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 corp b04 plr-100704-10 date march legend target acquiring shareholder a x y z date business --------------------------- -------------------------- ----------------------------- ------------- -------------------------- ----------------------------- ---------------------------------------------------------------- ---------------------------------------------------------------- ---------------------------------------------------------------- ----------- ------ ------ ------ -------------- ------------------------------------- plr-100704-10 dear -------------- this letter responds to your date request for rulings on certain federal_income_tax consequences of a series of proposed transactions the information submitted in that request and in later correspondence is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process summary of facts target is the common parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return target was originally formed as a holding_company for a number of operating subsidiaries shareholder a directly and indirectly owns approximately x percent of target’s outstanding common_stock the remainder of target’s common_stock is publicly held over the years target has controlled a number of businesses however as of the end of date target had disposed of its interests in operating companies apart from its interest in acquiring currently target’s primary business is acting as a holding_company for acquiring acquiring is the common parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return acquiring is engaged in business acquiring has two classes of stock outstanding class a common_stock and class b common_stock which is exchangeable into class a common_stock acquiring’s class a common_stock is widely held and publicly traded target owns all of acquiring’s outstanding class b common_stock or approximately y percent more than of the outstanding common_stock of acquiring by value proposed transaction for what have been represented to be valid business purposes the following steps have been proposed the proposed transaction i acquiring will form a limited_liability_company llc an entity disregarded as separate from its owner under sec_301_7701-3 plr-100704-10 ii pursuant to state law target will merge with and into llc together with acquiring the acquiring unit with llc surviving the downstream_merger as a result of the downstream_merger the target common_stock will be converted into the right to receive common_stock of acquiring target shareholders may receive class a common_stock of acquiring class b common_stock of acquiring or both it is anticipated that the rights associated with the two classes of stock will be similar to the currently outstanding class a common_stock and class b common_stock of acquiring during the three-year period preceding the date of the downstream_merger shareholder a directly and indirectly will have owned no less than z percent of the stock of target immediately after the downstream_merger shareholder a directly and indirectly will own less than z percent of acquiring representations the following representations are made in connection with the proposed transaction a b c d e the fair_market_value of acquiring common_stock and cash in lieu of fractional shares received in the downstream_merger by each of the target shareholders will be approximately equal to the fair_market_value of target common_stock surrendered in the downstream_merger at least percent of the proprietary interest in target will be exchanged for acquiring common_stock and that proprietary interest will be preserved within the meaning of sec_1_368-1 neither acquiring unit nor any person related to acquiring unit within the meaning of sec_1_368-1 has any plan or intention to reacquire any acquiring common_stock issued in the transaction for any consideration other than acquiring common_stock either directly or through any transaction agreement or other arrangement with any other person acquiring unit has no plan or intention to sell or otherwise dispose_of any of the assets of target acquired in the transaction except for dispositions made in the ordinary course of business or transfers described in sec_368 or described in sec_1_368-2 the liabilities of target assumed by acquiring unit and the liabilities to which the transferred assets of target are subject were incurred by target in the ordinary course of its business plr-100704-10 f g h i j k l m following the downstream_merger acquiring unit will continue the historic_business of the target or use a significant portion of target’s historic_business_assets in a business as required and defined in sec_1_368-1 acquiring unit target and target’s shareholders each will pay their respective expenses if any incurred in connection with the downstream_merger there is no intercorporate indebtedness existing between acquiring unit and target that was or will be issued acquired or settled at a discount no two parties to the downstream_merger are investment companies as defined in sec_368 and iv target is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 the fair_market_value of the assets of target to be transferred to acquiring unit will equal or exceed the sum of liabilities assumed by acquiring unit plus the amount of liabilities if any to which the transferred assets are subject target and acquiring unit will adopt a plan of merger and the downstream_merger will occur pursuant to such plan the payment of cash in lieu of fractional shares if any of acquiring common_stock will be solely for the purpose of avoiding the expense and inconvenience to acquiring of issuing fractional shares and will not represent separately bargained-for consideration the total cash consideration that will be paid in the downstream_merger to the target shareholders instead of issuing fractional shares of acquiring common_stock will not exceed one percent of the total consideration that will be issued in the downstream_merger to the target shareholders in exchange for their shares of target common_stock the fractional share interests of each target shareholder will be aggregated and no target shareholder will receive cash in an amount equal to or greater than the value of one full share of acquiring common_stock n target acquiring and each of their affiliates will be eligible to file a consolidated_return immediately after the downstream_merger plr-100704-10 rulings based solely on the information submitted and the representations set forth above we rule as follows regarding the proposed transaction the downstream_merger will qualify as a reorganization within the meaning of sec_368 acquiring and target will each be a party to the reorganization within the meaning of sec_368 target will recognize no gain_or_loss upon the transfer of the assets of target to acquiring unit solely in exchange for acquiring common_stock and the assumption_of_liabilities by acquiring unit sec_361 and sec_357 target will recognize no gain_or_loss on the distribution of acquiring common_stock to its shareholders sec_361 acquiring will recognize no gain_or_loss upon acquiring unit’s receipt of target’s assets in exchange for acquiring common_stock sec_1032 the basis of target’s assets in the hands of acquiring unit will be the same as the basis of such assets in the hands of target immediately before the downstream_merger sec_362 the holding_period of target’s assets in the hands of acquiring unit will include the period during which target held such assets sec_1223 a target shareholder will recognize no gain_or_loss upon the receipt of acquiring common_stock in exchange for target common_stock sec_354 a target shareholder’s basis in the acquiring common_stock received will be the same as the basis of the target common_stock surrendered in exchange therefor sec_358 a target shareholder’s holding_period in the acquiring common_stock received will include the period during which the target common_stock surrendered in exchange therefor was held provided the target common_stock was held as a capital_asset on the date of the exchange sec_1223 the payment of cash in lieu of issuing fractional shares of acquiring common_stock will be treated as if the fractional shares were issued in the downstream_merger and then redeemed by acquiring with the cash payments treated as having been received as distributions in full payment in exchange for the redeemed fractional shares as provided in sec_302 provided the fractional share interest is a capital_asset in the hands of the recipient shareholder the gain_or_loss will constitute capital_gain or loss plr-100704-10 subject_to the provisions and limitations of subchapter_p of chapter revrul_66_365 1966_2_cb_116 revproc_77_41 1977_2_cb_574 acquiring will succeed to and take into account as of the close of the effective date of the downstream_merger the items of target described in sec_381 subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 and the regulations thereunder sec_1_381_a_-1 with regard to the sec_382 testing_date applicable that occurs as a result of the downstream_merger shareholder a will not contribute to any owner shift in target because a shareholder a's percentage of stock ownership_interest in target will not increase during the testing_period and b immediately following the downstream_merger shareholder a's percentage of stock ownership_interest in acquiring target's successor will not exceed shareholder a's lowest percentage of stock interest in target during the testing_period sec_1_382-2t and sec_1_382-2 the downstream_merger will constitute a reverse_acquisition within the meaning of sec_1_1502-75 with acquiring becoming the common parent of the affiliated_group caveats we express no opinion about the tax treatment of the proposed transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings procedural statements this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent plr-100704-10 a copy of this letter must be attached to the federal_income_tax return of each party involved in the proposed transaction for the taxable_year in which the proposed transaction is completed under the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely __________________ lewis k brickates chief branch office of associate chief_counsel corporate


