t c memo united_states tax_court jason chai petitioner v commissioner of internal revenue respondent docket no filed date frank agostino jeremy m klausner and lawrence m brody for petitioner timothy a sloane and andrew m tiktin for respondent memorandum findings_of_fact and opinion cohen judge respondent determined a dollar_figure deficiency in petitioner’s federal_income_tax and a dollar_figure accuracy-related_penalty under sec_6662 for in an amendment to answer respondent asserted an increased deficiency and an increased penalty of dollar_figure and dollar_figure respectively petitioner’s motion to dismiss the increased deficiency and the increased penalty for lack of jurisdiction was granted on date by order of the court there are two issues for decision whether the dollar_figure million payment petitioner received from delta currency trading llc delta in is nonemployee compensation subject_to self-employment_tax and whether petitioner is liable for the accuracy-related_penalty under sec_6662 for unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference petitioner resided in connecticut when he filed the petition a the participants petitioner graduated from harvard university with a master’s degree in architecture petitioner began his career in los angeles but moved to new york in at all relevant times petitioner conducted a successful architecture business while attending harvard petitioner met andrew beer who later married petitioner’s cousin beer holds a bachelor of arts degree from harvard college and a master of business administration degree from harvard business school he has over years of experience in the investment management business beer created and marketed several tax_shelters directed to wealthy individuals the tax_shelters were designed to offset prospective clients’ large tax_liabilities for a particular year to that end beer formed several entities to create the tax_shelter structure among others these entities included delta bricolage capital llc bricolage and counterpoint capital llc counterpoint beer formed bricolage and delta as delaware limited_liability companies on date and date respectively counterpoint was formed as a delaware limited_liability_company on date at all relevant times beer indirectly owned all or a majority of the interests in delta bricolage and counterpoint collectively bricolage entities petitioner never owned an interest in delta or bricolage the bricolage entities were affiliated by common ownership and shared clients offices employees and resources in and they developed and marketed beer’s tax_shelters and advised their clients on the same b the structure bricolage advised its clients on partnership option portfolio strategy pops tax_shelters during and counterpoint and bricolage advised their clients on personal_investment_corporation pico tax_shelters during and delta also advised its clients on both the pops and pico tax_shelters collectively tax_shelters the tax_shelters were designed to eliminate delta’s clients’ tax_liabilities by generating noneconomic tax losses to offset the clients’ taxable_income the tax_shelters shared three key characteristics each centered around the formation of a flowthrough entity each involved a straddle comprising offsetting derivatives into which the pops or pico entity entered and each required a transitory partner or shareholder in the pops or pico entity to whom the entity allocated income from the derivatives so that a tax_shelter investor could recognize offsetting tax losses to facilitate the transactions delta provided a transitory partner or accommodating party the pops and pico entities allocated income to the accommodating party and allocated noneconomic losses to delta’s clients to offset their large tax_liabilities petitioner was an accommodating party for its part delta received sizable fees for advising its clients on the tax_shelters and facilitating the clients’ participation these transactions were especially profitable for beer as the majority owner of the bricolage entities for instance for delta reported over dollar_figure million of income primarily from client fees similarly for delta reported over dollar_figure million of income primarily from client fees in the commissioner released notice_2002_50 2002_2_cb_98 and notice_2002_65 2002_2_cb_690 advising taxpayers and their representatives that transactions like pops and pico were subject_to challenge by the commissioner and had been designated listed transactions c petitioner’s role after petitioner moved to new york he lived in beer’s home during the summer of that summer beer approached petitioner about participating in a new tax strategy beer had developed to reduce tax_liabilities of potential clients beer explained to petitioner that he intended to market the tax_shelters to encourage wealthy individuals to become clients of delta and its affiliated companies beer also explained the tax strategy and the structure of the tax_shelters to petitioner petitioner understood that the clients had large tax_liabilities for a given year additionally petitioner understood that the structure was a series of transactions designed to offset clients’ tax_liabilities and that his role was to serve as a partner with the potential clients these partnerships were integral to the overall structure furthermore petitioner understood he would serve as a conduit and that the potential clients’ tax_liabilities then would be transferred to him beer told petitioner the tax obligations transferred to petitioner would be eliminated by offsetting activities petitioner raised concerns about the transactions and asked beer whether pops and pico were pure tax_shelters beer assured petitioner these structures had been vetted by attorneys and accountants despite his concerns petitioner agreed to serve as an accommodating party for the pops and pico transactions in exchange for compensation from the bricolage entities petitioner agreed to a dollar_figure annual salary plus a signing bonus in exchange for his participation in the transactions beer and petitioner also discussed discretionary bonuses petitioner could receive for his involvement in pico d the economics of petitioner’s participation petitioner was an accommodating party for at least tax_shelters having reported over dollar_figure billion of noneconomic income allocated to him by the tax_shelters on his and income_tax returns this income was approximately equal to the amounts of offsetting noneconomic tax losses allocated to delta’s clients to relieve petitioner’s concerns about increased tax_liabilities beer assured petitioner that there were strategies they could use to offset petitioner’s tax_liabilities on the basis of his participation in the tax_shelters notably petitioner received and reported offsetting losses from the pops and pico entities for and approximately equal to amounts of income allocated to him from the tax_shelters e jjc trading llc petitioner’s participation in the tax_shelters involved executing numerous transactions to facilitate each of the tax_shelters this included signing binders of legal documents including articles of incorporation loan agreements wire transfers and redemption request letters for the pico and pops entities in petitioner went to the offices of delta and its affiliates a lot and regularly to sign documents executing the tax_shelter transactions this signing responsibility was problematic for petitioner because he traveled frequently for his architecture business he was often unable to be physically present to sign these documents therefore at delta’s suggestion in petitioner formed jjc trading llc jjc to facilitate and simplify petitioner’s participation in the bricolage entities petitioner was the sole owner of jjc and bricolage was jjc’s nonmember manager jjc relieved petitioner of his signature burden because jjc’s operating_agreement signed by petitioner gave bricolage authority to make decisions and sign documents for jjc in petitioner’s stead petitioner also gave bricolage power_of_attorney to make decisions and sign documents for jjc petitioner did not maintain books_and_records regarding his interests in jjc the tax_shelter entities or the transactions f petitioner’s compensation petitioner received significant compensation from the bricolage entities in exchange for his participation in the tax_shelters for instance in petitioner received dollar_figure million from counterpoint as a signing bonus and in jjc received dollar_figure million from delta counterpoint and delta reported these payments on forms 1099-misc miscellaneous income form_1099 as nonemployee compensation and petitioner reported them as income on form sec_1040 u s individual_income_tax_return and paid the resulting tax petitioner also received several other_payments from bricolage and counterpoint totaling dollar_figure per year for and and reflecting beer’s agreement with petitioner that he would receive an annual salary of dollar_figure in exchange for his participation bricolage and counterpoint reported all of these amounts as petitioner’s wages and petitioner paid the resulting tax g the payment from delta in date petitioner received an email date email from delta’s chief financial officer helen del bove referencing petitioner’s receipt of dollar_figure million from delta in the date email also notified petitioner he would receive future fees for consulting work he performed for delta on date petitioner received a dollar_figure million payment from delta before petitioner received the dollar_figure million payment however he and del bove had exchanged several emails in date discussing the proper tax treatment of the dollar_figure million payment del bove notified petitioner that delta was going to wire petitioner the dollar_figure remaining in jjc dissolve that entity and pay petitioner an additional dollar_figure million in response petitioner asked to this end can you fill me in on how this money should be treated as far as my accountant is concerned will i be issued a for the whole amount del bove responded that the dollar_figure million payment will be reported on a so you should tax-plan accordingly petitioner again asked for clarification on whether both the dollar_figure million payment and the balance in the jjc account were going to be reported on his forms for del bove responded that t he amount you