t c memo united_states tax_court jacob and yehiella kalo petitioners v commissioner of internal revenue respondent docket no filed date robert w siegel for petitioners timothy s murphy for respondent memorandum findings_of_fact and opinion vasquez judge respondent determined the following deficiency in additions to and penalty on petitioners' federal income taxes additions to tax penalty sec sec sec sec year deficiency b b a b b dollar_figure --- dollar_figure --- --- --- --- --- --- big_number dollar_figure --- --- - - --- --- --- --- dollar_figure percent of the statutory interest applicable on dollar_figure and dollar_figure for and respectively from the due_date of the return to the date of assessment of the tax or if earlier the date of the payment all section references are to the internal_revenue_code in effect for the years in issue all rule references unless otherwise indicated are to the tax_court rules_of_practice and procedure respondent contends that dr kalo petitioner fraudulently and with the intent to evade taxes understated his interest_income from foreign bank accounts for the and tax years after concessions the issues for decision are whether petitioner is liable for additions to tax pursuant to sec_6653 and b for the and tax years and sec_6653 for the tax_year and for a penalty pursuant to sec_6663 for the tax_year findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and attached exhibits are incorporated herein by this reference petitioners resided in west bloomfield michigan at the time they filed their petition respondent concedes that yehiella kalo is not liable for the additions to tax and penalty as determined in the statutory_notice_of_deficiency respondent also concedes the deficiency for the tax_year petitioners filed an amended tax_return prior to the issuance of the notice_of_deficiency reflecting an underpayment of dollar_figure for the tax_year petitioners timely filed joint tax returns for all years in issue on or about date petitioners filed form sec_1040x amended u s individual_income_tax_return for the taxable years and the purpose of these amended returns was to report interest_income from several foreign bank accounts that had previously been unreported on their original returns petitioners failed to report a total of dollar_figure in interest_income earned from foreign bank accounts over a 4-year period petitioner jacob kalo was a medical doctor with a specialty in obstetrics and gynecology and a subspecialty in laser surgery petitioner owned and operated five clinics or offices including the east gyn medical clinic the clinic through his professional_corporation during the years in issue during the taxable years through petitioner did not maintain malpractice insurance coverage during and petitioner was under investigation by the internal_revenue_service criminal_investigation_division cid for possible federal_income_tax violations on date petitioner was interviewed by special agents with the cid on date petitioner was charged by the united_states attorney for the eastern district of michigan with four counts of willful failure to disclose that he had interests in foreign bank accounts in violation of sec_7203 on date petitioner pursuant to a rule plea agreement pleaded guilty to one count of violating sec_7203 for the tax_year for having willfully failed to disclose on his tax_return that he had interests in foreign bank accounts during the interview with special agents of the cid when asked about the existence of foreign bank accounts petitioner failed to disclose that he had bank accounts in canada when specifically questioned about bank accounts in canada petitioner stated that he thought he had an account with his father and that his father's money was in the account petitioner stated that he did not deal with this account as his father handled all of the banking transactions for this account during the years through petitioner did in fact have an account at the royal bank of canada which earned dollar_figure in interest during and petitioner also had an account at canada trust which earned dollar_figure in interest and in had a joint account with his father at the bank of montreal that earned dollar_figure in interest during petitioner also had a london bank account and a swiss bank account on which he earned interest of dollar_figure and dollar_figure respectively during the years through petitioner made numerous cash deposits into bank accounts in canada seven of which exceeded dollar_figure petitioner deposited over dollar_figure in cash fed r crim p into the royal bank of canada during these years by petitioner had approximately dollar_figure million deposited with the royal bank of canada and over dollar_figure million in all canadian accounts combined after the initiation of the criminal investigation by the irs petitioner removed business records from the east gyn medical clinic petitioner falsely told special agents on date that he never removed records indicating cash payments received at the clinic petitioner instructed an employee minnie malone that if anyone asked her about the records to state that the state of michigan took them during a medicaid audit during the date interview of petitioner by special agents dr kalo stated that records used to record cash payments for the clinic had been seized by the state of michigan during a medicaid audit and were never returned in a subsequent interview by special agents petitioner stated that the records had been returned by the state of michigan these records along with records from petitioner's other clinics were summonsed by special_agent kevin boudreau the summonses specifically requested any records which reflected cash receipts at no time during the cid_investigation did petitioner produce any record reflecting the cash receipts received by the clinic for the years through in an interview with special agents on date petitioner stated that the east gyn medical clinic never had a day where the cash receipts for a single day were more than dollar_figure petitioner stated that the clinic received very little cash on the following day petitioner asked two employees minnie malone and marlene parsons to write letters on his behalf to the irs stating that the amount of cash received daily at the clinic ranged from dollar_figure to dollar_figure both employees refused to write the letters as proposed by petitioner because the dollar amounts he asked them to insert were false during the date interview petitioner told special agents that he believed that the interest_income was not taxable until withdrawn from the bank petitioner then told the agents that his accountant had told him that the interest was not taxable until withdrawn when asked for the accountant's name petitioner's attorney interrupted and stated that it was not the accountant but that dr kalo just heard or knew of it from someone arthur sweet was petitioner's tax_return_preparer mr sweet was a certified_public_accountant since petitioner consulted with mr sweet in reference to his tax returns petitioner freely discussed matters with mr sweet petitioner also called mr sweet and inquired how the changes to the tax law in would affect him petitioner never advised mr sweet that he had bank accounts in canada or in other foreign countries other than a bank account in israel which was disclosed on petitioners' and tax returns in preparing petitioners' tax returns for the years and mr sweet specifically asked whether petitioner had any foreign bank accounts mr sweet never told petitioner that the interest earned from canadian accounts is not taxable until it is withdrawn john glancey is a stockbroker and financial adviser who provided services for petitioner for approximately years including the period from through over this time period mr glancey had significant dealings with petitioner which included discussions involving foreign interest rates and foreign investments mr glancey found dr kalo to have a better than average knowledge about these types of investments petitioner did not inform mr glancey that he had an interest in foreign bank accounts in the date interview petitioner told special agents that he was told by an unnamed bank official at an unnamed canadian bank that he did not have to pay taxes it is not the policy of the royal bank of canada to give advice to a nonresident about the taxability of the interest for united_states tax purposes opinion the addition_to_tax in the case of fraud is a civil sanction provided primarily as a safeguard for the protection of the revenue and to reimburse the government for the heavy expense of investigation and the loss resulting from a taxpayer's fraud 303_us_391 respondent has the burden of proving by clear_and_convincing evidence an underpayment for each year and that some part of the underpayment was due to fraud sec_7454 rule b to satisfy her burden_of_proof respondent must show two things an underpayment exists and the taxpayer intended to evade taxes known to be owing by conduct intended to conceal mislead or otherwise prevent the collection_of_taxes 94_tc_654 the mere failure to report income however is not sufficient to establish fraud 20_tc_759 if respondent establishes that any portion of the underpayment is attributable to fraud the entire underpayment is treated as attributable to fraud and subjected to an addition_to_tax or penalty except with respect to any portion of the underpayment that the taxpayer establishes is not attributable to fraud sec_6653 for through and sec_6663 for fraud is intentional wrongdoing on the part of the taxpayer with the specific purpose to evade a tax believed to be owing 61_tc_249 affd 519_f2d_1121 5th cir the existence of fraud is a question of fact to be resolved from the entire record 67_tc_181 affd without published opinion 578_f2d_1383 8th cir respondent must meet her burden through affirmative evidence because fraud is never imputed or presumed 55_tc_85 a taxpayer's entire course of conduct can be indicative of fraud 56_tc_213 53_tc_96 furthermore a taxpayer's fraudulent original return is not purged by the filing of a subsequent amended_return 464_us_386 a underpayment_of_tax petitioners admitted in their amended returns that they had underreported in their original returns interest_income from foreign banks for each year in issue although the filing of those amended returns is not an admission of fraudulent intent it is an admission of an underpayment_of_tax for each of those years see id