t c summary opinion united_states tax_court lee thomas petitioner v commissioner of internal revenue respondent docket no 142-08s filed date lee thomas pro_se richard j hassebrock for respondent armen 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 unless otherwise indicated all subsequent 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 other court and this opinion shall not be treated as precedent for any other case respondent determined deficiencies in petitioner’s federal income taxes for and of dollar_figure and dollar_figure respectively and an addition_to_tax for of dollar_figure for failure to timely file a tax_return after concessions the only issue remaining for decision is whether petitioner is liable for the addition_to_tax for failure to timely file under sec_6651 for we hold that petitioner is liable for the addition_to_tax background some of the facts have been stipulated and they are so found we incorporate by reference the parties’ stipulation of facts and accompanying exhibits petitioner resided in the state of kentucky when the petition was filed petitioner’s form_1040 u s individual_income_tax_return for was completed by his accountant the accountant had been handling petitioner’s taxes for about years petitioner through his accountant requested and was granted an extension of time to file his federal_income_tax return for the return petitioner conceded that he is liable for the deficiency determined by respondent for of dollar_figure the parties agreed that for petitioner is entitled only to a loss of dollar_figure rather than the dollar_figure loss claimed on schedule e supplemental income and loss of the tax_return due_date was thereby extended from april to date petitioner’s tax_return was filed date petitioner’s newspaper business closed its doors during in petitioner continued to wrap up the newspaper’s business matters and he also entered a new line of work namely truck driving after the extension to file was granted and before the return was filed petitioner and his accountant had little or no communication petitioner was frequently on the road and he assumed that his accountant had requested a subsequent extension to file in date petitioner contacted his accountant regarding the tax_return the accountant informed petitioner that the tax_return was prepared and awaiting his signature and had been prepared for some time petitioner then drove to the accountant’s office and signed the return on date sec_6081 authorizes the irs to grant a reasonable extension of time for filing any return except in the case of a taxpayer who is abroad no extension shall be for more than months id as a paid preparer the accountant also signed the return his signature was accompanied by the date date discussion sec_7491 provides that the commissioner bears the burden of production with respect to an addition_to_tax to meet this burden the commissioner must introduce evidence indicating that it is appropriate to impose the relevant addition_to_tax 116_tc_438 once the commissioner meets this burden the taxpayer bears the burden to produce evidence regarding reasonable_cause id pincite respondent has met his burden sec_6651 imposes an addition_to_tax for failure_to_file a return by its due_date the addition equal sec_5 percent for each month or fraction thereof that the return is late not to exceed percent id to escape the addition_to_tax the taxpayer must prove that such failure was due to reasonable_cause and not due to willful neglect id the term willful neglect may be read as meaning conscious intentional failure or reckless indifference 469_us_241 respondent does not contend that petitioner’s failure_to_file was willful or reckless therefore we consider only whether petitioner had reasonable_cause for failing to meet the deadline a showing of reasonable_cause requires taxpayers to demonstrate they exercised ordinary business care and prudence but were nevertheless unable to file the return within the prescribed time id pincite sec_301_6651-1 proced admin regs however the failure to timely file a tax_return is not excused by the taxpayer’s reliance on an agent and such reliance is not ‘reasonable cause’ for late filing under sec_6651 united_states v boyle supra pincite taxpayers have a personal and nondelegable duty to timely file a return reliance on an accountant does not provide reasonable_cause for an untimely filing petitioner agrees that the tax_return was not timely filed nevertheless he argues against the addition_to_tax on the basis that he relied on his accountant to inform him when the return was prepared moreover petitioner assumed that his accountant had requested an additional extension of time to file although we are sympathetic to petitioner’s position given his reliance on his accountant we are constrained to sustain respondent’s determination on this issue thus petitioner is liable for the addition_to_tax under sec_6651 conclusion we have considered all of the arguments made by petitioner and to the extent that we have not specifically addressed them we conclude that they do not support a holding contrary to that reached herein to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number ----------------------------- -------------------------------------- ------------------------------------- ---------------------------------- ------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------------ telephone number -------- -------------- refer reply to cc psi plr-147157-13 date date -------------------------------- company ------------------------------------------ state --------- dear --------------- this letter responds to a letter dated date submitted on behalf of company requesting that income derived from standard interest rate swaps forward- start interest rate swaps interest rate caps and treasury locks is qualifying_income within the meaning of sec_7704 of the internal_revenue_code facts the information submitted states that company is a publicly-traded partnership within the meaning of sec_7704 organized under the laws of state company has not elected to be taxed as an association for federal tax purposes company is not engaged in a financial or insurance_business within the meaning of sec_7704 in order to finance asset acquisitions and conduct the operations of its business_company periodically issues both fixed-rate and floating-rate debt securities the interest company pays on the debt securities is a function of two factors the market reference interest rate for example u s treasury bonds for fixed-rate debt or london interbank offer rate libor for floating-rate debt and company’s credit risk company enters into standard interest rate swaps forward-start interest rate swaps interest rate caps and treasury locks each defined below and together the plr-147157-13 financial transactions to manage its exposure to the first interest rate factor the market reference rate on its fixed-rate and floating-rate debt in some cases the financial transactions entered into by company are integrated with the related debt instruments under sec_1_1275-6 of the income_tax regulations company is requesting a ruling only on financial transactions that are not integrated the financial transactions standard interest rate swaps a standard interest_rate_swap allows company to swap a fixed rate cash_flow in exchange for a floating rate cash_flow a fixed for floating swap or a floating rate cash_flow for a fixed rate cash_flow a floating for fixed swap in a fixed for floating swap company agrees to pay a counterparty a fixed interest rate on a notional_principal_amount the counterparty agrees to pay company an amount equal to a floating index rate such as libor multiplied by the notional_principal_amount a floating for fixed swap operates in the same manner except that company pays a counterparty a cash_flow equal to a floating rate multiplied by the notional amount and would receive a cash_flow equal to a fixed rate on the notional amount forward-start interest rate swaps a forward-start interest_rate_swap is a transaction whereby company locks in a spot interest rate for a period prior to the issuance of its fixed-rate debt securities a forward lock or to convert an expected floating-rate debt securities offering into a fixed-rate instrument a forward floating for fixed swap in a forward lock company agrees to pay a counterparty a fixed interest rate on a notional_principal_amount for a fixed period that begins on the date of the anticipated debt issuance the counterparty agrees to pay company an amount equal to a floating-rate index such as libor multiplied by the notional_principal_amount for a fixed period that begins on the date of the anticipated debt issuance while periodic_payments may be obligated once the fixed period begins a forward lock is typically settled on the expected date of the anticipated debt issuance the payment on the settlement_date is determined by the present_value of net payment obligations under the forward lock a forward floating for fixed swap operates in the same manner as a floating for fixed swap except that its effective date is in the future because its term coincides with an expected floating-rate debt issuance and not an existing floating-rate debt issuance as with a floating for fixed swap if company is owed money on a net_basis by its counterparty company realizes income on the swap interest rate caps in an interest rate cap company agrees to pay to a counterparty an upfront fixed payment the counterparty agrees to pay to company an amount equal to a plr-147157-13 floating index such as libor multiplied by the notional_principal_amount if and only if the floating index rate exceeds a specified cap rate on a specified_payment date treasury locks a treasury lock is an arrangement where an unrelated party agrees to purchase at a fixed price a u s treasury bond with an interest rate equal to the rate in effect on the date of the agreement the purchase is generally consummated on the date company expects to be able to issue debt securities while not the intended result company may settle a treasury lock prior to the issue_date for its debt securities if in its judgment the risk of an unfavorable movement in interest rates had declined or doing so would maximize its income from the treasury lock and thereby effectively minimize the interest cost of the anticipated issuance of debt securities law and analysis sec_7704 provides generally that a publicly_traded_partnership shall be treated as a corporation sec_7704 provides that the term publicly_traded_partnership means any partnership if interests in such partnership are traded on an established_securities_market or interests in such partnership are readily_tradable on a secondary market or the substantial equivalent thereof sec_7704 provides in part that sec_7704 shall not apply to any publicly_traded_partnership for any taxable_year if such partnership met the gross_income requirements of sec_7704 for such taxable_year and each preceding_taxable_year beginning after date during which the partnership or any predecessor was in existence sec_7704 provides that a partnership meets the gross_income requirements of sec_7704 for any taxable_year if or more of the gross_income of such partnership for such taxable_year consists of qualifying_income sec_7704 provides that except as otherwise provided in sec_7704 the term qualifying_income includes interest sec_7704 provides that interest shall not be treated as qualifying_income if a such interest is derived in the conduct of a financial or insurance_business or b such interest would be excluded from the term_interest under sec_856 sec_1_7704-3 provides in part that for purposes of sec_7704 qualifying_income includes income from notional_principal_contracts as defined in sec_1_446-3 and other substantially_similar income from ordinary and routine investments to the extent determined by the commissioner income from a notional principal plr-147157-13 contract is included in qualifying_income only if the property income or cash_flow that measures the amounts to which the partnership is entitled under the contract would give rise to qualifying_income if held or received directly by the partnership sec_1_7704-3 provides in part that qualifying_income described in sec_1_7704-3 does not include income derived in the ordinary course of a trade_or_business sec_1_446-3 defines a notional_principal_contract as a financial_instrument that provides for the payment of amounts by one party to another at specified intervals calculated by reference to a specified_index upon a notional_principal_amount in exchange for specified consideration or a promise to pay similar amounts sec_1_446-3 further provides that this definition of a notional_principal_contract includes interest rate swaps and interest rate caps in order to qualify under sec_1_7704-3 the financial transactions must qualify as income from a notional_principal_contract as defined in sec_1_446-3 or as other substantially_similar income the standard interest rate swaps and interest rate caps are specifically included in the definition of a notional_principal_contract in sec_1_446-3 and therefore produce income from a notional_principal_contract however income from a notional_principal_contract is included in qualifying_income only if the property income or