receive from jjc trading is not income and therefore will not be reported on a that money is from what you had originally invested in jjc trading the 2mm we pay you will be reported on a as well as any other subsequent payments beer had authorized on behalf of delta the dollar_figure million payment to petitioner beer viewed the dollar_figure million payment as a discretionary bonus for services petitioner had provided to delta consistent with past practice delta reported the dollar_figure million on form_1099 for as nonemployee compensation h petitioner’s tax reporting petitioner did not report the dollar_figure million payment from delta as taxable_income contending that it was a return_of_capital from his investments however petitioner was not a partner of delta and did not invest any capital in delta neither petitioner nor jjc reported receiving a share of delta’s income or loss no schedule_k-1 partner’s share of income credits deductions etc was prepared by delta for petitioner all of petitioner’s interests in the other tax_shelter entities were either sold or redeemed before he received the dollar_figure million payment in in closing agreements executed between petitioner and the internal_revenue_service irs with respect to pops and pico petitioner agreed that he had disposed of all his interests in the tax_shelter entities by the end of petitioner reported the amounts he received before on form sec_1040 for and jjc reported amounts received in completed sales of its interests in petitioner reported zero total_tax on his income_tax return for stephen ellspermann a certified_public_accountant prepared petitioner’s income_tax return for petitioner and ellspermann discussed the nature of the dollar_figure million payment before filing petitioner’s return for petitioner told ellspermann that he did not know the nature of the dollar_figure million payment he indicated to ellspermann that the dollar_figure million was from activities managed by bricolage and that ellspermann should contact bricolage to clarify its nature before filing petitioner’s income_tax return for ellspermann asked del bove’s replacement barney taglialatela about money transfers between petitioner jjc mercato global opportunities fund lp mercato global and bricolage he did not ask taglialatela about money transfers to petitioner from delta ellspermann understood on the basis of his conversation with taglialatela that everything pertaining to the partnerships was included on the mercato global schedule_k-1 issued to petitioner ellspermann believed that the dollar_figure million payment was included on the schedule_k-1 he believed this even though he did not specifically ask taglialatela if the dollar_figure million payment was included on the schedule_k-1 taglialatela did not tell ellspermann that the dollar_figure million payment from delta was not income or that it would not be reported on form_1099 for similarly taglialatela never told petitioner or ellspermann that the dollar_figure million would be reported on schedule_k-1 the dollar_figure million payment was not reported as a withdrawal or distribution on any schedule_k-1 or any combination of schedules k-1 that petitioner received for before filing his income_tax return for petitioner did not tell ellspermann about his email correspondence with del bove regarding the dollar_figure million payment and that delta intended it to be income reported on a form_1099 for he also did not tell ellspermann that del bove had notified petitioner that he would receive future fees for his consulting work with delta ellspermann first learned of the delta form_1099 for in during the examination of petitioner’s income_tax return for had ellspermann known of the form_1099 for he would have discussed the tax treatment of the dollar_figure million with taglialatela opinion the parties’ fundamental dispute is over the character of the dollar_figure million payment delta made to petitioner in petitioner contends that the dollar_figure million payment from delta is either a return_of_capital or alternatively a gift from beer to petitioner neither would be subject_to self-employment_tax respondent contends the dollar_figure million payment is nonemployee compensation subject_to self-employment_tax that should have been reported on petitioner’s return i the dollar_figure million dollar payment a burden_of_proof and production generally the taxpayer bears the burden_of_proof rule a 290_us_111 petitioner contends however that pursuant to sec_6201 and sec_7491 respondent should bear the burden_of_proof if a taxpayer asserts a reasonable dispute with respect to an item_of_income reported on an information_return filed by a third party and meets certain other requirements the commissioner bears the burden of producing reasonable and probative evidence in addition to the information_return concerning the deficiency attributable to that item sec_6201 respondent has presented evidence other than the information_return filed by delta as to the character of the income in issue we therefore are not relying on the characterization reported in that information_return the parties stipulated petitioner’s receipt of the dollar_figure million payment and delta’s characterization of that payment for tax purposes thus petitioner must show the nontaxable character of the payment see 87_tc_74 holding that the taxpayer had the burden_of_proof to show nontaxable nature of payment where the taxpayer indisputably received the income in issue_price v commissioner tcmemo_2004_103 if a taxpayer produces credible_evidence to support her or his position complies with substantiation requirements and cooperates with the commissioner with regard to all reasonable requests for information then the burden_of_proof shifts to the commissioner sec_7491 see 116_tc_438 a prolonged discussion of burden_of_proof is unnecessary because we decide this case on the preponderance_of_the_evidence see 131_tc_185 in a case where the standard of proof is preponderance_of_the_evidence and the preponderance_of_the_evidence favors one party we may decide the case on the weight of the evidence and not on an allocation of the burden_of_proof see also estate of jorgensen v commissioner tcmemo_2009_66 aff’d 431_fedappx_544 9th cir b character of the payment gross_income generally includes all income from whatever source derived including compensation_for services in the form of fees commissions or fringe_benefits sec_61 the character of a payment for tax purposes is determined by the intent of the parties particularly the intent of the payor as disclosed by the surrounding facts and circumstances see smith v commissioner t c memo keck v commissioner tcmemo_1993_538 watson v commissioner tcmemo_1960_255 a receipt of capital or a return_of_capital does not constitute taxable_income see 247_us_179 11_tc_964 monico v commissioner tcmemo_1998_10 similarly receipt of a gift is not taxable_income see 29_tc_81 mcdermott v commissioner tcmemo_2003_269 the trial testimony supports the conclusion that the dollar_figure million payment was compensation subject_to self-employment_tax although petitioner attempts to minimize his role in the tax_shelters and describes his activities as investments the record reflects that he provided services to delta to facilitate the tax_shelter transactions beer testified that petitioner’s role in the tax_shelters was a critical component of the transactions and the tax_shelters could not have functioned as planned without petitioner’s participation delta could not have allocated noneconomic losses to its clients without petitioner’s acting as the accommodating party the allocation of dollar_figure billion of noneconomic income to petitioner enabled delta’s clients to reap the benefits of an almost equal amount of noneconomic losses to offset their taxable_income petitioner’s role was far from nominal petitioner argues that because he delegated decisionmaking authority to bricolage he did not perform any meaningful services for delta or any of the other bricolage entities petitioner’s income cannot escape taxation merely because he delegated certain duties to bricolage and beer the risky nature and large receipts of the tax_shelters provide ample justification for the high compensation relative to the low amount of personal effort involved petitioner also provided services in a more apparent manner petitioner’s primary responsibility was to sign binders of formation and organizational documents for the pico and pops entities he testified that there was often a flurry of activity requiring him to go to the bricolage entities’ offices a lot and regularly to sign large volumes of legal documents to execute the tax_shelter transactions this was a burden for petitioner because he traveled frequently for his architecture business to alleviate the burden delta suggested that he form jjc and sign a document granting a power_of_attorney to bricolage petitioner argues that the dollar_figure million payment could not have been compensation_for services because after jjc was formed he was completely removed from that process contrary to petitioner’s assertions signing the formation and organizational documents was not a menial task but an integral component of creating the tax_shelter entities whether petitioner subjectively understood and appreciated the nature of his actions does not eliminate the significance of the services he provided to delta and the other tax_shelters by signing the formation and organizational documents petitioner’s subsequent delegation of his signature_authority does not absolve him from liability for tax on the compensation he received the remainder of the record also reflects that the dollar_figure million payment was compensation beer agreed to pay petitioner a dollar_figure annual salary plus a signing bonus in exchange for petitioner’s involvement beer and petitioner also discussed possible discretionary bonuses petitioner received several payments consistent with his agreement with beer petitioner received significant payments from the bricolage entities characterized and reported as nonemployee income in petitioner received a dollar_figure million signing bonus from counterpoint counterpoint reported it as nonemployee income on its form_1099 for and petitioner paid income_tax on the full amount similarly in petitioner received a dollar_figure