pincite b fraudulent intent next respondent must prove that a portion of such underpayment for each taxable_year was due to fraud 79_tc_888 fraud may be proved by circumstantial evidence because direct proof of the taxpayer's intent is rarely available the taxpayer's entire course of conduct may establish the requisite fraudulent intent 56_tc_213 over the years courts have developed a nonexclusive list of factors that demonstrate fraudulent intent these badges_of_fraud include understating income maintaining inadequate records failing to file tax returns implausible or inconsistent explanations of behavior concealment of income or assets failing to cooperate with tax authorities engaging in illegal activities an intent to mislead which may be inferred from a pattern of conduct lack of credibility of the taxpayer's testimony filing false documents and dealing in cash see 317_us_492 899_f2d_164 2d cir 796_f2d_303 9th cir affg tcmemo_1984_601 91_tc_874 although no single factor is necessarily sufficient to establish fraud the combination of a number of factors constitutes persuasive evidence 732_f2d_1459 6th cir affg per curiam tcmemo_1982_603 a taxpayer's intelligence education and tax expertise are also relevant for purposes of determining fraudulent intent see 79_tc_995 affd 748_f2d_331 6th cir 19_tc_631 we note that some conduct and evidence can be classified under more than one factor a petitioner's sophistication and experience dr kalo was an educated person additionally he was familiar with the tax law and had a better than average knowledge of foreign investments petitioner's knowledge in this area is sufficient that we believe petitioner knew enough to at a minimum ask for tax_advice regarding foreign interest we find that dr kalo did not inform his accountant or his financial advisor of his foreign bank accounts and that this failure to inform from a taxpayer with petitioner's sophistication indicates fraud b consistent and substantial understatements of income the mere failure to report income is not sufficient to establish fraud 301_f2d_484 5th cir affg tcmemo_1959_172 parks v commissioner supra pincite however consistent and substantial_understatement of income may be strong evidence of fraud 70_tc_562 affd without published opinion 621_f2d_439 5th cir moreover a pattern of consistent underreporting of income when accompanied by other circumstances indicating an intent to conceal income justifies an inference of fraud 348_us_121 petitioners argue that during the years in issue they reported and paid on their original income_tax returns over percent of their tax_liability and that this indicates lack of an intent to evade taxes we find petitioners' argument unpersuasive in the instant case petitioners' understatements are both consistent and substantial they are evidence of fraud c failure to maintain adequate books_and_records failure to maintain adequate books_and_records of income may be indicative of fraud 89_tc_1280 gajewski v commissioner t c pincite respondent showed at trial that accurate records of cash receipts for petitioner's medical practice were not maintained respondent contends that this along with other evidence shows that petitioner skimmed profits from his medical practice respondent has not convinced us that any fraud was committed by petitioner's professional_corporation or by petitioner regarding the profits from that corporation we will not therefore base a finding of fraud on the evidence regarding skimming presented in that regard d attempts to conceal activities petitioners contend that the principal point in their favor is that they did not attempt to conceal their assets they argue that if petitioners' returns for the years in issue had been audited it would have been obvious that assets were unaccounted for and the whereabouts of those assets would have been easy to determine petitioners therefore argue that because the assets and income were readily discoverable there could not have been a fraudulent intent to conceal the income we disagree there is ample evidence in the record that petitioner did in fact make attempts to conceal his interest_income question on schedule b of petitioners' tax returns for the years in issue asks at any time during the tax_year did you have an interest in or a signature or other authority over a financial_account in a foreign_country such as a bank account securities account or other financial_account for the years and petitioner answered this question in the negative for the years and petitioner answered yes to this question but only listed a bank account in israel in signing the returns petitioner represented under penalty of perjury that he examined the schedules accompanying the returns and that they were true correct and complete to the best of his knowledge his answers to this question indicate an attempt to conceal his foreign accounts which is a strong indication of fraud e intent to mislead false and inconsistent statements to respondent's agents during the course of their investigation indicate fraudulent intent 75_tc_1 petitioner failed to mention any canadian bank accounts when questioned about foreign accounts and when specifically questioned about canadian accounts only mentioned that he thought that he had a canadian account but that the money was his father's by and prior to this interview petitioner had in excess of dollar_figure million in canadian bank accounts his explanation could only be seen as an attempt to mislead the agents and frustrate their investigation we find that petitioner intended to mislead special agents during their investigation and this indicates fraud f filing false documents this factor supports a finding of fraud for the same reasons discussed in subsection d of this opinion petitioner's attempt to argue that he was misinformed about the taxability of the interest is not persuasive petitioner told special agents that he was told by an unnamed bank official that the interest was not taxable until withdrawn yet petitioner could not name the official or the bank an official from the royal bank of canada testified that it is not the policy of the bank to advise clients on the taxability of interest in the united_states we find that petitioner intentionally withheld information regarding his foreign bank accounts from his accountant in an attempt to evade taxes this is strong evidence of fraud see korecky v commissioner tcmemo_1985_63 affd 781_f2d_1566 11th cir g other factors we also consider it significant that petitioner pleaded guilty to violation of sec_7203 for the tax_year for having willfully failed to disclose that he had interests in foreign bank accounts although this conviction does not in and of itself establish a fraudulent intent we consider the crime as evidence of fraud especially when combined with other factors taken from the record as a whole 92_tc_661 61_tc_249 affd 519_f2d_1121 5th cir c conclusion we find that respondent has clearly and convincingly proven fraud on the part of petitioner for all of the years in issue and we so hold this conclusion is based on the record as a whole and reasonable inferences therefrom taking into account our determination as to the credibility of petitioner and the other witnesses presented at trial petitioner has failed to show that any portion of the underpayment was not due to fraud therefore we sustain respondent's determination that dr kalo is liable for the fraud additions for through and for the fraud_penalty for decision will be entered under rule


t c summary opinion united_states tax_court jean marie fontayne and yves raymond fontayne petitioners v commissioner of internal revenue respondent docket no 5492-12s filed date jean marie fontayne and yves raymond fontayne pro sese vivian bodey for respondent summary opinion dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure respondent issued a notice_of_deficiency to petitioners in which he determined a deficiency of dollar_figure as well as a sec_6662 accuracy-related_penalty of dollar_figure for respondent allowed a deduction of dollar_figure for trade publication expenses but disallowed the remainder of petitioners’ employee_business_expense deductions petitioners conceded at trial that they are not entitled to the employee_business_expense deductions adjusted by respondent the issues remaining for decision are whether petitioners are entitled to deductions claimed for business_expenses reported on schedule c profit or loss from business and liable for a sec_6662 accuracy-related_penalty it appears from the notice_of_deficiency and the income_tax return that respondent also allowed as an itemized_deduction a dollar_figure tax preparation fee the original return and the amended_return both state that they are self-prepared respondent however failed to adjust the amount and did not request an increased deficiency other adjustments made to petitioners’ self-employment_tax are computational and will not be discussed background some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by reference petitioners resided in california when they filed their petition throughout both petitioners worked for vitesse semiconductor sales corp vitesse petitioner yves raymond fontayne mr fontayne was an employee of vitesse the entire year petitioner jeane marie fontayne petitioner worked part time as an independent_contractor from her home from january to date working from home enabled petitioner to care for her and mr fontayne’s three-year-old child at some point in petitioner’s supervisor retired and his replacement told her to come to work as a full-time_employee or he would end her contract and find another person to be a full-time_employee in date petitioner became a full-time_employee of vitesse pursuant to her agreement with vitesse petitioner was required to work from the vitesse office at least two days a week because of her desire to work from home and her proven ability to complete her assignments from her home she was allowed to work from home up to three days per week petitioners had moved into their home in date petitioner designated in her house a room with a closet and a bathroom as her office space petitioner did not see clients in her home_office nor did she receive anyone from vitesse in her home_office at some point in petitioners decided to make changes to the home_office area petitioners’ contractor at their instruction removed the wall separating the office area from the living room and replaced it with one inches further