cash_flow that measures the amounts to which the partnership is entitled under the contract would give rise to qualifying_income if held or received directly by the partnership payments due under a standard interest_rate_swap or an interest rate cap are measured by reference to an interest rate or interest rate index and would give rise to interest_income if held or received directly by company although the forward-start interest rate swaps and the treasury locks are not among the instruments specifically listed in the definition of a notional_principal_contract they are both ordinary and routine transactions and in this case were entered into for the same purpose as a notional_principal_contract that is to lock in an interest rate or manage the risk of interest rate movements on company’s borrowings sec_1 a provides that the commissioner may determine that income and gain from ordinary and routine investments substantially_similar to notional_principal_contracts may also constitute qualifying_income for purposes of sec_7704 it is therefore unnecessary to determine whether the forward-start interest rate swaps and the treasury locks meet the definition of a notional_principal_contract in sec_1_446-3 conclusion based solely on the facts and representations submitted we conclude that the income company derives from each of the four types of financial transactions is plr-147157-13 qualifying_income within the meaning of sec_7704 and sec_1_7704-3 except for the specific ruling above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code specifically we express or imply no opinion as to whether company's financial transactions can be integrated with the related debt instruments under sec_1_1275-6 as well as to whether company is taxable as a partnership for federal tax purposes we also express or imply no opinion as to whether the forward-start interest rate swaps or the treasury locks meet the definition of a notional_principal_contract in sec_1_446-3 finally no opinion is expressed or implied as to whether company meets the percent gross_income requirement of sec_7704 in any taxable_year the ruling contained in this letter is based upon information and representations submitted by company 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 ruling_request it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it however in the event of a technical_termination of company under sec_708 the resulting_partnership may continue to rely on this ruling in determining its qualifying_income under sec_7704 sec_6110 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to company’s authorized representatives sincerely holly a porter chief branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c number release date cc pa cbs br3 gl-603611-00 date uil memorandum for ronald d pinsky associate area_counsel sbse - washington d c cc sb was from subject lawrence h schattner chief branch collection bankruptcy summonses trust fund recovery penalty tfrp - different service responses to destroyed files recommending the tfrp this responds to your request of date on the above subject you requested general guidance on how the appeals function should handle collection_due_process cdp hearings and equivalent hearings challenging a_trust fund recovery penalty tfrp assessment pursuant to sec_6672 when the service has destroyed the administrative file that it created with respect to assertion of the tfrp for the reasons described further below it is not clear to us that different handling by the service of the tfrp assessments at issue in your examples involving the customer service collection and appeals functions was not appropriate under the circumstances background your request for assistance attached a prior memorandum of date now reproduced pincite irs cca lexi sec_172 which suggested that it would not be appropriate for the customer service function as part of its project to clean up aged non-master file accounts which include many tfrp assessments to investigate whether the service’s administrative file recommending assertion of the tfrp in each case had been destroyed or abate the unpaid portion of every tfrp assessment on the service’s books where the service’s tfrp file recommending assessment should have or has been destroyed pursuant to the service’s ordinary document retention policy the prior memorandum cited appropriate legal authority for the proposition that the service need not be able to produce the original documentation for all of its actions in a taxpayer’s case that a certified copy of an irs form_4340 certificate of assessments and payments constitutes prima facie proof that a timely and proper assessment was made we stand by the above-described advice offered in the prior memorandum gl-603611-00 consistent with the prior memorandum of date and footnote in particular from that memorandum you note that your office has recently advised a collection offer-in-compromise oic manager in a particular collection oic case that the service was not obliged to abate the unpaid portion of a tfrp assessment merely because the service has now destroyed its original file recommending that the tfrp be asserted next you indicate that the appeals function in your district also recently considered a taxpayer’s old tfrp assessment in an equivalent_hearing case under temp sec_301_6330-1t i part of the collection_due_process regulation and the service had also destroyed the tfrp recommendation file for this taxpayer before the taxpayer requested the equivalent_hearing as part of the service’s ordinary record retention policy however in the appeals function case you understand that the ultimate decision made by the service was to abate the unpaid portion of the tfrp assessment and that a part of the basis for this decision was the destruction of the tfrp recommendation file because the service does ordinarily retain its tfrp recommendation files for a number of years after making a tfrp assessment none of the examples discussed above involves a challenge to a tfrp assessment that could even arguably be covered by the burden_of_proof provisions of sec_7491 and this should remain true for many more years to come in any tfrp cases where the service’s tfrp recommendation files have been destroyed as part of the service’s record retention policy again because the service does ordinarily retain its tfrp recommendation files for a number of years after making a tfrp assessment the appeals function and the other examples discussed above also did not involve challenges to tfrp assessments where the taxpayer received the preliminary day notices for proposed tfrp assessments made after date described in sec_6672 however we do discuss the day notice requirement below because it is relevant to whether the appeals function should in future cases consider the merits of a tfrp assessment in a cdp or equivalent_hearing case brought under the collection_due_process regulation as more fully discussed sec_7491 applies only in court proceedings arising in connection with examinations that commenced after date which would mean that trfp assessments arising from investigations opened before date should clearly be unaffected by the burden_of_proof provision added in for tfrp investigations begun after date there is no case authority as yet on whether the tfrp may in substance be treated as a tax other than a tax imposed by subtitle a or b and therefore not covered by sec_7491 or whether the tfrp may be considered a penalty covered by sec_7491 see sotelo v 436_us_268 tfrp is not a penalty for purposes of bankruptcy act chief_counsel notice n burden_of_proof and sec_7491 date also taking the position that the tfrp is not a penalty for purposes of sec_7491 gl-603611-00 below in cdp or equivalent hearings where the file recommending assertion of the tfrp is unavailable we do not expect the merits of the tfrp to be an appropriate issue in most cases because the taxpayer will have received notice from the service of a prior opportunity to dispute the merits of the tfrp in an appeals function hearing issues conclusions issue is it appropriate for the appeals function to consider the merits of a challenged tfrp assessment in a collection_due_process cdp hearing or in an equivalent_hearing under the collection_due_process regulation temp sec_301_6330-1t conclusion it is appropriate for the appeals function to consider the merits if the taxpayer has not had a previous opportunity to contest the liability if a taxpayer received the day preliminary notice of the service’s proposed tfrp assessment required by sec_6672 after date or received another prior opportunity pre- or post-assessment for a conference with appeals to dispute liability for the tfrp then the existence or amount of the tfrp assessment may not be raised by a taxpayer in a cdp hearing or equivalent_hearing under the collection_due_process regulation similarly if the taxpayer was a party in or otherwise participated meaningfully in a judicial proceeding in which the taxpayer’s liability for the tfrp was at issue eg a tax_refund suit regarding the tfrp a suit or counterclaim by the united_states to reduce the tfrp to judgment or the service filed a proof_of_claim for the tfrp in the taxpayer’s bankruptcy case then the existence or amount of the tfrp assessment may not be raised by the taxpayer anew in a cdp hearing or equivalent_hearing under the collection_due_process regulation issue in a proper merits challenge of a tfrp assessment in a cdp hearing or in an equivalent_hearing under the collection_due_process regulation is it appropriate for an appeals officer to consider the service’s hazards_of_litigation on the merits conclusion yes if a taxpayer is permitted to and does properly contest the existence or amount of a tfrp assessment in a cdp hearing it is appropriate for the appeals officer to consider the service’s hazards_of_litigation on these issues including the destruction of the service’s file recommending the tfrp although a taxpayer has no right to obtain judicial review of an adverse appeals function determination resulting from an equivalent_hearing under the collection_due_process regulation an appeals officer should consider the same issues at an equivalent_hearing that the appeals officer would have considered in a timely requested cdp hearing including consideration of the service’s hazards_of_litigation on the merits of the tfrp where appropriate gl-603611-00 issue is it appropriate for an appeals officer to give substantial weight to an irs form_4340 certificate of assessments and payments in considering various types of taxpayer challenges to a tfrp assessment conclusion yes in a cdp hearing or equivalent_hearing under the collection_due_process regulation an appeals officer may rely on an irs form_4340 as presumptive evidence that the tfrp has been validly assessed by the service against a taxpayer and to otherwise verify the service’s compliance with the requirements of applicable law and administrative procedures for purposes of sec_6330 davis v commissioner t c no date the case law cited in davis and in the prior memorandum illustrate many circumstances where the courts have given substantial weight to irs forms in considering taxpayer challenges to various tax_liabilities but the service does not ordinarily rely solely on forms to defend a permissible merits challenge by a taxpayer to a tfrp assessment issue when a taxpayer makes a permissible merits challenge of a tfrp assessment is the destruction or missing_status of the service’s administrative file regarding the tfrp recommendation against that taxpayer necessarily fatal to the service’s case conclusion no the destruction of the service’s administrative file regarding a tfrp assessment in merits challenge circumstances may sometimes lead a court to consider whether the