million payment from delta through jjc petitioner testified that he viewed it as another bonus delta reported the dollar_figure million payment as nonemployee income on form_1099 for and petitioner paid income_tax on the full amount additionally in and petitioner received a dollar_figure salary paid_by bricolage and counterpoint and consistent with petitioner’s agreement with beer bricolage and counterpoint reported these amounts as wages and petitioner paid the resulting tax there is neither discernable reason nor persuasive justification for treating the payment differently moreover del bove informed petitioner that the dollar_figure million payment in issue would be reported on the form_1099 for in date del bove and petitioner exchanged several emails regarding the dollar_figure million payment and how delta intended to characterize it after responding to petitioner’s multiple requests for clarification del bove unequivocally notified him that delta intended to report the dollar_figure million payment on the form_1099 for after his email exchange with del bove petitioner still questioned del bove’s calculations and did not believe that all or part of the dollar_figure million payment was taxable_income petitioner’s testimony is implausible and unpersuasive he had received compensation in prior years pursuant to his agreement with beer and he had notice that the payment was to be treated as compensation by the payor delta at trial and in his posttrial supplemental brief petitioner objected to the use of the del bove emails as hearsay they are admissible however for purposes other than proving that del bove was correct in her characterization of the payment ie for purposes other than the truth of her statements the emails are admissible to show that petitioner was on notice that the dollar_figure million payment would be treated as taxable_income see 573_f3d_365 6th cir holding statement admissible for nonhearsay purpose to prove plaintiff was on notice of imminent danger ignored warning and acted negligently the del bove emails are also admissible under the state of mind exception to the hearsay rule to show how delta intended to report and characterize the dollar_figure million payment see fed r evid estate of pruitt v commissioner tcmemo_2000_287 holding testimony regarding decedent’s stated intent to include a power to make gifts in powers of attorney admissible under rule of the federal rules of evidence pan am acceptance corp v commissioner tcmemo_1989_440 holding check with notation repay debt admissible under rule of the federal rules of evidence as evidence of intent to repay loan petitioner additionally argues that respondent prevented material evidence from being introduced by not providing del bove with limited immunity petitioner also argues that respondent’s failure to do so should create an adverse inference that del bove’s testimony would not have supported respondent’s position contrary to petitioner’s assertions only the department of justice can grant immunity see u s c sec moreover even if respondent could have granted immunity to del bove and chose not to a negative inference cannot be drawn from that prosecutorial decision see 18_f3d_153 2d cir citing 880_f2d_579 1st cir and relying on that court’s determinations that the government’s failure to immunize a witness without more does not give rise to a missing witness instruction and that no negative inference may be drawn from that prosecutorial decision united_states v forbes wl at d conn date delta’s treatment of the dollar_figure million payment as nonemployee income was consistent with delta and counterpoint’s treatment of the and bonus payments delta reported both prior payments as nonemployee compensation and petitioner reported them as self-employment_income and paid tax on them petitioner has provided no persuasive justification for distinguishing the dollar_figure million payment from the or bonus payments the evidence establishes that the intent of the parties and specifically the intent of the payor delta was to treat the dollar_figure million payment as nonemployee income subject_to tax therefore the character of the dollar_figure million payment is nonemployee income subject_to self-employment_tax petitioner additionally argues that he is not subject_to self-employment_tax on the dollar_figure million payment because he was not engaged in a trade_or_business as a tax_shelter accommodating party the term trade_or_business has the same meaning under sec_1402 as under sec_162 sec_1402 see 118_tc_138 aff’d 353_f3d_595 8th cir in 480_us_23 the supreme court determined that to be engaged in a trade_or_business under sec_162 and in this case sec_1402 the taxpayer must be involved in an activity with continuity and regularity and with the primary purpose of receiving income or profit the record demonstrates that petitioner’s activities were continuous and regular petitioner testified that he went to bricolage’s offices a lot and regularly to execute large volumes of legal documents consisting of formation and organization documents for the tax_shelter entities this fact remained even after petitioner formed jjc in by forming jjc making bricolage jjc’s nonmember manager and giving bricolage power_of_attorney over jjc petitioner’s activities remained continuous and regular bricolage’s actions with respect to jjc are imputed to petitioner as his agent petitioner established the legal machinery for others to act on his behalf and cannot now use that delegation of authority as a shield the record also demonstrates petitioner’s profit_motive petitioner was paid for his services through large lump-sum payments that were reported by the payors as nonemployee compensation on forms and petitioner reported the payments as self-employment_income in short the record demonstrates that petitioner accommodated tax_shelters with sufficient continuity regularity and a profit_motive such that he was engaged in a trade_or_business as a tax_shelter accommodating party next petitioner asserts that the dollar_figure million payment was a return_of_capital aside from his blanket assertions the evidence establishes that petitioner was not a partner in delta and did not invest capital in delta the parties stipulated that petitioner received the dollar_figure million payment from delta and delta’s characterization of that payment simply stated the payment could not have been a return_of_capital because petitioner did not have any capital invested in delta the evidence establishes that petitioner did not have a capital_investment in any_tax shelter entity after in closing agreements with the irs petitioner agreed that both he and jjc sold or redeemed all of their respective interests in the tax_shelter entities by the end of he recorded amounts received in sales or redemptions of his interests in the tax_shelter entities on his income_tax returns for and similarly jjc recorded amounts received in sales or redemptions of its interests in the tax_shelter entities on its income_tax return for nevertheless petitioner asserts that he had investment capital in the tax_shelter entities when he received the dollar_figure million payment petitioner argues that he understood the initial dollar_figure million payment from bricolage would be a signing bonus in to be used as his investment capital in the tax_shelter entities similarly petitioner argues that the dollar_figure million deposit into jjc was ostensibly used to invest in the bricolage entities petitioner did not know which or how many of the bricolage entities’ partnerships he had invested in he did not keep track of the partnerships his investments in the partnerships or the transactions they engaged in he concedes that it is impossible to trace his investments in the bricolage entities because the tax shelters’ structures were too complex and vast to unwind finally he notes that tracing his investments is impossible because he has repeatedly been denied access to necessary financial records petitioner’s argument appears to be that the circumstantial evidence of his investment in the bricolage entities demonstrates that the dollar_figure million payment was a return_of_capital we disagree the preponderance_of_the_evidence establishes that the dollar_figure million payment was not a return_of_capital from delta petitioner alternatively argues that if the dollar_figure million payment is not a return_of_capital then it was a gift from beer petitioner notes that w hile the court may think the suggestion that the payment was part gift somewhat far-fetched this case must be decided on the evidence presented we agree with petitioner’s characterization of his suggestion and the necessity of deciding the case on the evidence but we reject his conclusion a gift results from a detached and disinterested generosity motivated by affection respect admiration charity or the like 363_us_278 the record is devoid of any evidence suggesting that the payment resulted from detached and disinterested generosity rather the evidence establishes that the payor delta intended the payment as compensation notably beer testified that he viewed the dollar_figure million payment as a discretionary bonus for services petitioner provided to delta the evidence compels the conclusion that the dollar_figure million payment in question was received for services and was neither a gift nor a return_of_capital contributions that neither petitioner nor beer could identify ii accuracy-related_penalty finally we consider whether petitioner is liable for the accuracy-related_penalty see sec_6662 respondent has the burden of production and must present sufficient evidence that it is appropriate to impose the penalty see sec_7491 higbee v commissioner t c pincite once respondent satisfies his burden of production petitioner must present evidence sufficient to persuade the court that respondent’s determinations are incorrect see higbee v commissioner t c pincite a sec_6751 petitioner raises for the first time in his posttrial brief an argument that respondent failed to carry his burden of production by not introducing evidence of his compliance with sec_6751 petitioner theorizes that for respondent to meet his burden of production respondent must introduce evidence that the individual making the penalty determination had his or her immediate supervisor approve the