into the living room increasing the size of the office while decreasing the size of the living room petitioners also improved the home_office area by replacing all the carpeting retiling the bathroom and by installing an under-the-floor heating system a programmable thermostat a central vacuum system and a fireproof safe in the closet of the home_office area the receipts for the supplies used for the improvements are dated november and date and the dollar_figure check paying the contractor for his work was both dated and negotiated in date petitioners timely filed their federal_income_tax return on their schedule c petitioners reported a tentative profit of dollar_figure with respect to petitioner’s consulting work for vitesse also on the schedule c petitioners reported expenses of dollar_figure for business use of their home relating to her consulting work respondent selected petitioners’ federal_income_tax return for examination on date respondent issued a notice_of_deficiency to petitioners disallowing some claimed employee business_expenses as personal expenses reducing the business use of home percentage and prorating other claimed home_office expenses to reflect petitioner’s change in employment status from part-time contractor to full-time_employee discussion generally the commissioner’s determinations are presumed correct and the taxpayer bears the burden of proving that those determinations are erroneous rule a see 503_us_79 290_us_111 in some cases the burden_of_proof with respect to relevant factual issues may shift to the commissioner under sec_7491 petitioners did not argue or present evidence that they satisfied the requirements of sec_7491 therefore petitioners bear the burden_of_proof with respect to the issues in the notice_of_deficiency deductions and credits are a matter of legislative grace and the taxpayer bears the burden of proving that he or she is entitled to any deduction or credit claimed rule a 308_us_488 292_us_435 additionally a taxpayer must substantiate all expenses sec_6001 65_tc_87 aff’d per curiam 540_f2d_821 5th cir schedule c business_expenses sec_162 generally allows a deduction for ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business generally no deduction is allowed for personal living or family_expenses see sec_262 the taxpayer must show that any claimed business_expenses were incurred primarily for business rather than personal reasons see rule a 72_tc_433 to show that the expense was not personal the taxpayer must show that the expense was incurred primarily to benefit his or her business and there must have been a proximate relationship between the claimed expense and the business see walliser v commissioner t c pincite the performance of services as an employee is considered a trade_or_business for sec_162 purposes 54_tc_374 home_office expenses on schedule c petitioners reported gross_receipts from petitioner’s work at home of dollar_figure and total expenses before business use of their home of dollar_figure for a tentative profit of dollar_figure petitioners claimed on form_8829 expenses for business use of your home allowable expenses for business use of their home of dollar_figure petitioners claimed that their home is big_number square feet and that square feet or of their home was used regularly and exclusively for business petitioners reported the following direct and indirect expenses on form direct expense indirect expense dollar_figure insurance big_number repairs and maintenance big_number utilities other expenses big_number total big_number big_number --- dollar_figure --- petitioners reported allowable operating_expenses of dollar_figure petitioners added to that allowable casualty losses and depreciation of dollar_figure to arrive at the claimed allowable expenses for business use of your home of dollar_figure in the notice_of_deficiency respondent allowed only dollar_figure as business use of home expenses which included dollar_figure of real_estate_taxes removed from schedule a and recharacterized as a business_expense due to petitioner’s business at trial petitioners conceded their claimed business use of home percentage was overstated and reduced their claimed percentage to this amount was computed by multiplying the business use of home percentage by the total indirect expenses x dollar_figure dollar_figure and adding that to the total of the direct expenses dollar_figure dollar_figure dollar_figure use of the home although respondent agrees that petitioner had a home_office respondent asserts that expenses related to the home_office should be restricted to the period during which petitioner was a part-time independent_contractor respondent’s adjustments also reflect a change in the percentage of the home used for business as well as a partial or complete disallowance of business_expense deductions claimed for repairs and maintenance utilities and other expenses as a general_rule sec_280a denies deductions with respect to the use of a dwelling_unit that the taxpayer uses as a residence during the taxable_year sec_280a however permits the deduction of expenses allocable to a portion of a dwelling_unit that the taxpayer uses exclusively and regularly as the principal_place_of_business for a taxpayer’s trade_or_business in the case of an employee the exception applies only if the use of the home_office is for the convenience_of_the_employer id any personal_use of a room or segregated area will preclude its use in computing depreciation or other allocable expenditures unless some or all of the use of the room was for the storage of inventory see hefti v commissioner tcmemo_1993_128 respondent agrees that it was proper for petitioners to deduct home_office expenses for the period during which petitioner was an independent_contractor the record shows however that petitioner’s new supervisor needed petitioner to take on responsibilities that required additional working hours and a presence at the vitesse office vitesse provided petitioner with an office and required her to work out of the vitesse office at least two days every week petitioner’s belief that she was more productive in her home_office is of no legal moment petitioners offered in support of their position a letter from petitioner’s supervisor stating that the split work location arrangement was beneficial for vitesse but petitioners offered no evidence that vitesse required or directed that petitioner work from her home petitioner was allowed to work from home part-time at her own request and for her own convenience as a result petitioners are not entitled to a home_office expense deduction for the period august through date petitioners’ calculation of the business use of their home originally included square footage for a hallway an entryway a room a bathroom and a closet at trial petitioners agreed that their initial claim of square feet was overstated and petitioners testified that they also used the home_office area to have conference calls and do research into whether to begin a real_estate business in florida the documents provided to corroborate that testimony are largely unsigned and undated and it is unclear to the court whether these efforts began if at all in the one document petitioners provided that was signed includes only the signatures of petitioners there is insufficient evidence that the home_office area was used regularly and exclusively as the principal_place_of_business for the real_estate business in see 87_tc_74 in fact the home_office wa sec_307 square feet petitioners initially calculated the square footage using measurements from the outside of the house and the exterior wall measurement from the hallway and the living room petitioners’ calculation at trial removes the square footage for the hallway and entryway but is still based on measurements from the hallway and the living room taken outside the home the court agrees with respondent that the bathroom was not used exclusively and on a regular basis for business nor could it be considered an area where petitioner conducted substantial administrative or management activities of a trade_or_business see sec_280a petitioner received no clients in her home_office nor did she meet with anyone from vitesse there the court also agrees that petitioner did not use the closet area exclusively and on a regular basis for her work with vitesse petitioners installed a fireproof safe in that closet in november or date which they used to store personal items petitioner performed financial audits and vitesse provided her with a laptop a laptop docking station and the financial information needed for the audits there is no evidence that petitioner was required to store any inventory or other items for vitesse nor is there any evidence that she used the closet for any reason related to her work for vitesse although the court disagrees with petitioners’ calculations with respect to the main office space the court also finds respondent’s position untenable respondent’s examiner determined that petitioner needed only an area of by feet or square feet in order to perform her tasks for vitesse it appears to the court however that the interior office space was exclusively and regularly used by petitioner when performing her work for vitesse as a contractor while the court does not agree that petitioners’ method of using exterior wall measurements is accurate the court finds that respondent’s determination of the size of the space petitioner needed to perform her work is arbitrary on the basis of the stipulated exhibits provided the court has estimated the interior office space see 39_f2d_540 2d cir bearing heavily against petitioners whose inexactitude is of their own making the court finds that the area of their home used for business i sec_180 square feet direct expenses mr fontayne removed some bookcases from the home_office and testified that in so doing he damaged the wall that was subsequently removed and the estimate concludes the interior office dimensions to be by feet or square feet which i sec_5 of the home for the reasons more fully described below this estimate does not include the additional square footage created by petitioners’ moving one office wall inches into the living room replaced at some point in petitioners decided to make changes to the home_office area the changes included among other things expanding the office space by moving one wall inches into the living room area replacing the carpeting installing a safe in the closet and making other