service has only a naked assessment for the tfrp which is not entitled to a presumption of validity however most courts will first allow the service an opportunity to conduct discovery or otherwise develop or reconstruct probative evidence regarding the tfrp liability such that the burden_of_proof remains on the taxpayer by the time of trial the employer’s form_941 and other returns secretary of state records bank signature cards and the testimony of other employees or officers may often still be available to the service as a more than adequate substitute for the destroyed or lost administrative file on various challenged elements of the tfrp liability issue when the service’s administrative file regarding a tfrp assessment has been destroyed and the merits of the tfrp assessment are being considered in the appeals function are there mandatory internal guidelines or tolerances as to how much time appeals should give the collection function to reconstruct or gather evidence supportive of the tfrp assessment or how many hours the collection function should expend on this task of reconstructing or gathering evidence before concluding the effort is not likely to be cost effective or otherwise worthwhile conclusion no the appeals function should generally attempt to conduct all cdp hearings or equivalent hearings under the collection_due_process gl-603611-00 regulation as expeditiously as possible but there are no time limits by law on how soon appeals must hold the hearing or issue its notice_of_determination for a cdp hearing or its decision letter for an equivalent_hearing if a tfrp case requires further factual development when the tfrp assessment is first proposed the appeals function may retain jurisdiction of the case but send it back to the collection function for at least days to take any necessary action with extensions possible through mutual agreement of the two functions see irm in a cdp hearing or equivalent_hearing context where the service is similarly stayed by law from levying in the case of a cdp hearing or where the appeals function may ask the collection function to stay its levy activity if it wants further time to reconstruct or develop the facts in the case of an equivalent_hearing the appeals function should also first afford the collection function at least days subject_to mutually agreed extensions to attempt to reconstruct or develop facts that may support the tfrp assessment which was the subject of the destroyed or lost administrative file if the taxpayer has brought a proper merits challenge to the liability however the local collection function after coordinating the matter appropriately within the new sbse structure may agree in advance with the local appeals function that cases within certain tolerances eg total dollar amounts of a certain age and or with minimal known levy sources are not cost effective for the service to attempt to reconstruct or support after the administrative file has been destroyed discussion not less than days before the day of the service’s first levy after the effective date of sec_6330 with respect to a particular tax and a particular tax period the service is required to give a taxpayer the notice described in sec_6330 a cdp_notice among other things a cdp_notice advises a taxpayer that the taxpayer may request a hearing a cdp hearing in the service’s appeals function to consider the proposed levy and other related matters by making a written request to the office which issued the cdp_notice within days sec_6330 if the taxpayer makes a request for an appeals function hearing with respect to a cdp_notice more than days after the cdp_notice was issued then the taxpayer may not obtain a cdp hearing but may receive an equivalent_hearing pursuant to temp sec_301_6330-1t i in an equivalent_hearing case with the appeals function under the collection_due_process regulation the appeals function considers the same issues that it would have considered in a cdp hearing case on the same matter but the service’s collection limitation period is not suspended while an equivalent_hearing case is in the appeals function the service is not automatically stayed but may choose to stay its proposed levy activity while the equivalent_hearing case is pending and the taxpayer has no right to judicial review of an adverse decision by the appeals function arising from an equivalent_hearing see temp sec_301_6330-1t i q ai1-5 gl-603611-00 issue considering the merits of tfrp assessments in a cdp hearing in a cdp hearing a taxpayer may be allowed to challenge the existence or amount of the underlying liability the merits but only if the taxpayer did not receive a statutory_notice_of_deficiency for such tax_liability not applicable in tfrp cases or did not otherwise have an opportunity to dispute such liability further a taxpayer may not raise an issue including the merits at a cdp hearing if the issue was raised and considered in any previous administrative or judicial proceeding in which the taxpayer participated meaningfully sec_6330 and c the collection_due_process regulation explains that an opportunity to dispute such liability includes a prior opportunity for an appeals function conference either before or after assessment of the liability one of the examples in the collection_due_process regulation of this principle specifically concerns a tfrp assessment it explains that when the service offers the taxpayer an opportunity to request an appeals function conference to dispute a tfrp liability and the taxpayer fails to take advantage of that opportunity then the taxpayer is precluded from challenging the existence or amount of the tfrp at a subsequent cdp hearing or equivalent_hearing see temp sec_301_6330-1t e q ae8 and e ex for proposed tfrp assessments made after date the service has been required except in jeopardy situations to give the taxpayer a day preliminary notice which generally informs the taxpayer of the proposed tfrp assessment and offers the taxpayer an opportunity to request an appeals function conference within days to dispute the proposed tfrp liability the service uses a letter do to provide this day notice of proposed tfrp assessments to taxpayers the service has generally decided to send the letter do to a taxpayer by certified mail to the taxpayer’s last_known_address sec_6672 irm the examples discussed in your memorandum requesting our assistance did not involve tfrp assessments made after date but we believe it is useful here to discuss the day preliminary notice requirements of sec_6672 effective after that date because the service’s prior compliance with this provision should ordinarily satisfy the prior opportunity to dispute exception in sec_6330 with regard to the merits of a tfrp assessment and thereby preclude consideration of the merits of the tfrp liability in a cdp hearing or equivalent_hearing conducted by the appeals function for that taxpayer this issue preclusion in turn should alleviate some of the complications that may otherwise be caused to the service in old tfrp cases by the service’s document retention policy of destroying some of its older files recommending tfrp assessments before the collection limitation period for the tfrp has expired certified mailing of the day notice return receipt requested is not required_by_law but is the preferred mailing method selected by the collection function for these notices in part so that mailing and receipt of the day notice may be more easily proven by the service if these matters are ever later contested the day notice may also now be delivered in person to the taxpayer gl-603611-00 prior to date we understand that it was also the service’s general policy to offer taxpayers an opportunity either before or after assessment of the tfrp to obtain an appeals function conference regarding the merits of their tfrp liability however since appeals function conferences regarding proposed tfrp assessments were not a matter of right before the effective date of sec_6672 it may generally be more difficult for the service to show whether or not a particular taxpayer was offered an appeals function conference to discuss a proposed or assessed tfrp if the tfrp recommendation file with respect to that taxpayer no longer exists nevertheless if the service can show that the taxpayer received notice of a prior opportunity to request an appeals function conference on the tfrp liability then the taxpayer would be precluded from challenging the merits of the tfrp liability in a cdp or equivalent_hearing for tfrp assessments made after date however a taxpayer who was properly mailed a notice of his her opportunity to request an appeals function conference to consider the merits of a tfrp assessment by the service may still be able to avoid preclusion of the underlying liability as an appropriate subject for a cdp hearing or equivalent_hearing if the taxpayer shows that he she did not receive the notice see temp sec_301_6330-1t e q ae2 and e ex discussing the consequences of a taxpayer’s failure to receive a statutory_notice_of_deficiency on the taxpayer’s ability to contest the underlying liability in a cdp hearing regardless of whether the tfrp assessment was made prior to or after date the service and the courts are not obliged to accept without question a taxpayer’s statement that he she does not recall having received such notice in the absence of clear evidence to the contrary the tax_court has found in a cdp hearing context that presumptions of official regularity and of delivery justify the conclusion that a notice by the service was sent and that delivery was attempted by the post office at the address the service used in its notice in the same cdp hearing case the tax_court also held that a taxpayer may not defeat actual notice of an opportunity to contest a tax_liability by refusing to accept delivery of mail from the service sego v commissioner t c no date the service may enhance the likelihood of showing that a taxpayer received a particular document by maintaining a centralized register of receipts for outgoing certified mail and by maintaining the register for years as the service is now doing for cdp notices with respect to liens see irm alternatively for recent tfrp assessments the service may rely on information found in the automated trust fund recovery penalty program atfrpp the atfrpp now reportedly allows the collection function to enter a textual history note on the date it receives a certified mailing receipt of delivery eg the customary green card for a letter do indicating that delivery of the day notice of proposed tfrp assessment to the taxpayer by the post office has occurred since atfrpp records for recent tfrp liabilities may not be readily available to the appeals function in every city it would be prudent for the collection function to include any atfrpp information which may exist with respect to delivery of the letter do in the summary statement portion of the gl-603611-00 in light of the foregoing discussion of the issue preclusion effect for the merits of a tax_liability of a taxpayer having been given and received prior notice of an opportunity to contest the tfrp with the service’s appeals function it would be prudent for the collection function to document prior notice and receipt before referring future cdp hearing or equivalent_hearing cases to the appeals function and to note these facts in its transmittal to appeals it may also be prudent for a revenue_officer newly assigned to collect an older tfrp assessment to ask the taxpayer before issuing a cdp_notice what types of prior notices the taxpayer has received from the service regarding the tfrp liability and to document the taxpayer’s response issue weighing litigation hazards on tfrp merits in equivalent_hearing if the merits of a tfrp liability eg responsibility