accuracy-related_penalty in writing a party may not raise an issue for the first time on brief if the court’s consideration of the issue would surprise and prejudice the opposing party see 116_tc_450 84_tc_191 aff’d 796_f2d_116 5th cir in deciding whether the opposing party will suffer prejudice we consider the degree to which the opposing party is surprised by the new issue and the opposing party’s need for additional evidence to respond to the new issue see 91_tc_200 aff’d 905_f2d_1190 8th cir in addition a party may not rely upon a new_theory unless the opposing party has been provided with fair warning of the intention to base an argument upon that theory see id pincite fair warning means that a party’s ability to prepare its case was not prejudiced by the other party’s failure to give notice in the notice_of_deficiency or in the pleadings of the intention to rely on a particular theory id petitioner’s new argument is untimely we do not rule on the issue of whether the sec_6751 requirement is part of respondent’s burden of production and express no opinion as to the merits of petitioner’s argument petitioner did not allege in the petition in his pretrial memorandum or at trial that respondent failed to comply with sec_6751 by belatedly raising this argument in his posttrial opening brief petitioner would prejudice respondent by denying him an opportunity to introduce evidence of the irs’s compliance with sec_6751 this case was tried before and submitted to a judge who is no longer available to decide it the parties were given an opportunity for a further trial but did not request one there is no justification for reopening the record at this late stage and we will not address the sec_6751 argument b substantial_understatement_of_income_tax a taxpayer is liable for an accuracy-related_penalty as to any portion of an underpayment attributable to among other things a substantial_understatement_of_income_tax or negligence sec_6662 and b and there is a substantial_understatement_of_income_tax if the amount of the understatement exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 sec_1_6662-4 income_tax regs because we determine that there is a substantial_understatement_of_income_tax we need not address negligence petitioner reported zero total_tax for and we are sustaining the determination in the notice_of_deficiency that he owes dollar_figure thus petitioner understated the tax on his return by dollar_figure accordingly respondent has met his burden of producing evidence that petitioner’s underpayment was attributable to a substantial_understatement_of_income_tax and therefore petitioner is liable for the accuracy-related_penalty absent a showing of reasonable_cause or some other defense c reasonable_cause and good_faith once the commissioner has met the burden of production the taxpayer must come forward with persuasive evidence that the penalty is inappropriate because for example he or she acted with reasonable_cause and in good_faith sec_6664 higbee v commissioner t c pincite the decision as to whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances see sec_1_6664-4 income_tax regs generally the most important factor is the extent of the taxpayer’s effort to assess her or his proper tax_liability id see halby v commissioner tcmemo_2009_204 while reliance on the advice of a professional tax adviser does not necessarily demonstrate reasonable_cause and good_faith it may when under all the circumstances such reliance was reasonable and the taxpayer acted in good_faith sec_1_6664-4 income_tax regs the requirements for reasonable_cause are not satisfied if the taxpayer fails to disclose a fact that he knows or reasonably should know to be relevant to the proper tax treatment of an item sec_1_6664-4 income_tax regs see diaz v commissioner tcmemo_2012_280 additionally a taxpayer’s education sophistication and business experience are relevant in determining whether the taxpayer’s reliance on the tax_advice was reasonable and made in good_faith sec_1_6664-4 income_tax regs petitioner seeks to defend against the accuracy-related_penalty by asserting that he relied on ellspermann his tax professional to prepare the tax_return and to assure him that the dollar_figure million payment was not taxable_income however ellspermann’s advice was only as good as the information that petitioner provided to him petitioner did not provide ellspermann with necessary and accurate information in the date email del bove discussed petitioner’s receipt of the dollar_figure million payment from delta in and notified petitioner that he would receive future fees for consulting work that he had performed for delta in date del bove emailed petitioner and notified him that he would be receiving the balance of funds from his jjc account and the dollar_figure million payment from delta petitioner and del bove exchanged several followup emails discussing the proper tax treatment of the dollar_figure million payment del bove responded that the dollar_figure million will be reported on a so you should tax-plan accordingly petitioner asked for additional clarification on whether both amounts would be included on form_1099 for del bove responded unequivocally that t he amount you receive from jjc trading is not income and therefore will not be reported on a that money is from what you had originally invested in jjc trading the 2mm we pay you will be reported on a as well as any other subsequent payments petitioner asserts that after this email exchange he questioned del bove’s conclusion and exchanged several emails with bricolage’s general counsel regarding how much was due to him and how it would be treated for tax purposes petitioner’s testimony on these points is not persuasive del bove unequivocally explained to petitioner after several clarifications that the dollar_figure million would be included on his form_1099 for and that he should tax-plan accordingly del bove’s emails clearly explained how delta intended to characterize the payment delta subsequently reported the dollar_figure million payment as nonemployee compensation on petitioner’s form_1099 for consistent with del bove’s emails and explanation petitioner never informed ellspermann of his date email exchange with del bove regarding the tax treatment of the dollar_figure million payment or that petitioner was notified it would be treated as income and included on form_1099 for apparently petitioner’s argument is that he had satisfied himself on the tax treatment of the dollar_figure million payment we reject petitioner’s explanation of why he did not tell ellspermann about his email exchanges with del bove instead petitioner erroneously told ellspermann that the dollar_figure million payment was part of the activities bricolage managed and that if ellspermann had any questions he should contact bricolage regarding the classification and nature of the payment ellspermann testified that he would have followed up with delta regarding a potential form_1099 for if he had been informed of petitioner’s correspondence with del bove petitioner must demonstrate by a preponderance_of_the_evidence that he relied in good_faith on his adviser’s judgment to establish good cause see 115_tc_43 aff’d 299_f3d_221 3d cir see also 136_tc_67 aff’d 684_f3d_84 d c cir petitioner cannot establish good-faith reliance because he withheld from ellspermann a crucial and probative email exchange petitioner’s decision to withhold that information from ellspermann was negligent at best or intentionally obstructive at worst in either event petitioner failed to inform ellspermann of facts that he knew or should have known were relevant to the proper tax treatment of the dollar_figure million payment a reasonably prudent person would have informed his or her tax professional as to the disputed characterization of a payment it was objectively unreasonable for petitioner to fail to do so additionally petitioner cannot demonstrate good-faith reliance because he knew or should have known that ellspermann’s advice was based on incomplete information and an unreasonable assumption the advice of a professional must not be based on unreasonable factual and legal assumptions and must not unreasonably rely on the representations statements findings or agreements of the taxpayer or any other person sec_1_6664-4 income_tax regs see 135_tc_199 dunn v commissioner tcmemo_2010_198 the advice must not be based on a representation or assumption that the taxpayer knows or has reason to know is unlikely to be true sec_1_6664-4 income_tax regs ellspermann determined the dollar_figure million payment could be omitted from petitioner’s tax_return on the basis of an unreasonable and erroneous assumption-- that the payment was recorded on schedule_k-1 as to a partner’s distributive_share that assumption is erroneous and unreasonable for several reasons del bove’s replacement taglialatela credibly testified that he never told petitioner or ellspermann that the dollar_figure million would be reported on schedule_k-1 or any combination of schedules k-1 similarly taglialatela credibly testified that he never told ellspermann that the dollar_figure million payment was not income or that it would not be reported on form_1099 for the dollar_figure million payment does not appear on petitioner’s schedules k-1 petitioner’s failure to inform ellspermann about his email exchange with del bove bolstered ellspermann’s erroneous assumption petitioner knew or had reason to know that the dollar_figure million would be reported on form_1099 for therefore ellspermann’s advice was based on a representation or assumption that petitioner knew or had reason to know was unlikely to be true finally we note that petitioner is a highly educated businessperson petitioner received his undergraduate and master’s degrees from harvard and he owned and operated a successful architecture business on the basis of petitioner’s education sophistication knowledge and experience we find that he should have known of the importance of informing ellspermann that he knew or had reason to know the dollar_figure million payment would be treated as nonemployee compensation in sum petitioner has not demonstrated reasonable_cause for his failure to report the dollar_figure million payment on his income_tax return for petitioner did not provide the necessary and accurate information to ellspermann and as a result did not rely in good-faith on ellspermann’s judgment we have considered all remaining arguments the parties made and to the extent not addressed we conclude they are irrelevant moot or meritless to reflect the foregoing decision will be entered for respondent