major changes to the heating and cooling systems the record reflects that petitioners purchased the required materials in november and date and paid the contractor in date petitioners’ claim that these alterations were necessary for petitioner to be able to work in the home_office is self-serving an under-the-floor heating system is hardly an ordinary and necessary business_expense further the court finds that the alterations were made at the end of when the home_office was no longer her only office and was not maintained for the convenience of her employer petitioners characterize the work done on the office wall that was removed and replaced as a repair of damage caused by mr fontayne it appears to the court however that the expense incurred to remove and replace the wall was not a repair or maintenance expense but was instead a capital_expenditure no deduction is allowed for expenditures_for permanent improvements or betterments that increase the value of any property sec_263 to repair is to restore to a sound state or to mend while a replacement connotes a substitution jenkins v commissioner tcmemo_1982_407 removal and replacement of ceiling was capital improvement generally an expenditure to acquire an asset with a useful business life exceeding one year is treated as a capital_expenditure and is not currently deducible as a business_expense 55_tc_743 rowell v commissioner tcmemo_1988_410 improvements to office bathroom were capital expenditures and not currently deductible aff’d 884_f2d_1085 8th cir ross v commissioner tcmemo_1984_352 sign advertising business was capital_asset aff’d without published opinion 780_f2d_1028 9th cir mr fontayne’s testimony that the carpeting was gross and the damaged wall had mold suggests that replacing these items appreciably prolonged the useful_life of the office and added to its value likewise the new heating system new central vacuum and new tile in the bathroom are items having a useful_life of more than a year and add to the value of the home as a result petitioners are not entitled to deduct these expenses as direct expenses related to the business use of the home and must instead capitalize the costs petitioners claimed a direct utilities expense of dollar_figure which was the cost of the monthly home telephone expense under sec_262 the cost of basic local_telephone_service with respect to the first telephone line provided to a residence is a personal_expense and is not deductible we agree with respondent that none of this expense is allowable indirect expenses with respect to the indirect repairs and maintenance expense of dollar_figure petitioners offered no evidence petitioners did supply the court with a summary of the expenses that included the date of the repairs the company that performed the repairs and the amount of each repair expense the court however is unable to determine whether petitioners in fact incurred these expenses or how they may have related to any repair or maintenance of the home therefore petitioners are not entitled to a deduction for the claimed indirect repairs and maintenance_expenses petitioners claimed dollar_figure in insurance expenses as an indirect expense on form_8829 at trial petitioners reduced their claim to dollar_figure which reflected the removal of the claimed automobile insurance expenses the examiner agreed that the remaining insurance expenses were generally allowable but should be reduced for the period of petitioner’s full-time employment the home_office was no longer maintained at the convenience of vitesse once petitioner became a full-time_employee and thus the court agrees that expenses for the home_office were not allowable as of date petitioners claimed indirect utilities expenses of dollar_figure at trial petitioners reduced their claim to dollar_figure which reflected the removal of the claimed housekeeper expenses gardener expenses and homeowners_association fees respondent allowed dollar_figure which included electric gas sewer water and trash expenses from january through july the court agrees that petitioners may not deduct expenses related to the home_office for the period after petitioner became a full-time_employee petitioners claimed other expenses of dollar_figure this amount included expenses for a refrigerator water filters a central vacuum blinds and installation home inspection title fees and escrow charges petitioners conceded this item at trial accuracy-related_penalty taxpayers may be liable for a penalty on the portion of an underpayment_of_tax attributable to negligence or a substantial_understatement_of_income_tax sec_6662 and b and an understatement of income_tax is the excess of the amount of income_tax required to be shown on the return for the taxable_year over the amount of income_tax that is shown on the return reduced by it appears that these expenses total only dollar_figure however respondent allowed the amount and has not requested an increase in deficiency any rebate see sec_6662 an understatement is substantial if it exceeds the greater of of the tax required to be shown on the return for the taxable_year or dollar_figure see sec_6662 the term negligence in sec_6662 includes any failure to make a reasonable attempt to comply with the internal_revenue_code and the term disregard includes any careless reckless or intentional disregard sec_6662 negligence has also been defined as the failure to exercise due care or the failure to do what a reasonable person would do under the circumstances see 92_tc_1 aff’d 925_f2d_348 9th cir 85_tc_934 negligence also includes any failure by the taxpayer to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs the commissioner bears the burden of production with respect to the applicability of an accuracy-related_penalty determined in a notice_of_deficiency sec_7491 in order to meet that burden the commissioner need only make a prima facie case that imposition of the penalty is appropriate 116_tc_438 once that burden is met the taxpayer bears the burden of proving that the accuracy-related_penalty does not apply because of reasonable_cause substantial_authority or the like sec_6662 sec_6664 higbee v commissioner t c pincite respondent has met his burden of production for the accuracy-related_penalty on the basis of a substantial_understatement_of_income_tax because petitioners’ understatement of income_tax exceeds dollar_figure which is greater than of the tax required to be shown on the return it also appears petitioners were negligent in the preparation of their return acknowledging that they overstated the percentage of their home used for business and claimed business_expense deductions for personal expenses a taxpayer may avoid the application of an accuracy-related_penalty by proving he acted with reasonable_cause and in good_faith see sec_6664 see also higbee v commissioner t c pincite sec_1_6664-4 income_tax regs we analyze whether a taxpayer acted with reasonable_cause and in good_faith by examining the relevant facts and circumstances and most importantly the extent to which the taxpayer attempted to determine his proper tax_liability see neely v commissioner t c pincite stubblefield v commissioner tcmemo_1996_537 sec_1_6664-4 income_tax regs in order for the reasonable_cause exception to apply the taxpayer must prove that he exercised ordinary business care and prudence as to the disputed items 115_tc_43 aff’d 299_f3d_221 3d cir although petitioner claimed a dollar_figure expense for tax preparation fees and respondent allowed the deduction all of the tax_return documents in the record state that they were self-prepared petitioners made no statement about their preparer if any and what attempts they made to determine their proper tax_liability as a result we conclude that petitioners are liable for the accuracy- related penalty we have considered all of petitioners’ arguments and to the extent not addressed herein we conclude that they are moot irrelevant or without merit to reflect the foregoing decision will be entered under rule


tax_exempt_and_government_entities_division number release date ‘legend org organization mame org adress department of the treasury internal_revenue_service attn mandatory review mc dal commerce st dallas tx date january xx date - address address vil employer_identification_number person to contact id number contact numbers voice fax certified mail - return receipt requested dear in a determination_letter dated january 19xx you were held to be exempt from federal_income_tax under sec_501 of the internal_revenue_code the code based on recent information received we have determined you have not operated in accordance with the provisions of sec_501 of the code accordingly your exemption from federal_income_tax is revoked effective january 20xx status under sec_501 of the code this is a final adverse determination_letter with regard to your we previously provided you a report of examination explaining why we believe revocation of your exempt status is necessary at that time we informed you of your right to contact the taxpayer_advocate as well as your appeal rights on august 20xx you signed form 6018-a consent fo proposed action agreeing to the revocation of your exempt status under sec_501 of the code you have filed taxable returns on form s us corporation income_tax return for the year s ended december 20xx december 20xx and december 200x with us service_center indicated in the instructions for the return for future periods you are required to file form_1120 with the appropriate you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as oo the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have te file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please contact the person whose name and telephone number are shown at the beginning of this letter sincerely vicki l hansen acting director eo examinations fom 886a ‘name of taxpayer daparan oe tesora revenue seco explanation of items org website website date picnic picnic city city motto motto organization name xyz state companies co-2 20xx xx schedule no of exhibic ‘yeat period ended december issues issue whether the org is still qualified to be exempt under sec_501 of the intemal revenue code irc issue whether the revocation of the organization's tax-exempt status should be applied retroactively to tax_year beginning january 20xx facts org inc abbreviated org is an exempt_organization located in city xyz the organization's main activities ate to operate a recreational club which promotes