and willfulness are properly at issue in a cdp hearing the appeals function may be required to weigh the taxpayer’s and the service’s respective hazards_of_litigation in deciding whether to sustain compromise or concede the amount of the unpaid tfrp assessment see h_r conf_rep no 105th cong 2d sess validity of tax_liability reviewed de novo see also irm the destruction of the service’s file recommending assertion of the tfrp at issue against the taxpayer may affect the service’s hazards_of_litigation on the merits of the taxpayer’s challenge to the tfrp liability but the destruction of this tfrp file is not necessarily fatal to the service’s case as discussed further below in a cdp hearing context where the merits of the tfrp liability are properly at issue the appeals function gives the taxpayer a written notice_of_determination at the end of the hearing process which should address the tfrp merits issues and the other issues the taxpayer was allowed to and did raise a notice_of_determination also advises the taxpayer of the taxpayer’s right to seek judicial review of the appeals function’s determinations within days by filing a complaint in u s district_court in the case of a tfrp liability see temp sec_301_6330-1t e q ae7 in this manner a taxpayer’s cdp hearing challenge to an unpaid tfrp liability that is no longer supported by the service’s original file recommending assertion of the tfrp may be brought to court to consider the merits of the unpaid tfrp liability the service issues a decision letter rather than a notice_of_determination at the conclusion of an equivalent_hearing process and the taxpayer has no right to judicial review of the appeals function’s resolution of the issues in a decision letter nevertheless even though the equivalent_hearing process in the appeals function may not lead directly to a taxpayer’s right to litigate the outcome in court transmittal for a cdp or equivalent_hearing case involving the tfrp liability to the appeals function a form_3210 is the transmittal form used for this purpose and the summary statement attached to it should contain information of this type that would assist the appeals function in its determination see irm and gl-603611-00 the service has decided that it is appropriate for the appeals function to consider the same issues that it would have considered at a cdp hearing on the same matter including the hazards_of_litigation to the service’s position see temp sec_301_6330-1t i this policy decision reflected in the regulation also makes good practical sense in the case of an unpaid tfrp liability if the service goes forward with its proposed levy action the service’s levy activity may then easily result in the collection of enough of the tfrp liability the trust_fund_taxes owed with respect to one employee for one quarter to entitle the taxpayer to make a request for a refund of the liability paid and to put the merits of the previously unpaid tfrp liability with its attendant hazards_of_litigation before a u s district_court for decision alternatively a taxpayer denied an opportunity to discuss the parties’ hazards_of_litigation with respect to the merits of a tfrp liability in an equivalent_hearing by the appeals function could file bankruptcy and obtain an opportunity to litigate his her liability for the tfrp in the bankruptcy case if the service files a bankruptcy proof_of_claim for the unpaid tfrp liability issue reliance on forms to establish elements of tfrp liability in a cdp hearing or equivalent_hearing case the appeals function is required prior to issuing a notice_of_determination or notice of decision to obtain general verification from the collection function that the requirements of applicable law or administrative procedure have been met by the service in addition to considering the issues properly raised by the taxpayer sec_6330 temp sec_301_6330-1t e and e a-e1 i in davis v commissioner t c no date the tax_court held that it was not an abuse_of_discretion for an appeals function hearing officer in a cdp case to rely on an irs form_4340 certificate of assessments and payments for purposes of complying with sec_6330 indeed as you have concluded and the prior memorandum you attached with your request for assistance suggests it is highly appropriate and proper for an appeals function hearing officer and for other service employees to see 280_f2d_89 8th cir wherein the united_states confessed error and stipulated that the full_payment_rule for income_tax refund actions discussed in 357_us_63 does not apply to assessments of divisible taxes such as the tfrp these practical alternative opportunities for a taxpayer to obtain judicial review with respect to the merits of an unpaid tfrp liability may also admittedly exist with respect to the merits of the liability in some of the issue preclusion circumstances when the taxpayer receives prior notice of an opportunity for a prior appeals function conference discussed in relation to issue above nevertheless as a policy matter it is not appropriate for the appeals function to consider the service’s hazards_of_litigation on the merits in these issue preclusion circumstances otherwise there would be no limit to the number of appeals function conferences a taxpayer might seek on the same tax or issue and taxpayers would not be appropriately encouraged to seek timely conferences with the appeals function gl-603611-00 rely on a form_4340 first to satisfy the requirements of sec_6330 and second to overcome a variety of arguments a taxpayer may raise with respect to a tfrp assessment at a cdp or equivalent_hearing pursuant to sec_6330 even when the service’s file recommending the tfrp assessment against the taxpayer has been destroyed however an irs form_4340 alone does not overcome all potentially proper challenges eg a factually supported merits challenge to the underlying liability that a taxpayer may raise to a tfrp assessment in a cdp or equivalent_hearing case further if there are material discrepancies between the information reflected on an irs form_4340 and other available evidence or if the irs form_4340 does not contain relevant entries that address the issues raised by the taxpayer then an appeals function hearing officer or a reviewing court may seek or receive further explanations from the interested parties rather than give conclusive weight to the information reflected on the form_4340 even when the merits of the tfrp liability are not properly at issue in the davis case the taxpayer failed to allege that he did not receive a statutory_notice_of_deficiency for the income_tax deficiencies in issue nor did he allege that he did not have a prior opportunity to contest the service’s deficiency determinations accordingly the tax_court opinion started with the conclusion that the taxpayer’s underlying tax_liability the merits was not properly before the court in this cdp review case the procedural argument raised by the taxpayer in davis was that the appeals function hearing officer should not have relied on a form_4340 in the cdp hearing to establish the date and amount of assessments made by the service against him that the hearing officer should instead have attempted to go behind the form_4340 to verify from personal inspection of the original documents that irs form sec_23c summary records of assessment were actually signed by an irs service_center assessment officer on the dates and for the amounts shown in the service’s certified records the tax_court rejected this frivolous procedural argument citing several prior circuit_court decisions on the issue the tax_court correctly observed that irs forms provide presumptive evidence that a tax has been validly assessed under sec_6203 and noted that the taxpayer did not demonstrate any irregularity in the assessment procedure the prior memorandum you referred to and the davis opinion each cite a number of court decisions decided outside the context of a cdp hearing in which the service and the courts have relied upon irs forms as presumptive proof of the regularity of various procedural matters such as whether the service properly made a record of the assessment under sec_6203 whether the service properly gave notice_and_demand for payment under sec_6303 whether the service’s records reflect the actual assessment_date of a tax to measure the timeliness of a suit by the united_states to reduce the tax to judgment before the collection limitation period expired under sec_6502 or whether the service’s records reflect the actual amount of a non-divisible tax_assessment made by the service to evaluate the taxpayer’s compliance with the flora full_payment_rule so that the taxpayer could properly initiate a refund_suit for the tax under sec_7422 gl-603611-00 three circuit_court cases involved quiet title challenges by taxpayers pursuant to u s c to the procedural regularity of the service recording its assessments and or the service giving the taxpayer proper notice_and_demand for payment under sec_6203 and sec_6303 respectively challenges to the merits of a federal tax_liability are not permitted in a quiet title action in each case the circuit_court relied upon irs forms as presumptive proof of the service’s proper compliance with sec_6203 and or and the taxpayers failed to show any discrepancies between the forms and any of the available evidence see 961_f2d_1 1st cir cert_denied 506_us_891 3_f3d_1297 9th cir cert_denied 511_us_1030 962_f2d_555 6th cir two other circuit_court cases involved suits by the united_states to reduce unpaid assessed taxes to judgment the taxpayer raised non-merits objections to the assessed taxes and the courts relied on the information reflected on irs forms to resolve the disputes in the service’s favor in 871_f2d_1015 11th cir cert_denied 493_us_975 the taxpayer challenged whether the service had properly recorded a tfrp assessment against him and whether the service had made proper notice_and_demand for payment on the taxpayer for purposes of sec_6203 and sec_6303 in 318_f2d_637 7th cir an heir to a decedent argued that an estate_tax liability had been assessed by the service earlier than the date shown on an irs form_4340 so as to make the suit by the united_states to reduce the unpaid tax to judgment untimely ie outside of the collection limitation period two other circuit_court cases involved tax_refund suits brought by taxpayers the taxpayers were not permitted to or did not contest the merits of the taxes in their appeals and the courts again relied upon the information shown on forms to resolve the disputes in the service’s favor in 8_f3d_1169 7th cir the merits of the tax_liabilities contested by the taxpayer could not be contested because the taxes had been previously determined in prior tax cases that were then res_judicata so the taxpayer’s challenge was limited to a bare allegation the service had failed to comply with sec_6203 in making its assessments of the tax in 933_f2d_991 fed cir the lower court dismissed the taxpayer’s refund case for a federal estate_tax because the taxpayer had not fully paid the tax before filing the suit and the taxpayer alleged that the irs form_4340 overstated the amount of the estate_tax assessment that the executor was required to pay in full in order to bring the refund action while the eight circuit_court cases described above showcase procedural challenge circumstances where the service has prevailed by offering certified forms in evidence other procedural challenges to the service’s actions have not been fully resolved by irs forms when the courts have found there was some evidence of material discrepancies or of data missing from the forms in 970_f2d_66 5th cir a suit by the united_states to reduce unpaid income_tax deficiency assessments to judgment the court relied on certified gl-603611-00 forms to defeat the