar_figure of revproc_2002_23 the election once made cannot be revoked except with the consent of the commissioner for tax years and all subsequent tax years until the tax_year in which a final distribution is made from the rrsp a must file form_8891 for the rrsp for which the election is made 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 a copy of this letter must be attached to a's u s income_tax return for the year in which a obtained the ruling and should be associated with a’s amended returns for tax years this letter_ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter will be sent to your authorized representative sincerely _______________ quyen huynh senior counsel branch office of associate chief_counsel international enclosure copy for purposes cc


department of the treasury i n t e r n al r e v e n u e s e r v i c e w ashington d c date of f i c e of c h i ef c ou n sel number info release date cc ita b07 ------------- genin-109916-10 uil ------------------- -------------------------------------- ------------------ ----------------------------- dear ---------------- thank you for your letter dated date in which you ask whether the taxpayer could elect to use a one-year spread period for a net positive sec_481 adjustment in lieu of using the adjustment period specified in sec_5 of revproc_2008_52 2008_36_irb_587 i hope the following general information is helpful section dollar_figure of revproc_2008_52 provides that unless otherwise provided in the revenue_procedure a taxpayer making a change in method_of_accounting under the revenue_procedure must apply sec_481 and take into account a sec_481 adjustment in the manner provided in section dollar_figure of the revenue_procedure sec_5 of revproc_2008_52 provides that except as otherwise provided in sec_5 the appendix of the revenue_procedure or in other published guidance in the internal_revenue_bulletin the sec_481 adjustment period is four taxable years for a net positive sec_481 adjustment sec_5 of revproc_2008_52 provides rules for when a sec_481 adjustment period may be shortened or accelerated for instance a taxpayer may elect to use a one-year sec_481 adjustment period in lieu of using the adjustment period otherwise provided by the revenue_procedure for a positive adjustment if the net sec_481 adjustment is less than dollar_figure this letter is advisory only and has no binding effect on the service see revproc_2010_1 2010_1_irb_1 genin-109916-10 if you have any questions please contact me at --------------------- or -------------------- i d no ----------------- at --------------------- sincerely grant d anderson senior counsel branch income_tax accounting