the safety skill and enjoyment of sport parachuting’ although the organization was granted exempt status in xyz the location of the exempt activity is at co-1 in city xyz at an airfield owned by the city of city the organization was granted its exempt status in january 19xx as an exempt_organization under sec_501 c of the intemal revenue code the letter of exemption explained that a sec_501 c is permitted to recaive up to percent of its grass receipts including investment_income from sources outside of its membership without losing its tax exempt status the letter further explained that if your organization's character method of operation or purposes change please let us know sa we can consider the effect of the change ‘on your organization's exempt status the organization operated as an organization under the name of co-2 with a website named website this website solicited individuals to purchase tandem jumps packages static line classes and student freefall jumps the website also explained their activity as follows we have been in operation as org we recently changed our organization's name to co-2 to better reflect our since the early 19xx's in addition to the packages avallable for purchase the website also discussed the regional identity annual picnic held over the fourth of july waekend this income has been a source_of_income for tax years 20xx through 20xx for tax_year ending december 20xx a review of the sources of income was not performed since the organization has filed an extension to file the form_990 in addition to the website the organization advertised in the local phone book by referencing the website of website the organization had members in tax_year 20xx with each member paying yearly dues of dollar_figuredollar_figure per year in addition to the yearly dues the members pay for jumps done with other individuals based on the the organization's source_of_income for its members number of participants and the altitude of the jump in tax_year 20xx per the books_and_records was dollar_figure for dues and dollar_figuredollar_figure for member jumps the remaining income from the organization was dollar_figuredollar_figure from nor-members and dollar_figuredollar_figure from investments law sec_501 c of the code irc defines an exempt_organization under this section as one that is organized for the pleasure recreation and other nonprofit purposes for its members sec_1 c -1 of the income_tax regulations provides thal in general the exemption extends to social and recreation clubs which are supported by membership fees dues and assessments however form 886-a re issued july department of the teeasury - intemnal revenve service page -1- foun 886a ‘name of taxpayer explanation of items os ee org schedule no or exhibit ‘year period ended december 20xx a club which engages in business such as making its social and recreational facilities available to the general_public is not organized and operated exclusively for pleasure recreation and other nonprofitable purposes and is not exempt under section s01 a revproc_71_17 as amended by public law provides certain gross_receipts safe harbors ie social clubs may receive up to of their total gross_receipts including investment_income from sources outside of their membership without jeopardizing their tax-exempt status within thi sec_35 limit no more than of a club's gross_receipts may be derived from nonmember use of the club's faelities and or services if these standards ars exceeded a social_club will nat qualify for exemption pursuant to irc section c under revrul_68_638 the court ruled that a country club organized for the promotion and enjoyment of golf and other sports for its members was not exempt under sec_504 c of the code during the toumaments the club received substantial receipts from admission fees broadcasting rights parking the net_income received from the tournaments was used for fees and food and beverage concessions capital improvements and club operating_expenses the revenue_ruling explained that this country club ‘was not exempt for two reasons is engaged in business with the general_public by hosting an it annual goff tournament to which the public is admitted for a charge and income from the tournaments is inuring to the benefit of the members in the form of improved facilities and increased services the club engaged in golf tournaments that attracted large numbers of spectators government's position review of the income reported in tax_year 20xx showed the organization had the following income as filed by organization form_990 x ‘as adjusted for non-member income 20xx type of revenue member dues and assessments member dues member jumps ‘total member income non-member income as classified by examiner boogie income club store credit cards demos gift certificates non-member jumps non-member services ‘observer rides paypal transfers static line class static line class-deposit static line class-other ‘student jumps not college students student jumper form 886-a rer issued july -2- department of the treasury - internal reveaue service page fou bga ‘name of taxpayer tdepastannr of che teasany tero ravens sic schedule noor exhibit ‘yeat period ended december explanation of items org 20xx_ tandem mottos tandem deposit tandem mottos-other video w stills miso income un-used deposits total non-member income total income from org without investments total member income total non-member income_percentage of non-member income dollar_figure percentage of member income ws a review of the revenue for the prlor year being examined atong with the subsequent year 20xx showed the following revenue received by org for members and non-members december 20xx the current_year 1120xk -12isazoxx nzoxx a2ib120xx examined year member percentage non-member percentage exceed sec_15 non-member revenue program service revenue member dues non-member revenue total revenue the safe_harbor in revproc_71_17 as amended by public law allows org to receive only a review of the gro sec_15 of their receipts from members and a total of from investment_income receipts received from members and non-member activities for tax years 20xx through 20xx showed the orgarization consistently received income that exceeded the allowable from non-members since the amount received from non-members was greater than further review of the investment_income received by the organization was not required to be calculated issue whether the org is still qualified to be exempt under sec_501 o of the intemal revenue code department of the treasury - internal_revenue_service page form 886-acrev t-68 issued july yes yes yes fom 886a ‘name of taxpayer ‘depart of the teena toeral revonae sano explanation of items org 20xx schedule noor exhibit ‘year period ended december a review of the income received by org indicated more than of the income was from non-members in tax_year 20xx the organization does not meet the requirements to be exempt under sec_501 c of the code issue whether the revocation of the organization's tax-exempt status should be applied retroactively to tax_year beginning january 20xx the profit and loss statements provided for 20xx and 20xx show the organization has consistently exceeded the allowed in income from non-members since the first year under examination is the year ending december 20xx it is the government's position that the exempt status should be fevoked back to january 20xx taxpayer's position the position of the taxpayer is unknown at this time conglusion based on the review of the income received by org the organization's exempt status should be revoked since its income exceeded the maximum allowed under sec_501 c of the internal_revenue_code the organization will file the annual form_1120 beginning in the tax_year january 20xx through december 20xx and in all future tax years exempt_organization will submit forms for tax years ending december 20xx december 20xx and december 20xx to the revenue_agent per sec_277 of the intemial revenue code coda a non-exempt organization that is a membership_organization is allowed a deduction for expenses that relate to the operation of the organization for its members sec_277 states that in the case of a social_club or other membership_organization which is operated primarily to furnish services or goods to members and which is not exempt from taxation deductions for the taxable_year attributabie to furnishing services insurance goods or other items of value to members shall be allowed only to the extent of income derived during such year from members or transactions with members including income derived during such year from institutes and trade shows which are primarily for the education of members the when completing the form_1420 the organization must divide the income and expenses between the if there is loss from the membership activity it cannot be used to member and non-member activities offset the income from the non-member activities a loss on the member activity can be carried forward to a later year to be taken against member income form 886-acrev t-69 issued july 20k page deparment ofthe tseasury - internal_revenue_service