t c summary opinion united_states tax_court charles edward fagan petitioner v commissioner of internal revenue respondent docket no 28981-15s l filed date charles edward fagan pro_se jeremy d cameron for respondent summary opinion gerber judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed 1unless otherwise indicated all section references are to the internal_revenue_code in effect at all relevant times pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent made the determination to proceed to collect petitioner’ sec_2011 income_tax_liability by levy petitioner seeks review of that determination under sec_6330 we consider whether there was an abuse_of_discretion due to respondent’s refusal to treat petitioner’ sec_2011 income_tax_liability as satisfied by means of payments that respondent had misapplied background petitioner was a resident of florida at the time his petition was filed in this case he was a practicing attorney in buffalo new york until his retirement when he moved to florida this collection case emanated from a date notice to petitioner that respondent intended to proceed with collection of a income_tax_liability of dollar_figure petitioner sought a hearing alleging essentially that previous payments were misapplied and should have been applied to pay hi sec_2011 tax_liability the date notice was not petitioner’s first encounter with respondent it was the culmination of a long and protracted history of collection and tax issues spanning more than years during the mid-1990s petitioner and his wife’s divorce resulted in personal difficulties including tax problems petitioner also encountered problems with his accountants which exacerbated his tax problems all beginning around between and through petitioner attempted to file all delinquent returns and to pay back taxes his goal was to retire at the end of without tax debt during petitioner was contacted by kenneth heidle a collection officer in respondent’s buffalo office regarding withholding_tax returns going back to and running through beginning in petitioner engaged in a series of about meetings with mr heidle the meetings resulted in the resolution of numerous issues for various taxable periods the unresolved tax periods resulted in a collection_due_process case that was scheduled for a hearing before this court sitting in buffalo new york during date petitioner met with respondent’s trial attorney in an effort to settle issues involving the remaining tax_liabilities including income_tax for and and withholding_tax for the fourth quarter of and first quarter of a settlement was reached and memorialized in the parties’ notes and agreements the documentation reflects that the income_tax liabilities including penalties for and totaled dollar_figure and that the two withholding liabilities totaled dollar_figure or total_tax liabilities of dollar_figure respondent’s counsel conceded dollar_figure in income_tax penalties for and resulting in a net settlement of dollar_figure which petitioner was to pay off in monthly payments of dollar_figure in the decision entered by this court the parties’ stipulation included mention of respondent’s concession of the penalties and that the case had been settled by the parties’ execution of an installment_agreement with respect to the withholding_tax liabilities however there remained a question despite the fact that the parties’ notes and the agreed settlement included the dollar_figure withholding_tax liabilities petitioner explained to mr heidle that the employment_tax liability had been paid in full the fourth quarter employment_tax liability constituted dollar_figure of the dollar_figure in employment_tax liabilities petitioner supplied mr heidle during date with documents showing a federal_tax_lien dated april for fourth quarter withholding_tax of dollar_figure and three checks all dated in june of that reflected that respondent had been paid in full and the lien had been released after supplying proof of payment petitioner asked mr heidle why the dollar_figure fourth quarter liability continued to be part of the installment_agreement and mr heidle advised that payments petitioner made for would be available to him after the final payment on the installment_agreement petitioner complied with the installment_agreement making all agreed payments during an approximately one-year period during the intervening years numerous transactions and interactions occurred between petitioner and respondent when petitioner filed hi sec_2011 income_tax return showing a dollar_figure tax_liability he attempted to convince respondent that the tax_liability was satisfied by dollar_figure that was a result of errors and misapplications resulting from the ongoing collection issues between the parties during petitioner received a notice that he owed additional interest and penalties for the very same years that had been resolved in the settlement and covered by the installment_agreement petitioner pursued an administrative appeal and convinced the internal_revenue_service service that those matters had been resolved ultimately the service agreed while petitioner was convincing respondent that liabilities had been duplicated the service seized dollar_figure of petitioner’s funds and applied them toward liabilities that were already satisfied but had mysteriously reappeared on respondent’s records ultimately the service sent petitioner an dollar_figure check petitioner also overpaid dollar_figure on a related matter and asked that it be refunded or returned to him the explanation he received as to why he did not receive the dollar_figure is that he had outstanding withholding_tax liabilities that was the first time since the settlement and the installment_agreement that petitioner heard that any withholding_tax liabilities remained outstanding or in dispute at this time petitioner was no longer practicing law and no longer generating employment_tax liabilities between and the service sent petitioner bills for taxes penalties and interest involving around dollar_figure to dollar_figure for the same tax periods which petitioner had paid off as part of his settlement and installment_agreement in each instance petitioner convinced the service that these claims had been resolved in the settlement and paid as part of the installment_agreement petitioner also discovered in respondent’s records that one of the dollar_figure installment payments that the parties agreed would pay off income_tax for and was applied to withholding_tax for the fourth quarter of respondent also applied another dollar_figure from the installment_agreement to the fourth quarter employment_tax which petitioner had shown that he had paid in full the net effect of these misapplications and confusion is that dollar_figure remained available to satisfy the outstanding income_tax_liability for which petitioner admits he is liable discussion the record in this case reveals a convoluted and complex relationship between respondent’s collection offices and petitioner the record of these interactions consists of several hundred pages of correspondence transcripts reports and notes of the parties although the parties had settled one collection_due_process case and entered into an installment_agreement with which petitioner complied the service was not able to adjust its records to properly reflect the resolution and it continued to issue notices and seize property in satisfaction of tax_liabilities that had been settled and satisfied the interaction and confusion began in and has continued through the instant collection_due_process case the only position advanced by petitioner is that this complex series of transactions between him and the government results in no collectible outstanding income_tax_liability the main thrust of respondent’s argument is that the service has absolute authority to apply overpayments in any manner it chooses petitioner counters that his is not a question of the application of an overpayment but involves the misapplication of payments and a duplication of paid tax_liabilities resulting in a dollar_figure difference from respondent’s records that should be used to satisfy the income_tax_liability petitioner does not question the amount of the underlying income_tax_liability for and we do not address the merits of that liability the question we consider is whether the payments petitioner made were misapplied resulting in no tax due for this question does not involve a challenge to the merits of the underlying liability and is properly before the court to decide whether respondent’s decision to proceed with collection is an abuse_of_discretion see 138_tc_348 see also 114_tc_176 respondent contends that sec_6402 provides the commissioner with authority to apply overpayment to any outstanding tax_liability sec_6402 in pertinent part provides sec_6402 general_rule --in the case of any overpayment the secretary within the applicable_period of limitations may credit the amount of such overpayment including any interest allowed thereon against any liability in respect of an internal revenue tax on the part of the person who made the overpayment however petitioner is not claiming an overpayment or credit he has shown that his payments both under the installment_agreement and otherwise satisfy all outstanding liabilities against him including the income_tax which respondent seeks to collect respondent’s position that this case involves an overpayment is incorrect there were payments that were made in satisfaction of a series of outstanding tax_liabilities there were misapplications of payments that petitioner and respondent had agreed were to be applied against specific liabilities such payments are not overpayments which are covered by sec_6402 as they were payments that respondent agreed to apply against specific tax_liabilities one of those tax_liabilities had been fully satisfied in addition respondent applied one of petitioner’s refunds to accounts that had been satisfied these errors and misapplications totaled dollar_figure an amount sufficient to satisfy the income_tax_liability respondent seeks to collect accordingly the record supports petitioner’s position that respondent misapplied dollar_figure an amount which exceeds the outstanding balance of the liability for which collection is being pursued we agree with petitioner that his payments cover the amount due for and that it was an abuse_of_discretion for respondent to pursue collection to reflect the foregoing decision will be entered for petitioner


office_of_chief_counsel internal_revenue_service memorandum gl-167187-02 cc tege eoeg uilc date january number release date to ---------------------------------- ---------------------------------------------------------------------------- ----------------------------------------------------------------------- from michael a swim senior technician reviewer employment_tax branch office of division counsel associate chief_counsel tax exempt and government entities subject ---------------------------------- this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 chief_counsel_advice may not be used or cited as precedent legend taxpayer --------------------------------- years at issue -------------------- issue whether the service can assert that each client company of the taxpayer a professional_employer_organization peo is liable in the years at issue for employment_taxes that can not be collected from the taxpayer that are due upon wages paid to workers leased by each client company from the taxpayer conclusion if each client company is the common_law employer of the particular workers leased from the taxpayer and the taxpayer is not a sec_3401 employer the service could assert that each such client company is liable in the years at issue for the unpaid employment_taxes related to these particular workers that can not be collected from the taxpayer whether the service chooses to act on this legal conclusion is dependent gl-167187-02 upon a decision made by the operating division handling the case the operating division’s decision will include consideration of policy and operational concerns including resource availability facts the taxpayer is a professional_employer_organization peo as a peo taxpayer contracted to provide employees to client companies each client company was required to complete and sign two documents as part of the contract process - an application and a contract the application_for professional employer services application contained information such as payroll method and frequency employee_benefits health insurance and direct debit information that the taxpayer needed to perform those services for the client company the client service agreement contract which was also signed by the taxpayer set forth the terms of the agreement you have provided copies of an application and contract that are typical of those used by the taxpayer the application provided that the client company agreed that its employees would be hired by the taxpayer and that the client company would then lease back these employees from the taxpayer further the application stated that the taxpayer had no right to interfere with the hiring termination direction or control of the leased employees and that the client company retained responsibility and liability for the control_over the employees the contract provided that the taxpayer was responsible for administrative matters such as payroll administration and tax deposits human resource record keeping and benefits administration under the contract the client company retained the ability to recruit hire train discipline evaluate and terminate the workers the contract required the client company to supply the taxpayer all necessary payroll information including time slips before the employees’ payday the parties were to determine what other necessary payroll information would be supplied by the client company prior to payday the taxpayer would compile the payroll and report the amount due by the client company including the taxpayer’s service fee the client company was required to pay the amount in full to the taxpayer on the morning of the client company’s regular payday to achieve this result the taxpayer required each client company to authorize the taxpayer to electronically transfer the gross payroll wage and tax amounts as well as the taxpayer’s fee directly from an account owned by the client company to the taxpayer’s account the funds were withdrawn from the client company’s account and deposited to the taxpayer’s account before the client company’s payroll was issued the contract further provided that the taxpayer could terminate the contract for any material breach of the agreement by the client company the application provided that non-payment of the taxpayer’s invoice was grounds for immediate termination of the contract between the taxpayer and the client company your office had several client gl-167187-02 companies indicate that they timely paid all wage and tax amounts to the taxpayer as required by the contract for each quarter of the years at issue payroll and tax_payments were made from the taxpayer’s account the taxpayer co- mingled funds from each client company in its account there is no subsidiary ledger which showed the amounts in the account which were attributable to any particular client company the taxpayer filed for chapter bankruptcy liquidation on -------------------------- on the petition date the taxpayer handled payroll for over ------client companies and had significant unpaid employment_taxes the trustee has reconstructed the taxpayer’s payroll records and filed delinquent employment_tax returns for the taxpayer the united_states has assessed employment_taxes based on the reconstructed returns and has filed a proof_of_claim poc in the bankruptcy proceeding the poc includes a secured claim of dollar_figure------------------ an unsecured priority claim of dollar_figure------------------ and a general unsecured claim of dollar_figure------------------ due to subordination of the united states’ secured claim to other priority creditors under the provisions of u s c sec_724 it appears that the taxpayer’s property will not be sufficient to pay in full the united states’ secured claim it appears that none of the united states’ priority and general unsecured claims will be paid the commissioner is considering whether to assert that each client company is liable for the unpaid employment_taxes attributable to the particular workers leased by each such client company from the taxpayer since the investigation of the client companies will require substantial time and resources the commissioner wants some assurance that counsel will support collection of any assessments against the client companies if the evidence shows that the client companies would be liable as the common_law employers law and analysis in a suit against a client company the service needs to establish that the client company was liable for the employment_taxes due on wages paid to the leased employees following is a discussion of the legal issues that need to be factually developed to establish the liability of a client company common_law employment the applicable federal employment_taxes consist of taxes under the federal_insurance_contributions_act fica sections of the internal_revenue_code the code federal_unemployment_tax_act futa sections of the code and federal_income_tax withholding itw sections of the code for federal employment_taxes to apply an employer-employee relationship must exist the existence of an employer-employee relationship generally is determined using the common_law control test see sec_31_3121_d_-1 i -1 a and c - a of the employment_tax regulations gl-167187-02 specifically the employment_tax regulations describe an employer-employee relationship generally such relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished that is an employee is subject_to the will and control of the employer not only as to what shall be done but how it shall be done in this connection it is not necessary that the employer actually direct or control the manner in which the services are performed it is sufficient if he has the right to do so the right to discharge is also an important factor indicating that the person possessing that right is an employer other factors characteristic of an employer are the furnishing of tools and the furnishing of a place to work to the individual who performs the services sec_31_3121_d_-1 see also i -1 b and c -1 b the service has developed a three-category test analyzing various factors to determine whether a common_law employment relationship exists between workers and a particular entity see independent_contractor or employee training rev the categories are behavioral control financial control and relationship of the parties each category contains types of information facts that illustrate the right to direct and control - or its absence there is no magic number of relevant evidentiary facts that is dispositive of the issue instead all the facts must be weighed in evaluating the extent of the right to direct and control to determine who is the common_law employer of the leased employees the facts for each relationship must be documented and weighed we are not presented specific facts sufficient to determine on a case-by-case basis whether any particular leased employees are the common_law employees of a particular client company however the form contract used by the taxpayer indicates that each client company retained the ability to recruit hire train discipline evaluate and terminate the leased employees in gathering facts you should determine whether the taxpayer had any role in the hiring worksite supervision evaluation or termination of the leased employees or if the taxpayer relied exclusively on the client company to perform these functions we suggest you engage a revenue_agent trained as an employment_tax specialist to assist you in gathering facts and making the determination co-employment if a client company was the common_law employer of workers it leased from the taxpayer the taxpayer could also be a common_law employer under the theory of co- employment under the common_law doctrine_of co-employment a worker may have gl-167187-02 the status of an employee with respect to more than one employer if service to one does not involve abandonment of service to the other therefore two employers may employ a worker simultaneously see for example revrul_66_162 1966_1_cb_234 rev_rul deals with payments made to sales clerks by a department store and by a concessionaire hired by the department store to run the departments the salary paid_by the department store was wages and was not at issue the question presented was whether the commission payments made by the concessionaire directly to the sales clerks was wages for purposes of the employment_taxes the ruling holds that the concessionaire controlled the clerks independently of the control exerted by the department store such that the clerks were the employees of the concessionaire and that the commissions paid_by the concessionaire were wages for employment revrul_66_162 demonstrates that an employee can have two employers with regard to the same performance of services however because only the taxpayer was making a payment to the employees in this case revrul_66_162 would not be controlling on the liability of any client company if the facts reveal that both the client company and the taxpayer are common_law employers of the leased employees in that case we advise you to seek further guidance from this office on the liability of the client company --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------the form contract indicates that the taxpayer was responsible only for administrative matters with no right to interfere with the direction and control of the employees leased by any client company additionally the form contract used by the taxpayer is devoid of any claim that the taxpayer was the employer or the co-employer of the leased employees -------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------- sec_3401 if a person who is not the common_law employer has control of the payment of wages that person will be considered the employer for federal employment_tax purposes pursuant to sec_3401 of the code if the common_law employer does not have control of the payment of wages the term employer means the person having control of the payment of wages the code imposes federal_income_tax withholding obligations upon the sec_3401 employer case law has extended the sec_3401 employer’s obligations to include withholding and payment of fica and futa taxes see 419_us_43 in re armadillo corp v united_states gl-167187-02 561_f2d_1362 10th cir the 25_f3d_662 8th cir the key inquiry to make in determining whether the taxpayer is a sec_3401 employer of the employees leased to any client company is to establish whether the taxpayer was in control of the payment of wages to those employees several cases have dealt with the issue of what constitutes control of the payment of wages for purposes of determining if a taxpayer is a sec_3401 employer in winstead v united_states 109_f2d_989 4th cir the taxpayer winstead owned land that was farmed by sharecroppers who were accountable for their hired help however the sharecroppers could not pay the hired help until after the crops were sold therefore winstead paid the help from his checking account over which the sharecroppers had no authority then deducted what he paid from the sharecroppers’ share of the crop proceeds winstead was held to have control of the payment of wages to the hired help and thus to be the employer under sec_3401 in in re 199_br_62 bankr m d fla the taxpayer earthmovers was a construction company in chapter bankruptcy earthmovers entered into a contract with sunshine staff leasing inc whereby earthmovers leased all of its employees from sunshine pursuant to the contract the employees were under the direction and control of earthmovers but sunshine was responsible for the payment of wages to the employees the collection of the appropriate payroll_taxes from the paychecks the payment of all employee withholding taxes due and the filing of all necessary federal tax forms because earthmovers had exclusive control of its workers the court held it to be the common_law employer additionally because earthmovers submitted the information regarding the hours worked each week by each employee forwarded the amount owed for payroll including the tax amounts to sunshine and retained the right to hire and fire the employees earthmovers was held to be in control of the payment of wages for purposes of sec_3401 in alexander drilling inc v united_states ustc big_number w d ark the taxpayer alexander drilling leased its field workers from r a leasing corporation under the terms of the leasing arrangement alexander drilling was required to pay r a sufficient funds to cover payroll including tax amounts r a paid the field workers wages out of its own checking account there is no mention of which party determined the wage rate or whether r a would have paid the field workers regardless of whether it received the funds from alexander drilling the jury found that alexander drilling did not have control of the payment of wages to field workers leased to it by r a for purposes of sec_3401 consistent with precedent such as earthmovers the service position is that a taxpayer is not in control of the payment of wages if the payment of wages is contingent upon or proximately related to the taxpayer having first received funds from its clients see for gl-167187-02 example fsa lexis date see also in re professional security services 162_br_901 bankr m d fla court holding that because the leasing company did not issue payroll checks unless it first received payment from the client company the leasing company was not in control of the payment of wages for purposes of sec_3401 of the code based on the provisions in the application and the contract and anecdotal statements you have obtained from employees of the client companies and the taxpayer the indications are that the taxpayer was not in control of the payment of wages within the meaning of sec_3401 of the code the form contract used by the taxpayer required each client company to provide payroll information including time slips so the taxpayer could compute the payroll this fact indicates that the taxpayer had only a ministerial role in providing payroll the form application used by the taxpayer required each client company to authorize the taxpayer to electronically transfer funds from the client company’s account to the taxpayer’s account so that the taxpayer’s invoice could be paid in full on the morning of the client company’s regular payday the application also stated that non-payment of the taxpayer’s invoice could result in immediate termination of the contract these facts support that the taxpayer was not obligated to and indicate that the taxpayer would not meet the payroll obligations for a client company without first receiving the funds to make payroll from that client company additionally conversations that you have had with several client companies and employees of the taxpayer confirm that the taxpayer’s practice was to withdraw funds from a client company’s account and deposit the funds to its own account before payroll was issued to employees leased to that client company thus it appears that the taxpayer acted merely as a conduit for each client company in making payroll and does not meet the standards established in winstead or earthmovers to be considered the sec_3401 employer ----------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------- sec_530 sec_530 of the revenue act of h_r publaw_95_600 92_stat_2763 provides businesses with relief from federal employment_tax obligations if certain requirements are met it is not necessary for a taxpayer to claim relief under sec_530 for it to be applicable pursuant to sec_530 before or at the commencement of any audit inquiry related to the employment status of one or more individuals who performs services for the taxpayer the service must provide the taxpayer with a written notice of the provisions of sec_530 the service has developed publication independent_contractor or employee for this purpose gl-167187-02 sec_530 was enacted to provide relief for businesses in controversies between the business and the service about whether individuals treated as independent contractors should be reclassified as employees see s rep pincite a business may qualify for relief under sec_530 if the business filed all required forms reporting consistency treated all workers in similar positions the same substantive consistency and had a reasonable basis for treating the workers whose status is in question as independent contractors sec_530 did not contemplate situations where a business used workers leased from a third-party that treated the workers as employees the application of sec_530 in this situation has not been addressed by a 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------------------------------------------------------------------------------------------------------------------- this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call --------------------at --------------------- if you have any further questions


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 b09 plr-114204-04 date july ----------------------- ----------------------------------------------------------------------------- -------------------------- ------------------ --------- ---------------------- --------- ------- ------- legend husband -------------------------------- wife trust date date x date y year year dear ---------- requesting an extension of time under sec_2642 of the internal_revenue_code and sec_301_9100-3 of the procedure and administration regulations to make an allocation of husband’s generation-skipping_transfer gst_exemption and wife created trust on date on date husband transferred dollar_figurex in cash to trust on date husband transferred dollar_figurey in cash to trust date and date are in year date is in year no additions have been made to trust after the year and year gifts and no distributions have been made to any persons from trust at any time two subaccounts one for each of husband and wife’s two sons sec_2_1 provides in relevant part that the trustees have the discretion to accumulate net_income this is in response to your letter dated date and prior correspondence sec_1 of the trust agreement provides in relevant part that trust contains the facts and representations submitted are summarized as follows husband the executrix of husband’s estate has requested an extension of time to allocate sec_2513 provides that a gift made by one spouse to any person other husband relied upon his accountant to prepare his gift_tax returns for year and plr-114204-04 or distribute income and or principal to or for the benefit of the child for whom the subaccount is set_aside and the issue of such child upon the death of a child the unappointed balance of the segregated account is to be distributed to such child’s living issue per stirpes husband and wife each filed a form_709 united_states gift and generation- skipping transfer_tax return gift_tax_return for year and year reporting the transfers to trust on each return husband and wife elected to split_gifts under sec_2513 none of husband’s gst_exemption was allocated to the transfers to trust on either gift_tax_return year husband’s accountant inadvertently failed to allocate gst_exemption to the year and year transfers to trust gst_exemption to husband’s portion of the gifts made to trust during year and year than the other spouse shall for the purposes of this chapter be considered as made one-half by him and one-half by his spouse but only if at the time of the gift each spouse is a citizen or resident_of_the_united_states have signified under the regulations provided for in subsection b their consent to the application of paragraph in the case of all such gifts made during the calendar_year by either while married to the other sec_25_2513-2 of the gift_tax regulations provides that consent to the application of the provisions of sec_2513 with respect to a calendar_period shall in order to be effective be signified by both spouses if both spouses file gift_tax returns within the time for signifying consent it is sufficient if the consent of each spouse is signified on his own return skipping transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2601 imposes a tax on every generation-skipping_transfer a generation- sec_2513 provides that paragraph shall apply only if both spouses sec_2631 provides that for purposes of determining the inclusion_ratio sec_2642 provides that in determining whether to grant relief under sec_2642 provides generally that the secretary shall by regulation sec_2632 provides that any allocation by an individual of his or her gst plr-114204-04 exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_2642 provides that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer or is deemed to be made under sec_2632 or c the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period on and after the close of such estate_tax_inclusion_period prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a gst_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except in subtitles e g h and i for regulatory elections that do not meet the requirements of sec_301_9100-2 must be made under the rules of sec_301_9100-3 sec_301_9100-3 provides that in general requests for extensions of time notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time requests for relief under sec_301_9100-3 will be granted when the taxpayer under sec_301_9100-1 a regulatory election includes an election whose due sec_301_9100-3 provides that a taxpayer is deemed to have acted based on the facts submitted and the representations made we conclude that plr-114204-04 date is prescribed by a notice published in the internal_revenue_bulletin in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an election described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or to advise the taxpayer to make the election the requirements of sec_301_9100-3 have been satisfied therefore the executrix is granted an extension of time of days from the date of this letter to file supplemental form sec_709 on behalf of husband for the year and year transfers to trust the form sec_709 should include a notice of allocation properly allocating husband’s gst_exemption to the year and year transfers the allocations will be effective as of the date of the transfer and the gift_tax value of the transfers to trust will be used in determining the amount of gst_exemption to be allocated to the trusts the inclusion_ratio for trust will be determined under sec_2642 and sec_2642 a copy of this letter should be attached to the supplemental form sec_709 and filed with the internal_revenue_service center cincinnati ohio a copy is included for this purpose concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination being sent to the taxpayer’s representative provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is this ruling is directed only to the taxpayer requesting it sec_6110 except as expressly provided herein no opinion is expressed or implied the rulings contained in this letter are based upon information and sincerely heather c maloy heather c maloy associate chief_counsel passthroughs special industries plr-114204-04 enclosures cc copy of this letter copy for sec_6110 purposes


internal_revenue_service number info release date index number -------------------- ------------------------------- --------------------------------------- -------------------------- ------------------------------------ department of the treasury washington dc person to contact ----------------------------------- telephone number --------------------- refer reply to cc psi genin-101653-06 date date re ----------------------------------- dear ------------- this letter is in response to your letter dated date requesting that we provide you with a copy of a private_letter_ruling issued to a specific taxpayer providing that this taxpayer was entitled to claim the credit under former sec_29 of the internal_revenue_code and we provide you with the procedures for applying for the credit under sec_45k of the code we hope that you find the following general information to be helpful with respect to as to the first request you should request a copy of a private_letter_ruling issued by your requests the internal_revenue_service by following the procedures outlined in the freedom_of_information_act foia usc sec_552 and sec_601_702 of the income_tax regulations your initial foia request must be made in writing and signed by you state that it is made pursuant to the foia u s c or the regulations under the foia be addressed to and mailed to the office listed sec_601_702 that is responsible for the control of the records requested reasonably describe the records in accordance with sec_601_702 because you are requesting a document the disclosure of which is limited by statute or regulations establish the identity and the right of the person making the request to the disclosure of the records in accordance with sec_601_702 set forth the address where the person making the request desires to as to the second request if a taxpayer wants a ruling that it qualifies for the section genin-101653-06 be notified of the determination as to whether the request is granted state whether the requester wishes to inspect the records or desires to have a copy made and furnished without first inspecting them and state the firm agreement of the requester to pay the fees for search duplication and review ultimately determined in accordance with sec_601_702 or in accordance with sec_601_702 place an upper limit for the fees that the requester is willing to pay or request that the fees be reduced or waived and state the justification for this request sec_601_702 enclosed is a copy of sec_601_702 c f and the relevant language in h 45k credit the taxpayer may request a private_letter_ruling revproc_2006_1 2006_1_irb_1 provides the general procedures the service follows in issuing private letter rulings and the related instructions for the submission of private_letter_ruling requests by taxpayers in addition taxpayers are required by statute to pay user fees for requests for private letter rulings under sec_15 of revproc_2006_1 i r b pincite the user_fee must accompany the request in order to be processed by the service in general the user_fee is dollar_figure for private_letter_ruling requests postmarked before date and dollar_figure for private_letter_ruling requests postmarked on or after date however there is a reduced fee of dollar_figure for a request involving a personal or business tax issue from a person with a gross_income of less than dollar_figure there is also a reduced fee of dollar_figure or dollar_figure if the request is postmarked on or after date for a request involving a personal or business tax issue from a person with gross_income of less than dollar_figure million and more than dollar_figure see appendix a of revproc_2006_1 i r b pincite the energy policy act of publaw_109_58 119_stat_594 date redesignated sec_29 as sec_45k sec_45k provides that for purposes of sec_38 the nonconventional source production credit determined under this section for the taxable_year is an amount equal to dollar_figure multiplied by the barrel-of-oil_equivalent of qualified_fuels a sold by the taxpayer to an unrelated_person during the taxable_year and b the production of which is attributable to the taxpayer sec_45k provides rules regarding limitations on and adjustments to the credit determined under sec_45k sec_45k and d provides definitions and special rules for purposes of sec_45k sec_45k provides rules governing the applicability of sec_45k sec_45k and g provides extensions for certain facilities generally except for facilities producing coke and coke gas the credit under sec_45k is only available for production from facilities placed_in_service before date pursuant to a binding written contract in effect before date sec_45k and g enclosed is a copy of sec_45k of the code and a copy of form_8907 which is used to claim the nonconventional source fuel credit if you should decide to request a private_letter_ruling section of rev_proc this letter has called your attention to certain general principles of tax law it is genin-101653-06 i r b pincite provides information as to where to send the request also as we have noted above section of revproc_2006_1 i r b pincite provides general instructions for requesting a private_letter_ruling intended for informational purposes only and does not constitute a ruling see section dollar_figure of revproc_2006_1 i r b pincite if you should have any additional questions or comments please contact me or -------------------- at ----- ------------- enclosures charles b ramsey chief branch office of associate chief_counsel passthroughs and special industries s charles b ramsey sincerely yours