taxpayer’s allegation that the taxes were not properly recorded for purposes of sec_6303 but the court remanded the case for proof that a statutory_notice_of_deficiency had been properly mailed to the taxpayer by the service and that the taxpayer defaulted before the deficiencies were assessed because the taxpayer denied that he received a notice_of_deficiency and the irs forms did not address this procedural issue in 10_f3d_1440 9th cir cert_denied 512_us_1219 the taxpayers filed a quiet title action challenging the procedural regularity of the service’s tax_liens and the court accepted certified forms as evidence the service made proper notice_and_demand for payment for sec_6303 purposes but the ninth circuit found the forms in the case were defective for purposes of sec_6203 because the documents did not show a 23c date that indicated when the irs form sec_23c were signed earlier in 990_f2d_451 9th cir cert_denied 510_us_1023 the ninth circuit also stated that while forms are proper evidence of the propriety of the assessment procedures followed by the service the forms are not necessarily conclusive evidence the farr court suggested that the united_states could rely on irs forms in a summary_judgment proceeding to show that a notice_of_deficiency was mailed by the service to the taxpayer’s last_known_address but that the taxpayer was first entitled to conduct discovery on the issue and that the taxpayer’s case could not be dismissed at the outset for an alleged failure to state a claim on the basis of the information reflected on irs forms finally in a recent district_court case where the united_states was seeking to reduce an old tfrp assessment to judgment and the service had destroyed a form_941 return of the taxpayer’s former employer the court was unwilling to conclude that no material issue of fact remained for trial for one of the tfrp quarters at issue a certified irs form_4340 showed that the tfrp assessment against the taxpayer for that quarter was made for an amount that was about dollar_figure larger than the service had asserted that the corporate employer owed for that same quarter in an amended bankruptcy proof_of_claim that the service filed a few months after the tfrp assessment was made when the issue of the correct amount owed for this quarter is brought to trial the court indicated that the initial burden of proving by a preponderance_of_the_evidence that the tfrp assessment for this quarter was arbitrary and erroneous would lie with the taxpayer 102_fsupp2d_351 s d tex see also 997_f2d_335 7th cir in godfrey the service argued that it mailed the taxpayers a timely refund check the taxpayers alleged that they did not receive the check a new refund check was issued by the service and the taxpayers sued the service for interest that was due them on the tax_refund amount only if the service failed to mail the taxpayers the original check on the date shown with the notation refund of overpayment on an irs transcript other than a form_4340 without explanatory testimony the seventh circuit was unwilling to interpret the transcript notation as meaning the refund check was mailed on that date gl-603611-00 issue defending tfrp liability on the merits when files were destroyed in 428_us_433 the supreme court was primarily concerned with whether the exclusionary rule a criminal_law deterrent to improper police conduct should be applied to prohibit a federal_agency the service from using evidence that was improperly seized by california state police from a taxpayer’s business in support of the federal agency’s civil assessment of the federal wagering tax against the taxpayer the supreme court ultimately decided that the exclusionary rule should not be extended to these circumstances that the service was not barred from using the evidence of gambling activity by the taxpayer that it received from the california state police in support of its civil federal wagering tax assessments against the taxpayer if the evidence improperly seized by the state police could not have been used by the service then it had conceded that it would not have had any admissible evidence other than forms to support its federal wagering tax assessments against the taxpayer moreover if the service had been barred from using the evidence improperly seized by the state police any later efforts by the service to reconstruct or supplement the same type of evidence on its own could have been construed as tainted fruits of the improper search and also deemed inadmissible before it considered the historical policies behind the exclusionary rule and announced its decision on that issue the supreme court first discussed in dicta janis pincite what the status of the service’s naked assessments would have been if the exclusionary rule had been applied as follows what we have is a naked assessment without any foundation whatsoever if what was seized by the los angeles police cannot be used in the formulation of the assessment the determination of tax due then may be one without rational foundation and excessive and not properly subject_to the usual rule with respect to the burden_of_proof in tax cases there appears indeed to be some debate among the federal courts of appeals in different factual contexts as to the effect upon the burden_of_proof in a tax case where there is positive evidence that an assessment is incorrect however that may be the debate does not extend to the situation where the assessment is shown to be naked and without any foundation certainly proof that an assessment is utterly without foundation is proof that it is arbitrary and erroneous we are willing to assume that if the district_court was correct in ruling that the evidence seized by the los angeles police may not be used in formulating the assessment on which both the levy and the counterclaim were based then the district_court was also correct in granting judgment for janis in both aspects of the present suit this assumption takes us then to the primary issue seven years after janis the sixth circuit considered a federal_income_tax refund action where the government conceded that it no longer had in its possession any reports workpapers or other documents to support the notice_of_deficiency the service had issued to the individual taxpayers a little over years before the refund_suit was commenced 704_f2d_326 6th cir gl-603611-00 in the coleman case the court also found that the taxpayers had delivered their relevant financial records to the service in the course of the audit many years before that the service’s notice_of_deficiency to the taxpayers was returned as unclaimed by the post office that the taxpayers sought to learn the basis for the assessment from the service relatively soon after they discovered the service was trying to collect it and that as early as three years after the assessment was made the service admitted to the taxpayers that it could not locate the financial records the taxpayers had given them during the audit nor could the service locate it own files to explain the basis for its assessment in these circumstances the sixth circuit relied on the above-described dicta from janis and held that the taxpayers had established that the service’s naked assessments were arbitrary and could not be enforced however the sixth circuit clarified coleman pincite that it was not saying that the service in another case involving missing original records could not have preserved the presumption of correctness for its assessment by the use of non-original records it should be noted that reversing the district_court here does not strip the irs of the ability to collect taxes in the absence of original records had such secondhand records been available in the matter sub judice or any demonstrably reasonable methodology of estimation it is likely that even the destruction of the colemans’ original returns would not have precluded reliance upon the assessment’s presumption of correctness seven years after coleman the seventh circuit considered the meaning of a naked assessment in a case involving a tfrp liability that the service admitted before the second_phase of a trial that it had miscalculated 900_f2d_1144 7th cir in schroeder the service originally miscalculated the tfrp owed by two responsible persons by failing to account for part of a prior payment by the employer that was applied to the trust_fund_taxes it owed when the service originally made the tfrp assessment the total amount assessed was excessive by about as the collection limitation period for the tfrp approached the service believed that it had collected about of the total tfrp but it had in fact collected about of the liability not including a large interest accrual since assessment due to its original calculation error the united_states then brought suit to reduce the unpaid portion of the tfrp liability and the unpaid accrued interest to judgment due to the service’s original miscalculation of the tfrp and considering the amounts collected and applied toward the total tfrp since assessment the united_states eventually admitted that it had sought judgment against the taxpayers for an unpaid tfrp amount that was overstated by about not including the large interest accruals the service’s witness in the computation phase of the trial was also unable to provide the court with revised interest computations that accounted for the corrected tfrp amount in these circumstances the district_court found the service had an arbitrary erroneous and invalid assessment for the tfrp and that the united_states was liable to the taxpayers for attorney fees the seventh circuit reversed explaining schroeder pincite as follows gl-603611-00 when a court is faced with an incorrect but otherwise valid assessment the proper course is not to void the assessment as did the district_court but to determine what if anything the taxpayer owes the government see 293_us_507 55_sct_287 79_led_623 this course should be followed whenever a taxpayer’s liability is capable of being determined by some approved method of calculation even when the original assessment was arbitrarily computed and excessive in amount the district_court apparently believed this was a case like janis where the circumstances are such that the government’s assessment is without effect it is not a n assessment excessive in amount without more is not void under janis for the assessment to be void it must be more than incorrect for the correctness of the amount assessed is quite irrelevant it must be arbitrary in the sense that the calculation has no support and the true amount of tax owed is incapable of being ascertained thus where records supporting an assessment are excluded from evidence see janis supra or are nonexistent see 704_f2d_326 6th cir so that the basis upon which an assessment is calculated is beyond the knowledge of the court the assessment is arbitrary and erroneous it is beyond saving such an assessment however does not exist here there are plenty of records documents and other foundational items upon which a correct determination of the defendants’ liability may be made consequently there was no need to void the assessment there was at most a need to calculate the correct amount of tax due the government by the time that tax_refund and other suits involving the merits of a tfrp assessment are sometimes brought to court by the taxpayers or the united_states it is not uncommon for the service to have destroyed or lost some portion of its original records that might potentially be relevant to some aspect of the liability challenged by the taxpayers in these circumstances the united_states is ordinarily able to show - through the original records it may still have such as the employer’s tax returns or files documents obtained from neutral third parties eg secretary of state information bank signature cards or the testimony and other information obtained from witnesses related to the employer through discovery - that it has some foundation for its assessment and that the burden_of_proof should remain upon the taxpayer in 805_fsupp_1062 d p r the taxpayers argued that the tfrp assessment against them was naked because the service had apparently lost its file with respect to the employer who failed to pay the trust_fund_taxes at issue nevertheless the district_court in morales found that the united_states presented considerable evidence in that case to show that the tfrp assessments were not lacking an evidentiary foundation so the burden_of_proof remained on the taxpayers in united_states v tarlow u s t c big_number e d n y the taxpayers sought to dismiss a tfrp assessment as invalid and lacking a rational foundation because the service had apparently destroyed its original administrative file recommending the tfrp assessment against the taxpayer and the service’s revenue_officer who made the tfrp recommendation had since retired and could not be located since the taxpayers and or the united_states had apparently earlier made and retained gl-603611-00 copies of some of the pertinent records from the later destroyed tfrp file and the service was going to provide the taxpayers either with a certificate of destruction or with an affidavit explaining the efforts it had made to locate the missing tfrp file the district_court concluded that it was not presented with a naked assessment case and it held that the presumption of correctness for the tfrp assessment remained in another recent tax_refund case involving a tfrp assessment and a missing administrative file of the service with respect to the tfrp recommendation judge francis allegra of the u s court of federal claims provided a thoughtful analysis of the meaning of the janis and coleman cases and the possible effect of a naked assessment on the burden_of_proof in the taxpayer’s case in chief for refund of the paid portion of the tfrp assessment and on the counterclaim of the united_states for the unpaid balance of the tfrp see 46_fedclaims_110 fed cl in the cook case the court found that it could not determine whether the service’s loss of the tfrp recommendation file for the taxpayer gave rise to a naked assessment until the time of trial when the united_states would first be given an opportunity to show a foundation for the tfrp assessment judge allegra noted cook pincite that the government’s evidence to establish a foundation for a tfrp assessment need not include any documents or information that were originally in its possession when the tfrp assessment was made as follows as described in janis and its progeny however an assessment is not naked simply because the administrative file supporting its entry is lost - what is critical given the de novo nature of the proceedings before this court is that admissible evidence exists to support the assessment citations omitted if such evidence exists and is admitted by the court it is irrelevant whether it is the same evidence that the service relied upon in originally making its assessment indeed consistent with the no-look doctrine courts have repeatedly held that the government may support a tax_assessment based on any admissible evidence including that first disclosed in discovery and conversely need not rely solely or at all on the evidence reviewed administratively by the service issue appeals collection coordination re missing tfrp information in a taxpayer’s cdp hearing or equivalent_hearing case where the merits of an unpaid tfrp liability are properly at issue because the issue was timely raised by the taxpayer and consideration of the merits is not precluded the appeals function should be no less deferential than the courts have been in affording the service an opportunity to reestablish an appropriate foundation for a tfrp liability where all or part of the service’s original file recommending the tfrp assessment at the eventual trial of the tarlow case the government was ultimately unsuccessful see united_states v tarlow u s t c big_number e d n y gl-603611-00 has been destroyed in keeping with the independent review mission of the appeals function however it is not the responsibility of the appeals function to attempt to reassemble or gather the information necessary to provide a foundation for a tfrp assessment when the service’s file recommending the tfrp has been destroyed instead as with other appeals function hearing matters where further factual development of a collection function case is necessary to make a full and fair determination the appeals function should retain jurisdiction of the case but refer the matter back to the collection function for an appropriate time period the collection function may then determine under the particular circumstances of the case whether it would be a cost effective use of its resources in that case to attempt to gather foundational evidence to support the unpaid tfrp liabilitydollar_figure an appropriate model of appeals collection function coordination may be found where a taxpayer protests a proposed tfrp assessment to the appeals function when the collection function issues day preliminary notices of proposed tfrp assessments to taxpayers pursuant to sec_6672 the service’s original file recommending the tfrp should almost always be readily available for consideration by the appeals function if a taxpayer files a timely protest to such a day notice the appeals function still may decide that it is appropriate to retain jurisdiction of a case but to hold its consideration in suspense while matters requiring further factual development are referred back to the collection function in these cases of timely protests from day notices the time allowed by the appeals function to the collection function for further factual development is ordinarily at least days with extensions possible by mutual agreement of the parties see irm while these day notice tfrp cases are being further developed by the collection function the service does not assess the tfrp and therefore the taxpayer should not be prejudiced by the delay while it is generally desirable for the appeals function to conduct and conclude its cdp hearings and equivalent hearings as expeditiously as possible there are no time limits by law or regulation on when the appeals function must issue its notice_of_determination or decision letter in a case see temp treas reg a form_2209 or another locally acceptable form may be used for this purpose see irm and whether or not the service has retained the tfrp recommendation file for older tfrp liabilities should be an issue of lessening importance in a cdp context in future years first most taxpayers who were issued day notices of proposed tfrp assessments pursuant to sec_6672 after date should find that consideration of the merits of the tfrp liability is precluded in a cdp hearing or equivalent_hearing second most taxpayers who are liable for a tfrp liability in future year cases should be receiving their one cdp hearing notice per period much earlier in the collection process and therefore be precluded from receiving a cdp hearing or equivalent_hearing for the same liability when collection activity is again contemplated closer to the expiration of the collection limitation period for the liability gl-603611-00 1t e q ae8 moreover while a cdp hearing case is pending with the appeals function the proposed levy action by the collection function that was the subject of the requested hearing is generally suspended sec_6330 and f when a taxpayer properly requests an equivalent_hearing the service’s proposed levy action is not automatically suspended but the appeals function may also request on a case-by-case basis that the collection function suspend its proposed levy action in appropriate circumstances see temp treas reg 301-6330-1t i q ai-3 when the merits of a tfrp liability are properly at issue in a taxpayer’s equivalent_hearing request and the collection function wants further time to reestablish the foundation for a tfrp liability because its original file recommending assertion of the tfrp has been destroyed it would generally be appropriate absent jeopardy circumstances for the collection function to agree to suspend its proposed levy action while an equivalent_hearing case is pending with the appeals function accordingly while these cdp hearing or equivalent_hearing tfrp cases with missing files are being further developed by the collection function the prejudice caused to the taxpayer by reasonable delays in the hearing process should be minimaldollar_figure therefore as with day notice cases involving the tfrp it is appropriate for the appeals function in a cdp hearing or equivalent_hearing case to allow the collection function no less than days to decide whether to and to complete reconstruction of any necessary foundation evidence for a tfrp liability that is properly challenged by a taxpayer on the merits when the service’s original file recommending assertion of the tfrp has been destroyed when the collection function decides that it is cost effective for the service to reconstruct the evidence supportive of the unpaid tfrp liability in these circumstance but more than days are required by the collection function for this task we believe the appeals function should generally agree to reasonable extensions of the initial day period in some cases of this type we expect the collection function will decide that attempting to reconstruct the evidence is not a cost effective use of the service’s resources the collection function alone or the collection and appeals functions together may recommend advance selection tolerances to apply in these circumstances with appropriate coordination and approval through the new sbse structure such tolerances may be varied locally with appropriate approval from the new sbse structure because workload and general deterrence considerations may differ in various parts of the country please call the attorney assigned to this case pincite-3630 if you require further assistance during hearing process delays of this type interest will admittedly continue to accrue on the assessed tfrp liabilities that are unpaid


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 as h i n g t o n d c date offic e of c h ief c o u n sel number release date uilc cc dom it a wta-n-100540-00 memorandum for harry martin fed-state coordinator north-south carolina district from lewis j fernandez deputy assistant chief_counsel income_tax accounting subject north carolina flood relief - interest subsidies for business this technical assistance is in response to your request for assistance dated date regarding the tax treatment of state payments made to individuals and businesses of north carolina who suffered losses due to the flood damage caused by hurricane floyd technical assistance does not relate to a specific case and is not binding on examination or appeals this document is not to be cited as precedent issues what are the federal_income_tax consequences to a business taxpayer who receives benefits under the following flood relief programs a deferred payment loans b business advance program c interest buy-down on sba loans what information reporting requirements if any does the state of north carolina have with respect to payments under these flood relief programs conclusions a businesses that receive no-interest deferred payment loans are not required to include an amount in income and are not entitled to take any deduction for interest_paid or accrued wta-n-100540-00 b businesses that receive payments under the business advance program are not required to include an amount in income and are not entitled to take any deduction for interest_paid or accrued c payments to businesses under the interest buy-down program are includible in the gross_income of the business in the year the payment is received cash_basis taxpayers or in the year the taxpayer applies for the payment accrual basis taxpayers businesses may deduct in each year of the loan the amount of interest that accrues in that year the state must file information returns to report payments to business taxpayers that are not corporations for which the interest subsidy payments for the year total dollar_figure or more facts in response to widespread damage caused by hurricane floyd in the governor of north carolina proposed a state emergency package consisting of numerous relief programs to assist individuals and small businesses in recovering from the disaster on date the legislature enacted the hurricane floyd recovery act of which appropriated funds for a package of relief programs and requires that state agencies distributing the funds inform recipients by written_statement of the federal and state_income_tax consequences of the disbursements accordingly the north carolina department of revenue has requested your assistance in determining the federal_income_tax treatment of the disbursements the following disaster assistance programs are addressed in this technical assistance the numbers appeared in the margin of materials in your request for assistance deferred payment loans this program provides interest-free state-funded three year loans to small and mid- sized businesses that are economically viable but do not qualify for small_business administration sba loans at the end of three years the business must repay the principal_amount of the loan to the state business advance program the north carolina department of commerce will provide cash advances of up to dollar_figure to businesses that have applied for sba loans to pay for immediate needs under this program funds can be disbursed within days as opposed to three to six weeks to receive the sba loan proceeds the business must repay amounts received under the business advance program upon receipt of the sba loan funds wta-n-100540-00 interest buy-down on sba loans north carolina will provide grants to flood victims equal to the cost of interest on sba loans for the first three years this program will be administered by commercial banks businesses that qualify for sba loans will take their executed sba loan documents to the bank the bank will calculate the amount of interest for the first three years and issue a check to the business in that amount law and analysis sec_61 provides generally that gross_income means all income from whatever source derived sec_1_61-1 of the income_tax regulations provides that gross_income includes income realized in any form in 348_us_426 1955_1_cb_207 the united_states supreme court held that the concept of gross_income encompassed accessions to wealth clearly realized over which taxpayers have complete dominion sec_451 provides generally that an item_of_gross_income shall be included in gross_income in the taxable_year in which received by the taxpayer unless under the taxpayer’s method_of_accounting the amount is to be properly accounted for in a different period sec_446 and c provide generally that both the cash_method and the accrual_method are permissible methods_of_accounting cash_basis taxpayers generally take items into gross_income in the taxable_year in which they are actually or constructively received sec_1_451-1 c i accrual basis taxpayers generally take items into gross_income when all the events have occurred that fix the taxpayer’s right to receive the income and the amount of the income can be determined with reasonable accuracy sec_1_451-1 c ii a sec_163 generally permits business taxpayers to deduct all interest_paid or accrued within the taxable_year on trade_or_business indebtedness sec_461 provides generally that deductions are taken in the taxable_year which is proper under the taxpayer’s method_of_accounting in general_deductions for cash_basis taxpayers are proper in the year of payment sec_1_461-1 however sec_461 provides rules for prepaid_interest and provides generally that if taxable_income is computed under the cash_receipts_and_disbursements_method of accounting interest_paid by the taxpayer which is properly allocable to any period with respect to which the interest represents a charge for the use or forbearance of money and which is after the close of the taxable_year in which paid shall be charged to capital_account and shall be treated as paid in the period to which so allocable wta-n-100540-00 accrual basis taxpayers generally take deductions in the taxable_year in which all the events have occurred that establish the fact of the liability the amount of the liability can be determined with reasonable accuracy and economic_performance has occurred with respect to the liability sec_461 sec_1_461-1 in the case of interest_expense economic_performance occurs as the interest cost economically accrues sec_1_461-4 under the rules of sec_163 and sec_461 taxpayers engaged in a trade_or_business are generally permitted to deduct interest as it accrues that is ratably over the period of the indebtedness this is true regardless of whether taxpayers compute income using an accrual_method of accounting or a cash_method_of_accounting in general sec_7872 defines a below-market_loan as any loan on which the interest rate charged is less than the applicable_federal_rate under sec_1274 afr sec_7872 provides that the borrower of a below-market term_loan is treated as having received from the lender on the date the loan is made cash in an amount equal to the excess of the amount_loaned over the present_value of all payments required under the loan the imputed transfer sec_7872 further provides that a below-market term_loan is treated as having original_issue_discount in an amount equal to the imputed transfer which is in addition to any other original_issue_discount on the loan determined without regard to sec_7872 sec_7872 applies only to the below-market loans listed in sec_7872 under sec_7872 a tax_avoidance loan is a below-market_loan one of the principal purposes of the interest arrangements of which is the avoidance of any federal tax under sec_7872 a significant effect loan is a below-market_loan for which to the extent provided in regulations the interest arrangements of the loan have a significant effect on any federal tax_liability of the lender or the borrower no regulations have been issued under sec_7872 sec_7872 b c and f do not apply in this case the legislative_history of sec_7872 indicates that most government-subsidized loans such as government insured or guaranteed student loans or residential mortgages were intended to be exempt from sec_7872 s rep no vol 98th cong 2d sess sec_6041 provides that all persons engaged in a trade_or_business and making payment in the course of such trade_or_business to another person of rent salaries wages premiums annuities compensations or other fixed or determinable gains profits and income of dollar_figure or more in any taxable_year must make an information_return under sec_1_6041-1 federal and state governments are considered persons engaged in a trade_or_business for purposes of sec_6041 however sec_1_6041-3 generally exempts payments to a corporation from the information reporting requirements wta-n-100540-00 deferred payment loans and business advance program these programs are addressed together because both programs provide zero interest loans to eligible businesses although loans under the business advance program are extremely short term in the absence of regulations implementing sec_7872 sec_7872 will not apply to loans under the deferred payment loans and business advance programs unless they are determined to be tax_avoidance loans under sec_7872 those programs were established by north carolina to provide state-subsidized financial assistance to businesses that were damaged by the floods the interest arrangements of loans under the programs are not structured with a principal purpose of avoiding federal tax and the loans are not tax_avoidance loans for purposes of sec_7872 therefore sec_7872 does not apply to loans under these programs accordingly upon receiving a zero interest loan under the deferred payment loans or business advance programs a business is not required to include an amount in income and may not take a deduction for interest_paid or accrued because the disbursing of a loan is not taxable to the recipient there is no information reporting requirement interest buy-down on sba loans the payment to a business taxpayer of the amount that the business is expected to pay in interest for the first three years of an sba loan is a clear accession to wealth that is includible in the business' gross_income 673_f2d_784 5th cir aff’g 74_tc_743 revrul_76_75 1976_1_cb_14 interest subsidy payments made by government agency to mortgagees on behalf of mortgagor owners of lower-income rental housing constitute gross_income to owners a cash_basis taxpayer must include the amount of the payment in income in the year the payment is received an accrual basis taxpayer must include the amount of the payment in income when all the events have occurred that fix the right to receive the income and the amount thereof can be determined with reasonable accuracy in this case it appears that the right to a grant becomes fixed when a business files its executed sba loan documents with the commercial bank once an application is filed the remaining processing is ministerial as the bank appears to merely calculate the amount of interest on the loan for the first three years based on the loan documents supplied by the business see 286_us_290 accordingly a business using the accrual_method of accounting should accrue the amount of the grant in income in the year it files for the grant with the bank even if the grant is not received until a subsequent year regardless of the method_of_accounting a taxpayer may deduct the interest it pays on wta-n-100540-00 the sba loan only as the interest accrues that is ratably over the period of the loan the payments to businesses under the interest buy-down program are fixed or determinable gains profits or income to the recipients therefore the state must make an information_return reporting a payment if the payment is dollar_figure or more and the recipient is not a corporation however the bank and not the state is required to make the information_return if the bank performs management or oversight functions in connection with the payment see revrul_93_70 1993_2_cb_294 we suggest that you advise the state of north carolina to describe the tax consequences of these payments to the recipients in language similar to the following the internal_revenue_service has advised us that you are not required to include any amount in income as a result of receiving a zero interest loan under the deferred payment loans or business advance programs you may not take a deduction for interest when you repay these loans if you have received a payment under the interest buy-down program you must include the amount of the payment in income in the year you received the payment if you are a cash_basis taxpayer or in the year you applied to the bank for the payment if you are an accrual basis taxpayer you may deduct in each year of the loan the amount of interest that accrues in that year taxpayers uncertain whether these principles or interpretations of tax law should apply to their situations should consider seeking a private_letter_ruling or if appropriate technical_advice procedures for issuing letter rulings and technical_advice are in revproc_2000_1 2000_1_irb_4 and revproc_2000_2 2000_1_irb_73 respectively if you have any further questions about this memorandum please call george baker at