t c summary opinion united_states tax_court floyd william munsinger audreanne elise lewallen f k a audreanne elise munsinger petitioners v commissioner of internal revenue respondent docket no 19896-06s filed date audreanne elise lewallen pro_se michael w lloyd 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 taxable_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 a deficiency in petitioners’ federal_income_tax for of dollar_figure as petitioners have conceded the deficiency the sole issue remaining for decision is whether petitioners are each entitled to relief from joint_and_several_liability from the deficiency under sec_6015 background some of the facts have been stipulated and they are so found we incorporate by reference the parties’ stipulations of facts at trial and accompanying exhibits at the time the petition was filed floyd william munsinger mr munsinger and audreanne elise lewallen ms lewallen jointly referred to herein as petitioners resided in wyoming for the taxable_year petitioners were married and filed a joint federal_income_tax return the return was prepared by h_r block based on information and documents furnished by petitioners petitioners erroneously omitted dollar_figure of wage income from their return dollar_figure of which was attributable to ms lewallen and dollar_figure of which was attributable to mr munsinger the omitted wage income represented one-third of petitioners’ total income for the year ms lewallen had actual knowledge of mr munsinger’s various employments specifically including his employment as a welder for progress rail services it was this wage income attributable to mr munsinger that was omitted from the return petitioners divorced in date their divorce decree is silent regarding the allocation of responsibility for any outstanding federal tax_liabilities the notice_of_deficiency sent jointly to petitioners on date determined a deficiency of dollar_figure the deficiency stemmed solely from the omitted items of wage income although petitioners subsequently conceded the deficiency in its entirety they each seek relief from the joint_and_several_liability created by the filing of their return only ms lewallen appeared at trial discussion a relief from joint_and_several_liability generally married taxpayers may elect to file a joint federal_income_tax return sec_6013 after making the election each spouse is jointly and severally liable for the entire tax due sec_6013 sec_6015 provides three avenues for relief from that liability sometimes referred to as innocent spouse relief to a taxpayer who has filed a joint_return sec_6015 allows relief for understatements of although respondent moved to dismiss mr munsinger’s case for lack of prosecution we denied the motion as mr munsinger had signed a stipulation of facts in the case tax attributable to certain erroneous items on a return sec_6015 provides relief for a portion of an understatement_of_tax to taxpayers who are separated or divorced and sec_6015 more broadly confers on the secretary the discretion to grant equitable relief to taxpayers who otherwise do not qualify under sec_6015 or c see also sec_6015 except as otherwise provided in sec_6015 the taxpayer bears the burden_of_proof to show his or her entitlement to relief rule a 119_tc_306 affd 101_fedappx_34 6th cir b mr munsinger mr munsinger jointly filed the petition giving rise to the instant action and he signed a stipulation of facts however he did not appear in person at trial to testify mr munsinger’s stipulation of facts did not address the issue before us namely his request for relief from joint_and_several_liability it merely conceded the deficiency stemming from in part his own receipt of gross_income from wages in the amount of dollar_figure as noted above the taxpayer bears the burden of establishing entitlement to relief rule a alt v commissioner supra mr munsinger has not met his burden and accordingly we hold that he is not entitled to relief under sec_6015 for the taxable_year in issue c ms lewallen ms lewallen earned approximately one-third of the income giving rise to the understatement_of_tax mr munsinger earned the bulk of it in both the petition and at trial ms lewallen requested that she not be held liable for more than half of the deficiency resulting from the underreporting of wages however despite the understandable nature of her request the court is a court of limited jurisdiction and we are not at liberty to make decisions based solely in equity see 484_us_3 92_tc_776 73_tc_1014 40_tc_436 affd 331_f2d_422 7th cir in addition we are bound by the constraints imposed by the internal_revenue_code and any ability we have to grant ms lewallen relief from complete joint_and_several_liability must be made within sec_6015’s framework relief under sec_6015 sec_6015 provides full or apportioned relief from joint_and_several_liability for tax including interest penalties and other_amounts to the extent that such liability is attributable to an understatement_of_tax to be eligible for relief the requesting spouse must establish that in signing the return he or she did not know and had no reason to know of the understatement sec_6015 ms lewallen does not satisfy the applicable statutory requirements where a spouse seeking relief from joint_and_several_liability has actual knowledge of the underlying transaction that produced the omitted income relief is unavailable see sec_6015 115_tc_183 affd 282_f3d_326 5th cir ms lewallen had actual knowledge of the item_of_income omitted from the return attributable to mr munsinger namely his employment with progress rail services therefore petitioner is not entitled to relief under sec_6015 relief under sec_6015 sec_6015 allows proportionate tax relief if a timely election is made through allocation of the deficiency between individuals who filed a joint_return and are no longer married are legally_separated or have been living apart for a 12-month_period generally this avenue of relief allows a spouse to elect to be treated as if a separate_return had been filed rowe further the items that were omitted from petitioners’ federal_income_tax return giving rise to the understatement included income items attributable to ms lewallen herself it would not be inequitable to hold her liable for the understatement attributable to her omitted income see sec_6015 v commissioner tcmemo_2001_325 relief under sec_6015 however is not available if the commissioner demonstrates that the requesting spouse had actual knowledge at the time the return was signed of any item giving rise to a deficiency or portion thereof that is not allocable to such individual sec_6015 121_tc_73 cheshire v commissioner supra pincite as noted above ms lewallen had actual knowledge of mr munsinger’s employment with progress rail services the item giving rise to the underpayment not allocable to her therefore relief is not available to ms lewallen under sec_6015 relief under sec_6015 sec_6015 grants the commissioner discretion to relieve an individual where relief is not available under sec_6015 or c from joint liability if taking into account all the facts and circumstances it is inequitable to the knowledge requirement under sec_6015 does not require the requesting spouse to possess actual knowledge of the tax consequences arising from the item giving rise to the deficiency 121_tc_73 115_tc_183 affd 282_f3d_326 5th cir sec_1_6015-3 income_tax regs rather the statute mandates only a showing that the requesting spouse actually knew of the item on the return that gave rise to the deficiency or portion thereof without regard as to whether he or she knew of the tax consequences 292_f3d_800 d c cir affg tcmemo_2000_332 cheshire v commissioner supra in the instant case however we are convinced that ms lewallen also knew that wages are includable as income and fully taxable hold the individual liable for any unpaid tax or deficiency sec_6015 as previously discussed ms lewallen is not entitled to relief under sec_6015 or c as directed by sec_6015 the commissioner has prescribed guidelines in revproc_2003_61 2003_2_cb_296 modifying revproc_2000_15 2000_1_cb_447 that are to be used in determining whether it is inequitable to hold a requesting spouse liable for all or part of the liability for any unpaid tax or deficiency revproc_2003_61 sec_4 c b pincite sets forth seven threshold conditions that must generally be satisfied before the commissioner will consider a request for equitable relief under sec_6015 insofar as her own omitted wage income is concerned ms lewallen does not satisfy all of the threshold conditions condition of revproc_2003_61 sec_4 requires that the income_tax_liability from which the requesting spouse seeks relief is attributable to an item of the nonrequesting spouse although normally the court will review the commissioner’s denial of relief under sec_6015 under an abuse_of_discretion standard see eg 118_tc_106 affd 353_f3d_1181 10th cir the request for relief in this case was not made until the petition was filed revproc_2000_15 2000_1_cb_447 was superseded by revproc_2003_61 2003_2_cb_296 which is effective as to requests for relief filed on or after date and for requests for relief pending on date as to which no preliminary determination_letter had been issued as of that date ie mr munsinger unless one of the enumerated exceptions applies which none do as to the omitted wage income attributable to mr munsinger ms lewallen does satisfy the seven threshold conditions the inquiry then turns to whether any circumstances are present under which relief would normally be granted see id sec_4 c b pincite ms lewallen testified at trial that she would not suffer economic hardship if relief were not granted and no special circumstances are present in this case consequently we must examine whether taking into account all the facts and circumstances it is inequitable to hold ms lewallen liable for all or part of the deficiency stemming from the omission of mr munsinger’s wage income see id sec_4 c b pincite we hold that it is not petitioners’ divorce decree is silent on the allocation of outstanding federal tax debts and as noted above ms lewallen would not suffer economic hardship if relief were not granted most importantly however revproc_2003_61 sec_4 specifically states that actual knowledge by the requesting spouse of the item giving rise to the deficiency is a strong factor weighing against relief and may be overcome only if the factors in favor of equitable relief are particularly compelling unfortunately for ms lewallen no compelling factors present themselves in this case and ms lewallen is not entitled to relief under sec_6015 conclusion for the reasons discussed above neither petitioner is entitled to relief from joint_and_several_liability from the deficiency determined by respondent for to reflect our disposition of the disputed issue as to each petitioner decision will be entered for respondent


office_of_chief_counsel internal_revenue_service memorandum number release date cc tege eoeg et1 postn-113845-08 uilc date date to director submission processing cincinnati oh attn entity unit from office of division counsel associate chief_counsel tax exempt government entities subject railroad_retirement_tax_act status in accordance with the coordination procedure established between the service and the railroad retirement board rrb the rrb has provided us with its opinion that the following business is not an employer under the railroad retirement act and the railroad unemployment insurance act --------------------------------------- ---------------------------------------------------- ------------------------------------------------ -------------------------------------------------------- we have reviewed the opinion of the rrb and based upon the information submitted to us by the rrb we also conclude that --------------------------------------- is not an employer under the railroad_retirement_tax_act please take the appropriate action regarding this business cc -------------- _______________________ janine cook


internal_revenue_service department of the treasury number release date ndex number washington dc person to contact telephone number refer reply to cc corp -plr date date legend company district selling shareholders date date date date state c xxx ppp project b ddd percent purchaser purchaser purchaser ccc plr hhh dollar_figurefff dollar_figureggg dollar_figureiii case j dear this letter responds to the date request for rulings submitted by your representative on behalf of company and the selling shareholders listed on the attached schedule a with respect to the transfer of certain water rights you have requested a ruling that for federal_income_tax purposes company's participation in the procedures by which the transfer of the water is accomplished in conjunction with the sales by the selling shareholders of their rights to the water will not constitute a sale_or_other_disposition of property by company nor a distribution_of_property by the company to the selling shareholders with respect to their stock additionally you have requested rulings on whether the water rights will constitute capital assets in the hands of the selling shareholders and whether certain_sales of these water rights will constitute sales or exchanges of capital assets the information submitted in the request and in a later submission is summarized below facts company was organized on date as a ditch and reservoir company and is subject_to state c's statutory requirements for mutual ditch companies company uses the cash_method_of_accounting and its fiscal_year ends on date approximately xxx of the company's shareholders are selling shareholders the other shareholders are not transferring any of their water rights and are not involved in the transactions described herein state c mutual ditch companies generally were created when a group of farmers banded together and formed the cooperative company for the express purpose of storing and conducting water for irrigation purposes company's primary function has been to deliver to and store the water of its shareholders the company's assets are limited to those necessary to deliver and store the water these assets include weirs canals dams water control devices and a storage reservoir the shareholders used the bylaws and shares to quantify each of their beneficial use rights in the water transported by the company the company owns no land on which to make use of the water it transports and stores although water is derived from two sources only the water from project b the project b water as described below is the subject of this plr ruling_request on date district a quasi-governmental corporation subject_to state c's statutory requirements for such entities entered into an agreement the repayment contract with the united_states bureau of reclamation the bureau for the development of project b project b emanates from the reclamation act of as amended the repayment contract grants district the right to allocate the project b water the district does so through allotment contracts that require the water users to pay their proportionate share of the district's costs to operate and maintain project b and to repay the federal government for its construction costs the operating reimbursements costs on date district entered into an allotment contract with company which provided that company would be entitled to receive an allocation of water for the beneficial use of its shareholders the project b water was then allocated pro_rata among the shareholders based on their shares in addition to paying on a pro_rata basis company's annual operating_expenses based on their respective allocation of project b water each shareholder pays his proportionate share of the operating reimbursements costs under the allotment contract conditions in state c are such that water is in great demand as such the selling shareholders intend to relinquish their beneficial_ownership of ddd percent of the project b water through three sales agreements the master sales agreements with purchaser purchaser and purchaser the master sales agreements with purchaser and purchaser provide they will acquire an aggregate of ccc units of project b water at dollar_figurefff per unit and dollar_figureggg per unit respectively the master sales agreement with purchaser provides for an allocation of hhh units of project b water at dollar_figureiii per unit in order to satisfy certain transfer requirements of the district the master sales agreement with purchaser includes an option for purchaser to take all or some of the units through a twenty-five year interruptible supply contract the interruptible supply contract under the interruptible supply contract the price for the units is the same as in the master sales agreement and it includes an option to purchase the units for a nominal fee by its terms the interruptible supply contract will remove beneficial_ownership of the units from the selling shareholders you have indicated that purchaser has elected to take all the units pursuant to the interruptible supply contract the selling shareholders will be paid in full for all units upon the closing of all three transactions including the transaction subject_to the interruptible supply contract to facilitate the negotiation of the master sales agreements and the interruptible supply contract the selling shareholders created ppp to act as their agent the only members of ppp are the selling shareholders the selling shareholders are not selling their shares in company but their shares will bear a legend to reflect that they are no longer entitled to their full allocation of the project b water plr you have indicated that company is not materially participating in the transactions described above company as a party to the allotment contract however will agree to the amendment of the allotment contract to reflect the reduced allotment of project b water the master sales agreements and the interruptible supply contract are conditioned on our rulings herein however the selling shareholders due to the crisis situation in state c have already transferred some of the project b water to the purchasers the emergency sales the consideration received by the selling shareholders from these emergency sales is being held in escrow pending our rulings herein according to the courts of state c mutual ditch companies are unique entities which are formed not under state c' s general corporation statutes but under special legislation reserved for ditch and reservoir companies in analyzing the relationship between the shareholders and mutual ditch companies in regards to water rights the supreme court of state c in case j has stated that a mutual ditch company is merely engaged in the business of transporting and storing the water for its shareholders benefit and the law of state c uniformly holds that the actual ownership of the water rights is in the shareholder the supreme court's analysis noted that a longstanding tenet of state c law is that ownership of a water right can be acquired only by the actual beneficial use of the water mere diversion is not sufficient to meet the requirements of state c's constitution finally the supreme court noted that it is well established that the water rights owned by the shareholders are property rights accordingly based on this supreme court's decision and other decisions by this court it is clear that under state c law company is not the beneficial_owner of any of the water it transports for the benefit of its shareholders including the project b water representations company has represented that it is not a party to the master sales agreements or the interruptible supply contract and shall not receive any proceeds or other consideration arising or resulting from the transactions described herein based on the information and representations submitted we rule as follows the selling shareholders for federal_income_tax purposes are the beneficial owners of the project b water rights and the sale of such rights including the short-term emergency sales described above will not be deemed to be a sale_or_other_disposition of property by the company or a distribution_of_property by the company to the selling shareholders with respect to their stock accordingly the company will not realize gain_or_loss as a result of the selling shareholders' transactions sec_1001 sec_301 sec_311 plr the beneficial rights in the project b water constitutes a capital_asset in the hands of the selling shareholders sec_1221 the transfer of the beneficial rights in the project b water under the master sales agreements and the interruptible supply contract constitute sales of capital assets by the selling shareholders sec_1222 caveat no opinion is expressed about the tax treatment of the transactions 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 transactions that are not specifically covered by the above ruling for example no opinion is expressed about whether the short-term emergency sales constitute sales or exchanges of capital assets nor are we opining on the selling shareholders' bases in these water rights the rulings contained in this letter are based upon information and a representation submitted by the 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 request for rulings it is subject_to verification on examination procedural statements this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your taxpayer_representative sincerely steven hankin senior technical reviewer branch office of associate chief_counsel corporate cc


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 fip plr-132549-16 date date legend taxpayer state month a date b year individual cpa external business administrator ---------------------------- ------------------------------------------------------------------- --------------------- ---------------- ------------------- ------- ------------------- ------------------- dear ------------------ this letter is in response to taxpayer’s request pursuant to sec_301_9100-3 of the procedure and administration regulations for an extension of time to make the election under sec_831 of the internal_revenue_code facts taxpayer was formed as a corporation in month a of year under the laws of state and was licensed as an insurance_company in state external business administrator was engaged to assist with the formation of a captive_insurance_company taxpayer and to provide administrative services individual is taxpayer’s president taxpayer engaged cpa to prepare tax returns and provide accounting services based upon discussions with cpa and external business administrator individual approved the decision to make an election under sec_831 for taxpayer’s first tax_year ending on date b of year individual directed cpa to make the election cpa indicated that he would make such election in a timely fashion in connection with the preparation of taxpayer’s initial return plr-132549-16 taxpayer filed a timely request for an extension of time to file its form 1120-pc u s property and casualty income_tax return for the tax_year ending on date b of year pursuant to this extension taxpayer timely filed its initial tax_return for the tax_year ending on date b of year cpa inadvertently omitted the sec_831 election statement from the originally filed return upon learning of the error cpa prepared an amended_return differing from the original return only by the attachment of the election statement taxpayer then submitted the amended_return and the letter_ruling requesting relief pursuant to sec_301_9100-3 taxpayer represents that upon granting of the requested extension taxpayer will not have a lower tax_liability in the aggregate for all taxable years affected by the election than taxpayer would have had if the election had been timely filed taking into account the time_value_of_money further taxpayer represents that it requested relief before the failure to make the election was discovered by the internal_revenue_service taxpayer represents that it qualifies as a property and casualty insurance_company under part ii of subchapter_l of the internal_revenue_code ruling requested taxpayer requests a ruling that in accordance with sec_301_9100-1 and sec_301_9100-3 taxpayer be granted a reasonable period of time to make the election under sec_831 for the taxable_year ending on date b of year law and analysis sec_831 provides that taxes computed as provided in sec_11 are imposed for each taxable_year on the taxable_income of every insurance_company other than a life_insurance_company however sec_831 allows certain small companies to elect to be subject_to tax on their taxable_investment_income only the election applies to the taxable_year for which the company made it and as long as the company continues to qualify for all subsequent taxable years unless revoked with the consent of the secretary the time and manner to make the sec_831 election is prescribed by sec_301_9100-8 accordingly the election under sec_831 is a regulatory election sec_301_9100-1 pursuant to sec_301_9100-8 the election is to be made by the due_date taking into account any extensions of time to file obtained by the taxpayer of the tax_return for the first taxable_year for which the election is effective by attaching a statement to the tax_return containing the information specified in sec_301_9100-8 plr-132549-16 under sec_301_9100-1 the commissioner may 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 or statutory election sec_301_9100-2 does not provide relief for a taxpayer to make an election under sec_831 for any of the years for which relief is sought sec_301_9100-3 provides that a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that the grant of relief will not prejudice the interests of the government under sec_301_9100-3 a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer i requests relief under this section before the failure to make the regulatory election is discovered by the internal_revenue_service ii failed to make the election because of intervening events beyond the taxpayer’s control iii failed to make the election because after exercising reasonable diligence taking into account the taxpayer’s experience and complexity of the return or issue the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the internal_revenue_service or v reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election under sec_301_9100-3 a taxpayer is deemed not to have acted reasonably and in good_faith if the taxpayer i seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested ii was informed in all material respects of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief the commissioner will grant a reasonable extension of time to make a regulatory election only when the interests of the government will not be prejudiced by the granting of relief sec_301_9100-3 plr-132549-16 the interests of the government are prejudiced if granting relief would result in a taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money sec_301_9100-3 sec_301_9100-1 cautions that granting an extension of time to make the election is not a determination that the taxpayer is otherwise eligible to make the election based solely on taxpayer’s representations and the additional information required under sec_301_9100-3 taxpayer qualifies for an extension of time to make the election under sec_831 taxpayer is deemed to have acted in good_faith as defined by sec_301_9100-3 and the grant of relief will not prejudice the interests of the government ruling accordingly under sec_301_9100-3 taxpayer is granted an extension of time of days following the date of this letter to make the election provided by sec_831 for the tax_year ending on date b of year the election should be made in a written_statement filed with the appropriate service_center a copy of this letter should be attached to the sec_831 election caveats the ruling contained in this letter is based upon the information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the ruling_request and it is subject_to verification on examination except as provided above no opinion is expressed or implied concerning the federal_income_tax consequences of any other aspect of this or other transactions or item_of_income of taxpayer specifically no ruling is made as to whether taxpayer qualifies as an insurance_company under sec_831 and the granting of the extension under sec_301_9100-1 should not be construed as a determination that taxpayer is eligible to make the election provided by sec_831 this ruling is directed only to the taxpayer that requested it sec_6110 provides that this ruling may not be used or cited as precedent plr-132549-16 in accordance with a power_of_attorney on file in this office a copy of this letter is being sent to your authorized representative sincerely alexis a macivor branch chief branch office of the associate chief_counsel financial institutions products


department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------- id no ------------ telephone number -------------------- refer reply to cc psi b01 plr-142990-08 date date internal_revenue_service number release date index number ------------------------------ -------------------------- ----------------------------------------- -------------------- ---------- legend x y a b c d e f ----------------------------------------------------------- ------------------------------- ----------------------------------------------------------- -------------- ----------------------------------------------------- -------------------------------- ------------------------------------------------------------ -------------------------------- ------------------------------------------------------------ -------------------------- ------------------------------------------------------------ ------------------------------ ------------------------------------------------------------ ----------------------------- ------------------------------------------------------------ ------------------------------- country country --------------------------- ---------- plr-142990-08 year date ------ -------------------------- dear -------------- this letter responds to your request dated date on behalf of x seeking an extension under sec_301 of the procedure and administration regulations to file an election to treat x as a partnership for federal tax purposes facts based on the material submitted and the representations contained within we understand the relevant facts to be as follows y is a foreign eligible_entity formed in accordance with the laws of country as part of a year restructuring x was formed to facilitate the transfer some of the interests in y a publicly traded corporation formed under the laws of country and historically owned by a to b c d e and f however the form_8832 entity classification election inadvertently was not timely filed x represents that it was eligible to elect to be a partnership as of its formation date date law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes a business_entity is an entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the code sec_301_7701-2 an eligible_entity with a single owner can elect either to be classified as an association and thus a corporation under sec_301 b or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if a foreign eligible_entity has one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 if a foreign eligible_entity has more than one owner it may elect to be treated as a partnership pursuant to the rules in sec_301_7701-3 sec_301 c provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date on which the form is filed plr-142990-08 to elect to be classified other than as provided in sec_301_7701-3 an eligible_entity must file form_8832 entity classification election with the designated service_center sec_301_7701-3 an election can be effective on the date specified on the form_8832 or on the date filed if no such date is specified the effective date specified on the form_8832 cannot be more than days prior to the date the election is filed sec_301_7701-3 sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions for time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 conclusion based solely on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly x is granted an extension of time of sixty days from the date of this letter to elect to be treated as a partnership for federal tax purposes effective date the election should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the election except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent plr-142990-08 pursuant to the power_of_attorney on file with this office a copy of this letter will be sent to the taxpayer’s representative sincerely curt g wilson curt g wilson associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes