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 --------------------------- ------------------- telephone number -------------------- refer reply to cc psi plr-130673-14 date date legend coop1 coop2 --------------------------------------------------------------- ---------------------------------------------------------------------------------------- -------------------------------------------------------------- --------------------------------------------------------------------- ---------------------------------------------------------------------------- coop3 ---------------------------------------------------------------------------- --------------------------------------- corp state a ------- ------ llc ----------------------------------------------------------------------------- --------------------------------------------------------------- dear ---- ------- this is in response to a request for a ruling dated date submitted on behalf of coop2 by your authorized representative the ruling concerns the application of cooperative tax law to the transaction described below plr-130673-14 coop1 coop2 and coop3 the cooperatives are nonexempt rural_cooperative telephone_companies that operate on a cooperative basis each cooperative has less than ------ customers in its respective statutory exchange area as defined by the state a utilities board each cooperative’s service area is significantly rural and substantially agricultural coop1 has --------telephone access lines coop2 has ------telephone access lines and coop3 has ----- telephone access lines as discussed below each cooperative consistent with its respective business goal seeks to provide its member-patrons with access to communications technology advances as these advances become available and feasible for deployment coop1 was organized to among other things i furnish communication services to its members at the lowest cost ii contract for exchange service and toll service and reciprocal telecommunications service with connecting lines with local exchanges and long distance companies and iii do and perform any and all acts and things as necessary or convenient to accomplish any or all of the cooperative’s objectives members are issued a certificate of membership which is required in order to receive communication services no member of the association may own more than one membership and each member shall be entitled to one vote at meetings of the members of the association coop1’s articles of incorporation enumerate the manner in which the directors are to annually dispose_of the earnings_of the association in excess of its operating_expenses the articles provide among other things that remaining net_earnings shall be allocated to a revolving fund and shall be credited to the account of each member ratable in proportion to the business he has done with the association during each year such credits are herein referred to a as ‘deferred patronage dividends’ upon dissolution or liquidation the assets of the association shall be applied first to pay liquidation expenses then to pay association obligations and other capital credit statements issued therefore and the remainder of such assets shall be distributed in the manner and order provided by law coop2 was organized to among other things i furnish improve and expand telephone service to its members at the lowest possible cost consistent with the proper maintenance of its telephone lines and other facilities ii contract for exchange service and toll service and reciprocal telecommunications service with connecting lines with local exchanges and long distance companies and iii do and perform any and all acts and things as necessary or convenient to accomplish any or all of the cooperative’s objectives a member purchases a membership in the cooperative at the issuing price and is eligible to receive telecommunication services each member may only own one membership which entitles him or her to one vote at all meetings of the association the cooperative’s articles of incorporation explain the manner in which the directors shall annually dispose_of the earnings_of the association in excess of its operating_expenses r emaining net_earnings shall be allocated to a revolving fund and shall be credited to the account of each member ratably in proportion to the business he has done with the association during the year such credits are herein referred to as ‘deferred patronage dividends’ upon dissolution or liquidation the assets of the plr-130673-14 association shall be applied first to pay liquidation expenses next to pay obligations to general creditors next to redeem preferred_stock and pay accumulated dividends thereon if any and finally the remainder of the assets shall be distributed in the manner and or of priority provided by law and the by-laws coop3 was organized to among other things i furnish improve and expand telecommunication services to its members and others at the lowest possible cost consistent with the proper maintenance of its telephone lines and other facilities ii contract for exchange service and toll service and reciprocal telecommunications service with connecting lines with local exchanges and long distance companies in such manner as shall be deemed to be in coop3’s best interest and iii to do and perform all acts and things and to have and exercise any and all powers as may be necessary or convenient to accomplish any of all of the foregoing purposes or as may be permitted by the provisions of the laws under which coop3 was formed and to exercise any of its powers anywhere coop3 members are composed of any person firm cooperative corporation limited_liability_company partnership limited_liability partnership or body politic who receive retail telecommunication services from the cooperative at a premise within its established service area and the execution of a membership application agree to comply with and be bound by articles of incorporation and bylaws and relevant rules - and accepted by majority vote of board_of directors and are issued a certificate of membership at an issuing price no member may own more than one membership and each member entitled to one vote on each issue presented for vote of the members of the cooperative coop3 is operated on a cooperative nonprofit basis for the mutual benefit of its patrons members the cooperatives articles of incorporation provide the manner in which the directors shall annually dispose_of the earnings_of the cooperative in excess of its operating_expenses the cooperative’s articles of incorporation provide in relevant part that the cooperative shall allocate all remaining net_earnings as provided in sec_2 below sec_2 in the furnishing of telecommunications service the cooperative’s operations shall be conducted so that all persons will through their patronage furnish capital for the cooperative in order to induce patronage and to assure that the cooperative will operate on a nonprofit basis the cooperative is obligated to account on a patronage basis to all its patrons for all amounts received and receivable from the furnishing of telecommunications service in excess of operating costs and expenses at the moment of receipt by the cooperative and received with the understanding that they are furnished by the patrons as capital the cooperative is obligated to pay by credits to a capital_account for each patron all such amounts in excess of operating costs and expenses in the event of dissolution or liquidation after all outstanding indebtedness of the cooperative shall have been paid outstanding capital credits shall be plr-130673-14 retired without priority on a pro_rata basis before any payments are made on account of property rights of its members -------------------------------------------------- -------------------------------------- it is expressly understood that amounts paid for telecommunications services in excess of the cost of service are furnished by members as capital and each member shall be credited with the capital so furnished as provided in the bylaws or articles of incorporation the provision of telecommunication services by small independent telecommunication providers such as the cooperatives to the relatively few customers in a respective statutory exchange areas is costly particularly the provision of switching calling features broadband iptv and call announcements in an effort to provide their respective customers with a broader range of telecommunication services of higher quality delivered in a more efficient manner the cooperatives and similarly-situated providers formed llc llc enabled the providers to pool their respective resources and provide furnish improve and expand telecommunication services to their respective customers at the lowest possible cost which was consistent with each of the cooperatives respective goals the partnership’s operating_agreement provides in relevant part that the business of the company shall provide for switching telecommunications traffic to that end llc enabled the participating providers to pool their resources in securing a switch in which the partners could direct their respective telecommunications traffic the partnership_agreement provides that each member participate in the switch sharing_agreement in ------ in furtherance of llc’s overall purpose llc executed an agreement with --------------------------------------------------- and ----------------------------------------------------- --------- state a to purchase the state a --- license and state a --- license for dollar_figure---------- and dollar_figure---------- respectively llc purchased this spectrum in order to assist its members in enhancing the telecommunications services that each member provides to member- patrons that is it was intended that the spectrum acquisition would enable llc’s members to provide its member-patrons with enhanced voice data wireless internet and wireless backhaul llc did not purchase the spectrum for investment purposes the intention was to use the spectrum in order to enhance the telecommunication services that each member provided to its respective member-patrons llc did not put the spectrum to use immediately because the construction costs associated with its usage eg tower construction and electronic equipment installation was approximately dollar_figure---------- in addition to the construction-related costs it was estimated that on-going operational and management costs such as paying customer services representatives and fiber transport costs would be approximately dollar_figure------------ annually neither llc nor its members had the financial wherewithal at the time the spectrum was purchased to use the spectrum llc and its members however did anticipate using the spectrum in the future to enhance their respective customers’ telecommunication services plr-130673-14 between ------ and ------ the spectrum market exploded due in large part to advances in telecommunications technology which boosted the spectrum’s value in order to support the advances in technology the key players in the telecommunications marketplace sought available spectrum in some instances these players would consult spectrum brokers in their respective searches for available spectrum corp learned of the licenses that llc purchased in ------ - and corp ultimately made an offer which llc accepted as mentioned above llc purchased the spectrum in ------ with the intent to use it however at the time llc could not use the spectrum because construction costs were prohibitive importantly the spectrum license required llc to complete its build out by ------------------------- following the purchase the costs associated with using the spectrum continued to climb as the spectrum market began to heat up the key players in the telecommunications industry were better positioned to use the spectrum and possessed the financial wherewithal to bear the costs associated with using the spectrum as the costs associated with spectrum usage were ever-increasing llc determined in ------ that it would not be in a position to use the licenses and accepted corp’s offer on ------- ------------------------ llc sold the spectrum as a result of the spectrum sale coop2 received a distributive_share of partnership income relative to the sale coop2 submits that because the spectrum sale relates directly to its respective enterprise such distributive_share constitutes patronage sourced income based on the foregoing coop2 requests a ruling that its distributive_share of partnership income from llc’s spectrum sale constitutes patronage sourced income and if properly allocated to coop2’s member-patrons is excludable from coop2’s gross_income in the tax_year ending --------------------------- sec_501 of the code contemplates that rural_cooperative telephone_companies may qualify as tax-exempt organizations as the telephone business has developed however very few rural telephone cooperatives now qualify for this exemption coop2 falls into this category and thus is a non-profit but taxable cooperative corporation subchapter_t of the code sections provides the statutory scheme for taxing most cooperatives rural telephone cooperatives however are not governed by subchapter_t because of the exclusion provided by sec_1381 for rural telephone cooperatives when congress enacted subchapter_t in congress excluded rural telephone cooperatives in order to avoid over-regulating them and presumably to provide them with more flexible tax treatment because of the necessary services they provided to under-served parts of the country the underlying committee reports stated that cooperative corporations engaged in providing telephone service to persons in rural areas would continue to be treated the same as under prior_law see plr-130673-14 h_r rep no 87th cong 2d sess a127 s rep no 87th cong 2d sess see also revrul_83_135 1983_2_cb_149 sec_1382 and sec_1388 of subchapter_t placed new restrictions on the ability of cooperatives to deduct patronage_dividends that were allocated but not paid in many other ways however subchapter_t codified the law that existed prior to since its enactment in most of the development in the law regarding the taxation of cooperatives has occurred in cases under subchapter_t thus while the cases and rulings interpreting subchapter_t may not control the taxation of rural telephone cooperatives such as coop2 these authorities indicate the position of the service and the courts on many of the issues that do control the taxation of rural telephone cooperatives cooperatives are a unique form of business_entity which are democratically controlled by their patrons in cooperatives each member has one vote regardless of how much capital he or she contributed cooperatives are required to allocate their net margins from business done with or for their patrons back to such patrons in proportion to their patronage this return of patronage-sourced income is bound up with the basic concept of a cooperative rather than using their net_income to pay dividends to their shareholders as a regular_corporation would cooperatives pay patronage_dividends to their members based on the amount of business that the member does with the cooperative patronage_dividends are thus effectively price rebates for member- patrons see 995_f2d_101 7th cir the taxable_income of a cooperative is calculated in much the same manner as the taxable_income of a taxable corporation with one distinct difference the income of a cooperative that is attributable to business done with or for patrons is excluded from or deducted from the income of the cooperative when such income is allocated to the cooperative’s patrons at the time this patronage-sourced income is allocated or in the case of cooperatives not subject_to subchapter_t at the time it is distributed the cooperative’s patrons realize the income patronage-sourced income flows through the cooperative and is taxed only once in order for the amount_realized from the proposed sale of the spectrum to be deductible by coop2 upon allocation the amount must be patronage-sourced income ie income derived from business carried on with or for cooperatives patrons while neither the code nor the regulations provide a clear definition of patronage-sourced income the courts have in general held that if the income at issue is produced by a transaction which is directly related to the cooperative enterprise such that the transaction facilitates the cooperative’s marketing purchasing or service activities then the income is deemed to be patronage income farmland industries industries v commissioner 78_tcm_846 acq aod citing 765_f2d_1102 675_f2d_988 8th cir 88_tc_238 87_tc_435 plr-130673-14 in revrul_69_576 1962_2_cb_166 the service provided the following analysis of what it means for income to be patronage sourced the classification of an item_of_income as from either patronage or nonpatronage sources is dependent on the relationship of the activity generating the income to the marketing purchasing or service activities of the cooperative if the income is produced by a transaction which actually facilitates the accomplishment of the cooperative’s marketing purchasing or service activities the income is from patronage sources however if the transaction producing the income does not actually facilitate the accomplishment of these activities but merely enhances the overall profitability of the cooperative being merely incidental to the association’s cooperative operation the income is from nonpatronage sources see also revrul_74_160 1974_1_cb_245 ruling that interest_income realized from loans made by the taxpayer was patronage source because the loans actually facilitated the accomplishment of taxpayer’s cooperative activities in that the loans enabled the taxpayer to obtain the necessary supplies for its operations revrul_83_135 1983_2_cb_149 provides that a taxable cooperative not subject_to the provisions of subchapter_t of the code may exclude from gross_income the patronage_dividends paid or allocated to its patrons in accordance with its by-laws cooperatives became partners in llc to insure that telecommunication services would be available to the cooperatives’ customers courts have ruled in several instances that income from corporations organized by cooperatives to conduct activities related to the cooperative business is patronage sourced in farmland industries the taxpayer a cooperative organized for the purpose of providing petroleum products to its patrons sought to have the proceeds from the disposition of its stock in three subsidiaries classified as patronage-sourced income in reaching its decision the court stated that its task was to determine whether each of the gains and losses at issue was realized in a transaction that was directly related to the cooperative enterprise or in one which generated incidental income that contributed to the overall profitability of the cooperative but did not actually facilitate the accomplishment of the cooperative’s marketing purchasing or servicing activities on behalf of its patrons t c m pincite emphasizing the need to focus on the totality of the circumstances and to view the business environment to which the income producing transaction is related the tax_court analyzed the reasons behind both the organization of the subsidiaries and their eventual disposition id pincite first it looked at whether the taxpayer’s subsidiaries were organized to perform functions related to its cooperative enterprises the subsidiaries had been organized to explore for produce and transport crude_oil plr-130673-14 the court determined that all of the subsidiaries were organized to perform functions related to the taxpayer’s business and were not mere passive investments id pincite in other cases the direct relationship between the purpose of a cooperative business and its reasons for investing in a subsidiary were found to be dispositive on the question of whether income received from the subsidiary was patronage sourced for example in astoria plywood corp v united_states a f t r 2d ustc d or the court found that the income derived by a plywood and veneer workers cooperative from the cancellation of a lease on a veneer plant was patronage sourced because the production of veneer was an integral part of the cooperative’s business in other words the reason the cooperative leased the property to begin with had nothing to do with investing in real_estate and everything to do with making veneer similarly in 410_fsupp_1100 d or the court held that the dividends received by a plywood workers cooperative from west coast adhesives a glue supplier which the cooperative helped to organize in order to supply its adhesive needs were patronage-sourced income since glue is essential for the manufacture of plywood and the arrangement to produce the glue was reasonably related to the business done with or for the cooperative’s patrons coop2’s investment in llc and its purchase of the spectrum was directly related to its cooperative business investing in a company in order to provide wireless telephone service is directly related to the business of a rural_cooperative telephone company whose reason for existence is to provide telephone service to its patrons coop2’s sale of the spectrum through llc is also directly related to its cooperative business_purpose in cf industries judge posner noted in his opinion that the court was not aware of any dramatic opportunities for tax_avoidance by use of the cooperative form f 2d pincite however the court implied that a cooperative would be gaining an unfair tax advantage for its members if it were investing in businesses unrelated to its cooperative purpose and in effect running a mutual_fund for its members on the side id judge posner indicated that one type of transaction would not pass the mutual_fund test a temporary investment by a cooperative in securities id certainly if coop2 had taken its members capital and purchased a diversified portfolio of public company securities there can be no doubt that the proceeds from such a portfolio should not and would not be patronage sourced but coop2 did nothing of this sort rather it became a partner in llc for the purpose of providing its patrons with advanced telecommunication services accordingly based solely on the above we rule that coop2’s distributive_share of partnership income from llc’s spectrum sale constitutes patronage sourced income and if properly allocated to coop2’s plr-130673-14 member-patrons is excludable from coop2’s gross_income in the tax_year ending -------------------------- this ruling is directed only to the taxpayers that requested it under sec_6110 of the code it may not be used or cited as precedent in accordance with a power_of_attorney filed with the request a copy of the ruling is being sent to your authorized representative sincerely yours nicole r cimino senior technician reviewer branch office of the associate chief_counsel passthroughs special industries cc


a uniform issue list nos department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division aug ti pbhati attn legend state group c employees plan x plan y statute d statute e statute f dear this is in response to a ruling_request dated date as supplemented by additional correspondence dated date date date date date date december date and date from your authorized representative concerning the pick up of certain employee contributions to plan x under sec_414 of the internal_revenue_code the code and the federal_income_tax treatment of certain transfers of funds from plan y to plan x the following facts and representations have been submitted pursuant to statute d the state created plan x in as a defined benefit pension and retirement_system in order to provide retirement and other_benefits to group c employees plan x is intended to meet the qualification requirements of sec_401 of the code to the extent that section applies to a governmental_plan under sec_414 of the code participation in plan x is mandatory on the part of group c employees effective date all group c employees pursuant to statute d are required to contribute a percentage of their compensation to plan x no option to receive this amount in cash has ever been permitted under statute d the contributions shall be deducted from employee compensation and an employee may not have the option of receiving the payroll deduction directly in cash instead of having the contribution picked up by the employer statute d also requires the state to pick up and pay the mandatory_contributions to plan x pursuant to sec_414 of the code as of date the state has treated the employee contributions in a manner consistent with code sec_414 pursuant to state statute the state also established plan y a defined contribution pension_plan qualified under sec_401 of the code plan y covers employees of the state and employees of any political_subdivision of the state which elects to participate in plan y employees participating in plan y are required to contribute a percentage of their compensation to plan y this amount is deducted by the employer each payroll_period and paid over to the plan’s trust statute f requires the state or other adopting employer to pick up and pay the mandatory_contributions to plan y pursuant to sec_414 of the code statute e as submitted to the internal_revenue_service the service in proposed form on date provides for the purchase of credited service for employees participating in plan x such as credited service for employment with a political_subdivision or public organization of the state for leave of absence or military service the state proposes to implement a program under which an employee will have several options for purchasing credited service or for the reinstatement of forfeited credited service due to a prior refund of contributions two of the available options include employee payments made through payroll deduction or a direct trustee-to-trustee transfer from a code sec_401 plan including plan y these provisions will become effective upon the receipt of a favorable letter_ruling from the service concerning their tax consequences a covered_employee who is eligible to purchase credited service through payroll deduction is required to make an irrevocable election to purchase the credited service as permitted under statute e the irrevocable election must specify the number of payroll periods that deductions will be made from the employee’s compensation and the dollar amount_of_deductions for each payroll_period during the specified number of payroll periods the deductions will cease upon the earliest of the employee’s termination of employment with the employer the employee's death or completion of the specified payroll deduction period if an employee terminates employment before all payments are made the employee’s benefits shall be based only on the payments actually made with respect to the credited service purchased under statute e the amounts paid under the payroll deduction program are paid_by the employer in lieu of contributions by the employee making the election and the employee does not have the option of choosing to receive the contributed amounts directly in cash the state also proposes to allow employees to use funds from plan y for the iimited purpose of purchasing credited service on behalf of employees participating in plan x or for the reinstatement of forfeited credited service under statute e plan x permits the acceptance of funds by reason of a direct trustee-to-trustee transfer from an account established for the benefit of an employee in plan y the amounts transferred from plan y will be applied to reduce the employee’s outstanding indebtedness at the time that the contributions are received by plan x based on the foregoing facts and representations you requested the following rulings that amounts deducted and withheld from the salary of covered employees pursuant to statute d qualify as employee contributions that are picked up by the state under code sec_414 and as such are not included in gross_income for federal_income_tax purposes that amounts deducted and withheld from the salary of covered employees pursuant to statute d qualify as employee contributions that are picked up by the state under code sec_414 and as such do not constitute wages for federal_income_tax withholding purposes that amounts deducted and withheld from the salary of covered employees for purposes of purchasing additional credited service pursuant to statute e qualify as employee contributions that are picked up by the state under code sec_414 and as such are not included in the employee’s gross_income for federal_income_tax purposes that amounts deducted and withheld from the salary of covered employees for purposes of purchasing additional credited service pursuant to statute e qualify as employee contributions that are picked up by the state under code sec_414 and as such do not constitute wages for federal_income_tax withholding purposes that the picked-up contributions permitted under statute d and statute e will not be treated as annual_additions for purposes of code sec_415 that amounts transferred in a direct trustee-to-trustee transfer to the plan x trust from an account established in an exempt trust for the benefit of the employee in plan y which is a code sec_401 qualified_plan to purchase additional credited service pursuant to statute e will not result in ordinary_income to the employee under sec_72 of the code with respect to ruling_request sec_1 and code sec_414 provides that contributions otherwise designated as employee contributions shall be treated as employer contributions if such contributions are made to a plan described in code sec_401 established by a state government or a thereof or any agency_or_instrumentality of any one of the foregoing and are picked up by the employing unit political_subdivision the federal_income_tax treatment to be accorded contributions that are picked up by the employer within the meaning of code sec_414 is specified in revrul_77_462 1977_2_cb_358 in that revenue_ruling the employer school district agreed to assume and pay the amount employees were required by state law to contribute to a state pension_plan revrul_77_462 concluded that the school district's picked up contributions to the plan are excluded from the employees’ gross_income until such time as they are distributed to the employees the revenue_ruling held further that under the provisions of code sec_3401 the school district’s contributions to the plan are excluded from wages for purposes of the collection of income_tax at source on wages therefore no withholding for federal_income_tax purposes is required from the employees’ salaries with respect to such picked up contributions the issue of whether contributions have been picked up by an employer within the meaning of code sec_414 is addressed in revrul_81_35 1981_1_cb_255 and revrul_81_36 1981_1_cb_255 these revenue rulings established that the following two criteria must be met the employer must specify that the contributions although designated as employee contributions are being paid_by the employer in lieu of contributions by the employee and the employee must not be given the option of choosing to receive the contributed amounts directly instead of having them paid_by the employer to the pension_plan furthermore it is immaterial for purposes of the applicability of code sec_414 whether an employer picks up contributions through a reduction in salary an offset against future salary increases or a combination of both in revrul_87_10 1987_1_cb_136 the internal_revenue_service considered whether contributions designated as employee contributions to a governmental_plan are excludable from the gross_income of the employee the service concluded that to satisfy the criteria set forth in revenue rulings and with respect to particular contributions the required specification of designated employee contributions must be completed before the period to which such contributions relate plan x satisfies the criteria set forth in code sec_414 revrul_81_35 and revrul_81_36 by providing that the state will pick up and make contributions to plan x in lieu of contributions by eligible employees and that no employee will have the option of receiving such amount directly in cash instead of having it contributed to plan x accordingly with respect to ruling_request sec_1 and we conclude that the amounts deducted and withheld from the salary of covered employees to pay mandatory employee contributions pursuant to statute d are picked up by the state within the meaning of sec_414 of the code and that such amounts will be treated as employer contributions and will not be includable in employees’ gross_income for the taxable_year in which such amounts are contributed with respect to ruling_request sec_3 and statute e provides for the purchase of additional credited service for employees participating in plan x if a group c employee elects to purchase additional credited service under one of the provisions of statute e and agrees to do so by payroll deduction the employee and the state may further agree that the state will pick up the contributions that the employee is required to pay for the purchase of additional credited service any election to have payroll deductions for the purchase of additional credited service picked up by the state is irrevocable statute e provides that the state will pay the picked-up amount directly to plan x in lieu of such payment by the employee the payroll deductions shall continue to be picked up until the earlier of termination of employment or the completion of all the required_payments for the additional credited service statute e further provides that the covered_employee will not have the option of choosing to receive the picked-up amounts instead of having them paid_by the state to plan x accordingly we conclude that the amounts deducted and withheld from the salary of covered employees to purchase additional credited service pursuant to statute e are picked up by the state within the meaning of sec_414 of the code and that such amounts will be treated as employer contributions and will not be included in employees’ gross_income for the taxable_year in which such amounts are contributed because we have determined with respect to mandatory employee contributions under statute d and additional service_credit contributions under statute e that the picked-up amounts are to be treated as employer contributions they are excepted from wages as defined in code sec_3401 for federal_income_tax withholding purposes therefore no withholding of federal_income_tax is required from employees’ salaries with respect to such picked-up amounts with respect to ruling_request sec_415 of the code provides in general that a participant’s benefit expressed as an annual_benefit cannot exceed the lesser_of a dollar_figure as adjusted for cost-of-living increases or b percent of the participant's average compensation_for the high_three_years the percent of compensation limit under sec_415 does not apply to governmental plans sec_415 of the code provides in general that contributions and other annual_additions for a participant may not exceed the lesser_of a dollar_figure as adjusted for cost-of-living increases or b percent of the participant's_compensation sec_1 d of the income_tax regulations provides that where a defined_benefit_plan provides for mandatory employee contributions the annual_benefit attributable to such contributions is not taken into account for purposes of code sec_415 this regulation further provides that the mandatory employee contributions are considered a separate defined_contribution_plan maintained by the employer that is subject_to the limitations on contributions and other additions described in code sec_415 however employee contributions that are picked up by the employer pursuant to code sec_414 are treated as employer contributions and as such are not annual_additions to a separate defined_contribution_plan for purposes of sec_415 accordingly we conclude that the picked-up contributions under statutes d and e will not be treated as annual_additions for purposes of code sec_415 with respect to ruling_request sec_402 of the code provides in pertinent part that the amount actually distributed to any distributee by any employees’ trust described in sec_401 which is exempt from tax under sec_501 shall be taxable to such distributee in the year in which so distributed under sec_72 relating to annuities revrul_67_213 1967_2_cb_149 holds that where a participant's interest is transferred from a_trust forming part of one qualified employees’ plan to a_trust forming part of another qualified_plan no taxable_income will be recognized to the participant by reason of such transfer under code sec_72 therefore with respect to ruling_request we conclude that amounts transferred in a direct trustee-to-trustee transfer from an employee’s account in the plan y trust to such employee’s account in the plan x trust in order to purchase additional credited service pursuant to statute e will not result in ordinary_income to the employee under sec_72 of the code by reason of such transfer these rulings are based on the assumption that plans x and y will be qualified under sec_401 of the code at the time of the proposed contributions and distributions this ruling is based on the conditions that a a group c employee who elects to purchase a particular type of past_service_credit may not make more than one irrevocable election to purchase that type of service_credit and b a group c employee may make more than one irrevocable election to purchase past_service_credit provided any subsequent election is for the purchase of a different type of the past_service_credit is irrevocable and does not alter or amend the terms and conditions of any prior election to purchase past_service_credit proposed pick-up contributions for the purchase of additional credited service under plan x cannot commence prior to the later of the date statute e as submitted to the service in proposed form on date is signed or put into effect no opinion is expressed as to whether the amounts in question are subject_to tax under the federal_insurance_contributions_act no opinion is expressed as to whether the amounts in question are paid pursuant to a salary reduction agreement within the meaning of sec_3121 of the code this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent a copy of this ruling is being sent to your authorized representative pursuant to a power_of_attorney on file in this office should you have any questions pertaining to this ruling you may contact id of this office at sincerely yours donzen h pa employee_plans technical group acting manager


office_of_chief_counsel internal_revenue_service memorandum number release date cc pa br ---------------- posts-137978-07 uilc date date to marvis knospe associate area counsel--manhattan large midsize business cc lm f man attention --------------------- from nancy m galib senior technician reviewer branch procedure administration interest collection_period subject this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent issue whether sec_6601 underpayment interest that is assessed during the sec_6501 assessment_period applicable to the tax to which the interest relates bears its own collection_period under sec_6502 or must be collected within the collection_period for the tax conclusion underpayment interest assessed during the sec_6501 period applicable to the tax to which the interest relates generally does not bear its own sec_6502 collection_period but must be collected within the collection_period applicable to the tax facts the taxpayer timely filed a return reporting a liability and did not make any payments before or with the return the service assessed the tax effective on the return_due_date and assessed underpayment interest two years later within the sec_6501 posts-137978-07 period applicable to the tax to which the interest relates when the interest was assessed there were eight years remaining under sec_6502 for collecting the tax law and analysis interest is imposed on an underpayment_of_tax from the last date prescribed for payment of the tax sec_6601 interest is assessed collected and paid in the same manner as taxes sec_6601 the service generally has three years from the later of the due_date or filing_date of the return to assess the tax sec_6501 the service generally has years from the date of assessment to collect the tax sec_6502 underpayment interest may be assessed and collected at any time during the period within which the tax to which such interest relates may be collected sec_6601 originally sec_6601 sec_6601 was enacted in and no similar statutory provision existed before that time reg sec_301_6601-1 as published in stated f applicable rules - any interest prescribed by sec_6601 shall be assessed and collected in the same manner as tax and shall be paid upon notice_and_demand by the district_director interest on a tax may be assessed and collected at any time within the period of limitation on collection after assessment of the tax to which it relates for rules relating to the period of limitation on collection after assessment see sec_6502 no similar provision was contained in a regulation before the legislative_history to sec_6601 recognized the need to eliminate the risk of a contention that assessment of interest was limited to the sec_6501 period for assessment of the tax see also gcm date which suggested the addition of language to a technical_advice_memorandum consistent with that legislative purpose s rep no 85th cong 2d sess date at p states it has been contended that interest to be collectible must be assessed within the limitation period for the assessment of the tax on which the interest has accrued the house bill makes it clear by providing an exception to the general_rule of f now e that interest may be assessed and collected at any time during the time when the tax involved may be collected your committee has accepted this clarification the question arises therefore whether interest must be assessed within the period provided by the statute for assessment of a deficiency in tax we do not believe such to be the case it will be noted that sec_301_6601-1 in prescribing the manner in which interest shall be assessed provides that interest may be assessed and collected at any time within the period of limitation on collection after assessment of the tax to which it relates posts-137978-07 the long-standing application of sec_6601 since its enactment is that assessment and collection of underpayment interest under sec_6601 are limited to the collection_period of the underlying tax to which the interest relates generally the service limits collection of underpayment interest to the collection_period of the tax to which it relates see eg i r m statute_of_limitations -- interest may be assessed and collected as long as the underlying tax can be collected sec_6601 irm statutory period for assessment and collection of interest same case law has not addressed the precise question but the rationale in cases addressing sec_6601 appear to adopt views consistent with this guidance see eg 381_f3d_109 2d cir 78_fedclaims_164 772_fsupp_481 e d cal case development hazards and other considerations --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- 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 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 b02 plr-151453-13 date date x --------------------------------------------------------------------------------------------------- ------------------------------------------------- country ---------------- date ------------------ dear ------------ this letter responds to a letter dated date and subsequent information submitted on behalf of x by its authorized representatives requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be classified as a disregarded_entity for federal tax purposes the information submitted provides that x was organized under the laws of country on date x represents that it is a foreign_entity eligible to elect to be classified as a disregarded_entity for federal tax purposes however x failed to timely file form_8832 entity classification election to be treated as disregarded_entity effective date sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner plr-151453-13 sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes unless the entity elects otherwise a foreign eligible_entity is treated as an association if all members have limited_liability a foreign eligible_entity with a single owner may elect to be treated as a disregarded_entity pursuant to the rules under sec_301_7701-3 a foreign eligible_entity with two or more members is treated as a partnership if at least one member does not have limited_liability a foreign eligible_entity with two or more members may elect to be treated as a partnership pursuant to the rules under sec_301_7701-3 sec_301_7701-3 provides that an eligible_entity may make an entity classification election by filing form_8832 with the appropriate service_center under sec_301_7701-3 this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the effective date specified on form_8832 cannot be more than days prior to the date on which the election is filed sec_301_9100-1 provides that the commissioner in exercising the commissioner's discretion 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 election or a statutory election but not more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards by which the commissioner will determine whether to grant an extension of time to make an election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 describes the conditions under which the commissioner will grant requests for relief 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 granting relief will not prejudice the interests of the government based solely on the facts submitted and representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 as a result we grant x an extension of time of one hundred twenty days from the date of this letter to file form_8832 with the appropriate service_center to elect to be classified as a disregarded_entity effective date a copy of this letter should be attached to the form_8832 except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item either discussed or referenced in this letter the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the plr-151453-13 material submitted in support of the ruling_request it is subject_to verification on examination we are directing the ruling only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office we are sending a copy of this letter to x’s authorized representatives sincerely associate chief_counsel passthroughs special industries by ____________________________ bradford r poston senior counsel branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


department of the treasury internal_revenue_service washington d c offic e of c h ief c o u n sel number info release date uil no date dear mr senator arlen specter forwarded your correspondence dated date to our office for a response your letter requests essentially the same information as the letter you forwarded to the internal_revenue_service on date i answered that letter on date and am now providing you with a similar response i am sending senator specter a copy of this letter your letter asks us to address certain questions you first raised in correspondence to us dated date in that letter you said you had religious objections to obtaining social_security numbers ssn for your dependent_children as we explained to you in our date and date correspondence your letter raises two issues the first issue is whether a taxpayer may claim the dependency_exemption for his child if he does not provide the child’s ssn on his return the second issue is whether a taxpayer’s child would need to include an ssn on his or her income_tax return claiming the dependency_exemption aside from the two limited exceptions discussed briefly below the law denies the dependency_exemption for a minor child unless the taxpayer claiming the exemption includes the child’s ssn on the taxpayer’s return internal_revenue_code irc sec_151 prior to the law required taxpayers who claimed an exemption under sec_151 on their income_tax return to provide the dependent’s tin only if the dependent had reached one year of age by the close of such taxable_year by however sec_6109 required a tin for all dependents regardless of age except those born in november and date with respect to returns and date with respect to returns unless regulations prescribe otherwise an individual’s ssn is that individual’s taxpayer_identification_number tin sec_6109 aside from the ssn there are two other types of tins used for individual tax filing purposes one of these tins is the individual_taxpayer_identification_number itin a nine-digit number issued to an alien individual who is not eligible to obtain an ssn sec_1_6109-1 and the second type of tin is the adoption_taxpayer_identification_number atin the atin is a temporary nine-digit number issued to a child who is placed for adoption but is unable to get an ssn before the adoptive parents file their tax returns generally the law denies the dependency_exemption for a minor child unless the taxpayer claiming the exemption includes the child’s ssn on the taxpayer’s return sec_151 under specific circumstances however a taxpayer claiming a dependency_exemption for a minor child may provide the child’s itin or atin rather than the child’s ssn as the tin required by sec_151 including an ssn on an income_tax return the law requires all individual taxpayers to include their ssns on all income_tax returns filed with the internal_revenue_service sec_6109 the only exceptions to this requirement are the two limited circumstances mentioned above cid cid an individual taxpayer who is ineligible for an ssn may file under an itin a child who has a separate tax filing requirement could file using an atin before his or her adoption is finalized otherwise the individual’s tin is his or her ssn i hope this information is helpful unfortunately i cannot address your questions regarding the social_security administration’s procedures because they are not within our jurisdiction if you have further questions please contact elizabeth kaye badge no at sincerely _______________________ curtis g wilson assistant chief_counsel administrative provisions judicial practice cc the honorable arlen specter united_states senator room post office building 5th hamilton streets allentown pennsylvania


t c summary opinion united_states tax_court ramon emilio perez petitioner v commissioner of internal revenue respondent docket no 8126-07s filed date ramon emilio perez pro_se heather k mccluskey for respondent goldberg 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 dollar amounts are rounded after a concession1 the issue for decision is whether petitioner had a taxable_distribution in related to a form 1099-r distributions from pensions annuities retirement or profit-sharing_plans iras insurance contracts etc that northwestern mutual life_insurance co northwestern issued background some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioner resided in california when he filed his petition petitioner is a medical doctor specializing in the treatment of infectious diseases he began private practice in and in he formed a medical corporation petitioner employed one full-time_employee serving as both receptionist and bookkeeper and he employed part-time employees petitioner’s then wife lorraine torres was and presumably remains an attorney she operated her legal practice from space in petitioner’s office she also managed all of petitioner’s business financial and legal affairs 1during trial respondent conceded the accuracy-related_penalty for petitioner’s medical practice was hospital based he would rarely see patients in his office he used the office mainly for administrative purposes such as billing consultations and telephone calls ms torres arranged for the issuance of at least two life_insurance policies on petitioner’s life the policy involved in this case arises from a life_insurance application that ms torres obtained from northwestern petitioner signed the application on date the type of policy requested was a flexible life plan the application listed petitioner as the owner and the insured and named ms torres as the direct beneficiary trustee under will of insured was listed as the contingent beneficiary the amount of life_insurance applied for was redacted from the copy of the application in the record however the application noted another preexisting northwestern life_insurance_policy for dollar_figure together with an accidental death_benefit of dollar_figure the following boxes or options were checked on the date application capitalization as in the original 9c 9d flexible life plans complife - whole life additional benefits for flexible life plans - waiver of premium if an additional benefit cannot be approved should the company issue the policy without the benefit - yes shall the premium loan provision if available become operative according to its terms - ye sec_12 annual dividends until otherwise directed will - first policy - purchase paid-up additions policy loan interest rate option - premium payable - annually after receipt of the application northwestern issued a life_insurance_policy the february policy in the early 1990s petitioner’s income from his medical practice dramatically decreased and petitioner could no longer afford the life_insurance premiums by petitioner and his wife had finalized a chapter bankruptcy as a result he closed his office terminated his employees and lost his home the couple separated and in divorced ms torres handled the legal work for the divorce petitioner did not hire an attorney around the time of the marital separation petitioner starting receiving letters from northwestern warning that the policy would lapse if he did not act and the company would report the lapse petitioner consulted his former wife with respect to the letters and she told him that she would take care of the matter and not to worry petitioner never received any cash distributions from northwestern nonetheless northwestern issued petitioner a form 1099-r for reporting a taxable_distribution of dollar_figure we presume this form 1099-r pertained to the preexisiting life_insurance_policy for dollar_figure listed on the date life_insurance application petitioner prepared his own federal_income_tax return he timely filed the return but he did not include the dollar_figure in income instead petitioner attached the form 1099-r and a letter stating i need your advice as to the meaning of this i never received any money from them this is all an insurance_policy that lapsed petitioner tried to resolve the matter with the internal_revenue_service irs through a series of telephone and written exchanges each time hearing from a different representative he informed the irs that he believed the bankruptcy had taken care of the matter while petitioner was still waiting for a clarification from the irs the irs issued a notice cp2000 dated date informing petitioner of an increase in federal_income_tax penalties and interest totaling dollar_figure for as a result of northwestern’s form 1099-r petitioner paid the entire dollar_figure but he continued to dispute the adjustment and checked a box on the remittance form stating that he disagreed with the adjustment the irs received the payment on date as a result of the full payment the irs did not issue a notice_of_deficiency pertaining to while the dispute for was still ongoing northwestern issued another form 1099-r this second form 1099-r reported a taxable_distribution for of dollar_figure relating to the february policy in issue because petitioner was still waiting for clarification regarding he did not include the dollar_figure in his income the irs issued a notice_of_deficiency dated date with respect to determining a federal_income_tax deficiency of dollar_figure and a sec_6662 accuracy-related_penalty of dollar_figure on date petitioner filed a petition with this court seeking redetermination of the and federal_income_tax deficiencies on the grounds that he lost all of his assets in the bankruptcy including the cash_value of any life_insurance and the irs did not provide any evidence that he still owned the life_insurance policies at issue on date respondent filed a motion to dismiss the petition as it applied to on the grounds that the irs had not issued a notice_of_deficiency for and accordingly under sec_6212 and sec_6213 as well as rule the court lacked jurisdiction to hear the matter and petitioner had no federal_income_tax deficiency for because he had fully paid the deficiency on date on date the court granted respondent’s motion to dismiss the petition with respect to at trial the court received into evidence the following three documents that are relevant to our final_decision a copy of the date insurance application discussed above a printout of an irs taxpayer data inquiry computer screen replicating information from the form 1099-r and a signed form_2866 certificate_of_official_record with a raised gold seal and attached to that an irs internally computer- generated wage and income transcript showing data from all the information returns that the irs received for with respect to petitioner the computer replication of the form 1099-r reports northwestern issued the form 1099-r as a result of a policy termination a taxable_amount at lapse of dollar_figure loans repaid at lapse of dollar_figure and the last four digits of a redacted account number these four digits match the last four digits of the redacted account number written on the date life_insurance application respondent did not offer and the court did not receive into evidence a copy of the actual form 1099-r at issue or a copy of the issued life_insurance_policy corresponding to the date application discussion in general the commissioner’s determination set forth in a notice_of_deficiency is presumed correct and the taxpayer bears the burden of showing that the determination is in error rule a 290_us_111 under sec_7491 the burden_of_proof regarding a factual matter may shift to the commissioner if the taxpayer produces credible_evidence and meets the other requirements of the section in this case however before we apply sec_7491 we must first consider sec_6201 because petitioner reasonably raised the issue of the correctness of an information_return the form 1099-r for sec_6201 provides in any court_proceeding if a taxpayer asserts a reasonable dispute with respect to any item_of_income reported on an information_return filed with the secretary by a third party and the taxpayer has fully cooperated with the secretary including providing within a reasonable period of time access to and inspection of all witnesses information and documents within the control of the taxpayer as reasonably requested by the secretary the secretary shall have the burden of producing reasonable and probative information concerning such deficiency in addition to such information_return respondent did not challenge and in any event we would find that petitioner has fully cooperated with respondent’s requests for information documents and meetings petitioner on his own initiative attached a letter to his federal_income_tax return stating that he disagreed with the form 1099-r provided his reasons for disagreement and requested clarification from the irs likewise after filing his return and for the next years through the date of trial petitioner continued to question why the amounts northwestern reported on the forms 1099-r were taxable as income to him petitioner paid the proposed additional tax penalties and interest for totaling dollar_figure even though he disagreed with the additional income that respondent asserted he also attempted to dispute the tax for in the petition that he filed in this case on the basis of the above we hold that under sec_6201 respondent has the burden of producing reasonable and probative information regarding the deficiency respondent argues that petitioner’s circumstances are sufficiently similar to the taxpayers’ circumstances in atwood v commissioner tcmemo_1999_61 for us to hold that petitioner had gross_income in from the lapse of a northwestern insurance_policy we disagree in atwood the taxpayers each purchased a single premium whole_life_insurance policy each policy provided for the lapse or termination of the policy if the loan balance including unpaid interest grew to be larger than the cash_value of the policy after a few years the couple suffered financial setbacks forcing them to withdraw as loans the maximum amounts that the policies allowed they were unable to repay the loans or the accumulated unpaid interest as a result the loan balances exceeded the cash values causing the insurance_companies to terminate the policies in the insurance_companies issued forms 1099-r for reporting taxable_distributions in the amounts by which the ending cash values exceeded the single premium payments the taxpayers timely filed their joint federal_income_tax return without including any income related to the forms 1099-r the commissioner determined a federal_income_tax deficiency for and the taxpayers petitioned this court claiming in pertinent part they received very little cash and therefore the terminations were merely ‘paper transactions’ on the books of the insurance_companies we held that the lapses gave rise to income because even though the taxpayers received minimal cash upon termination the lapses resulted in a satisfaction of the loans and were therefore equivalent to payments of the cash surrender values however respondent puts the cart before the horse by assuming that our holding in atwood applies to the facts present here in atwood we analyzed the policies’ terms from which we found facts to arrive at our holding in petitioner’s case the february policy is not in evidence we do not know why the policy lapsed and we do not know the consequences to petitioner in the event of a lapse the insurance application form in evidence merely provides some suggestive terms such as a waiver of premium shall the premium loan provision if available become operative according to its terms - yes and annual dividends unless otherwise directed will on the first policy purchase paid-up additions we do not know the precise meaning of these terms with respect to this particular insurance_policy or whether the terms in the application were adopted or modified in the february policy or in subsequent riders significantly the application contains the escape clause that northwestern may issue the policy without certain requested benefits respondent’s failure to produce a copy of the february policy or to call a representative from northwestern prevents us from applying the holding in atwood to the facts in this case we do not doubt and petitioner did not contest that northwestern issued a form 1099-r for reporting a taxable_distribution of dollar_figure we are likewise persuaded that the account number on the form 1099-r ties into the account number written on the date insurance application petitioner never disputed and outright acknowledged that he received the forms 1099-r for and and that he signed the life_insurance application in evidence nonetheless the point of sec_6201 is that when a taxpayer raises a reasonable dispute with respect to an information_return and when the taxpayer has fully cooperated then the commissioner must produce evidence to establish the fundamental correctness of the deficiency arising from the information_return not merely that the information_return existed or that the commissioner accurately transcribed the information_return into the commissioner’s own internal records see 932_f2d_1128 5th cir affg in part and revg in part tcmemo_1990_68 and its companion case seeking recovery_of litigation costs 988_f2d_27 5th cir holding that as far back as courts have followed the principle that the commissioner’s naked assertion that a taxpayer received unreported income without a proper foundation is not sufficient support for a notice_of_deficiency and is therefore not entitled to a presumption of correctness revg tcmemo_1992_99 the date life_insurance application is the only evidence respondent produced to show the foundational accuracy of the form 1099-r without the actual february policy in the record or a northwestern representative testifying as to how the provisions in the policy applied when a lapse in premium payments occurred the record is silent as to how northwestern determined the amounts reflected on the form 1099-r moreover we also do not know whether the february policy changed over the years or whether petitioner’s subsequent bankruptcy allowed his creditors to receive the cash_value of his life_insurance policies in effect at the time in summary businesses can make mistakes in reporting data on information returns and decisive here respondent offered no evidence showing that the amounts on the form 1099-r are correct we conclude respondent has not met his burden of producing reasonable and probative information concerning the deficiency to reflect our disposition of the issue decision will be entered for petitioner


t c summary opinion united_states tax_court orlie e fay petitioner v commissioner of internal revenue respondent docket nos 8916-07s 8927-07s filed date james allen brown for petitioner ann darnold for respondent haines judge these consolidated cases were heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petitions were filed pursuant to sec_7463 the decisions to be entered are not reviewable by any 1unless otherwise indicated all section references are to the internal_revenue_code code as amended and all rule references are to the tax_court rules_of_practice and procedure amounts are rounded to the nearest dollar other court and this opinion shall not be treated as precedent for any other case respondent determined deficiencies and additions to tax with respect to petitioner’s federal income taxes as follows year deficiency sec_6651 sec_6651 sec_6654 additions to tax dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure the issues for decision after concessions are whether petitioner is entitled to deduct business_expenses related to car and truck use contract labor tax_return preparation supplies office and meals_and_lodging for and whether petitioner is entitled to deduct gambling_losses for and whether petitioner is liable for additions to tax under sec_6651 and sec_6654 for all purposes hereafter years at issue will refer to and background some of the facts have been stipulated and are so found the stipulation of facts together with the attached exhibits is incorporated herein by this reference at the time petitioner filed his petitions he resided in arkansas 2respondent concedes the proposed additions to tax under sec_6651 for and respondent also concedes that petitioner is entitled to deductions for mortgage interest of dollar_figure for both and real_estate_taxes of dollar_figure for both and general sales_taxes of dollar_figure for and gambling_losses of dollar_figure for during the years at issue petitioner worked as an independent_contractor for stallmann construction co stallmann and industrial siding industrial related arkansas businesses that specialized in the installation of siding soffit and fascia in and stallmann and industrial paid petitioner rental income of dollar_figure and dollar_figure respectively and nonemployee compensation of dollar_figure and dollar_figure respectively petitioner failed to file federal_income_tax returns for and on date respondent sent petitioner separate notices of deficiency for those years in response petitioner hired an accountant roger d harrod mr harrod on date mr harrod prepared and submitted petitioner’s proposed form sec_1040 u s individual_income_tax_return for the years at issue the schedules c profit or loss from business attached to the proposed returns reported the following expenses expense car and truck contract labor legal and professional supplies office travel total dollar_figure big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number the schedules a itemized_deductions attached to the proposed returns reported gambling_losses of dollar_figure for and dollar_figure for i schedule c expenses a car and truck expenses petitioner drove a chevrolet silverado throughout central arkansas completing projects for stallmann petitioner did not keep a mileage log but recorded his mileage from his odometer after each trip b contract labor petitioner regularly hired and supervised laborers to help with stallmann projects stallmann usually paid the laborers directly but petitioner would occasionally pay the laborers’ wages and motel expenses himself on stallmann’s behalf c legal and professional expenses petitioner retained the tax preparation firm j k harris to file his tax returns for the years at issue petitioner provided j k harris with his tax records and financial information for both and j k harris failed to file returns on petitioner’s behalf and failed to return the majority of petitioner’s records to petitioner d supplies between date and date petitioner purchased dollar_figure of equipment and supplies from stallmann for use on stallmann projects 3records made unavailable to petitioner because of the alleged actions of j k harris include motel receipts mileage notes and paradoxically j k harris receipts e office expenses petitioner deducted office expenses of dollar_figure for the expenses related to petitioner’s use of a cellular telephone f travel_expenses petitioner traveled extensively on behalf of stallmann during the years at issue and would stay in a motel when a project required that he work too far from home to commute ii gambling_losses petitioner frequently played keno at sam’s town casino sam’s town in tunica arkansas in and petitioner had gambling income of dollar_figure and dollar_figure respectively letters from sam’s town indicate that petitioner incurred a net_loss from gambling of dollar_figure for and a net gain from gambling of dollar_figure for i business_expense deductions discussion deductions are a matter of legislative grace and the taxpayer must prove he or she is entitled to the deductions claimed rule a 292_us_435 the burden_of_proof may shift to the commissioner under sec_7491 with respect to a factual issue relevant to the liability of the taxpayer for tax if the taxpayer introduces credible_evidence regarding the issue and establishes compliance with the requirements of sec_7491 and b by substantiating items maintaining required records and fully cooperating with the secretary’s reasonable requests as discussed below we find that petitioner has failed to substantiate his claimed expenses and to maintain adequate_records the burden_of_proof therefore does not shift to respondent under sec_7491 sec_162 provides that there shall be allowed as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business the regulations specify that ordinary and necessary business_expenses include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer’s trade_or_business sec_1_162-1 income_tax regs such as a reasonable allowance for salaries or other compensation_for_personal_services actually rendered sec_1_162-7 income_tax regs taxpayers are required to maintain records sufficient to establish the amount of allowable deductions and to enable the commissioner to determine the correct_tax liability sec_6001 112_tc_183 as a general_rule if the trial record provides sufficient evidence that the taxpayer has incurred a deductible expense but the taxpayer is unable to substantiate adequately the precise amount of the deduction to which he or she is otherwise entitled the court may estimate the amount of the deductible expense and allow the deduction to that extent 39_f2d_540 2d cir 85_tc_731 50_tc_823 affd per curiam 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date in these instances the court is permitted to make as close an approximation of the allowable expense as it can bearing heavily against the taxpayer whose inexactitude is of his or her own making cohan v commissioner supra pincite however in order for the court to estimate the amount of an expense the court must have some basis upon which an estimate may be made vanicek v commissioner supra pincite without such a basis any allowance would amount to unguided largesse 245_f2d_559 5th cir a car and truck expenses pursuant to sec_274 automobile expenses otherwise deductible as a business_expense will be disallowed in full unless the taxpayer satisfies strict substantiation requirements the taxpayer must substantiate the automobile expenses by adequate_records or other corroborating evidence of items such as the amount of the expense the time and place of the automobile’s use and the business_purpose of its use see sanford v commissioner supra pincite maher v commissioner tcmemo_2003_85 the only evidence of automobile expenses petitioner produced at trial was the testimony of mr harrod that petitioner drove roughly big_number miles for business in each of the years at issue mr harrod based this mileage on the reasonable mileage driven by other siding contractors in central arkansas petitioner failed to produce any documentary_evidence to support mr harrod’s testimony accordingly petitioner did not meet the adequate_records or other corroborating evidence requirement of sec_274 sec_274 overrides the cohan_rule with respect to sec_280f listed_property and thus specifically precludes the court from allowing automobile expenses on the basis of any approximation or the taxpayer’s uncorroborated testimony for this reason we are unable to estimate petitioner’s car and truck expenses for the years at issue b contract labor mr harrod testified at trial that he estimated petitioner’s contract labor expenses for the years at issue using comparable expenses listed in petitioner’s checkbook mr harrod’s testimony based on a rough estimation is insufficient to 4the big_number figure for and does not take into account the fact that petitioner’s income wa sec_28 percent lower in than possibly indicating that petitioner drove fewer miles for work in substantiate petitioner’s contract labor expenses for the years at issue see shea v commissioner supra pincite petitioner leaves us no basis upon which to estimate his contract labor expenses petitioner did not produce his checkbook at trial nor did he produce any other documentary_evidence of those expenses although it is reasonable to conclude that a siding contractor in petitioner’s position would incur contract labor expenses the record is devoid of any evidence that would allow us to estimate such expenses see vanicek v commissioner supra pincite c legal and professional expenses petitioner and mr harris testified that petitioner paid j k harris dollar_figure in both and to file petitioner’s tax returns we find their testimony to be credible therefore we hold that petitioner is entitled to a deduction for legal and professional expenses of dollar_figure for each of the years at issue for fees paid for tax_return preparation d supplies petitioner failed to produce any personal records such as checkbooks or receipts to substantiate his deductions for supplies however petitioner produced a notarized letter from stallmann stallmann letter indicating that between date and date petitioner purchased from stallman pieces of equipment worth dollar_figure all of the items listed in the stallmann letter have a clear business_purpose the stallmann letter provides us a basis upon which to estimate petitioner’s supply costs for the years at issue see cohan v commissioner f 2d pincite the letter identifies each piece of equipment and its cost but fails to specify each item’s exact date of purchase accordingly we will allow petitioner to deduct supply costs of dollar_figure for and e office expenses expenses of a cellular telephone must be substantiated pursuant to sec_274 the court cannot estimate those expenses sec_274 sec_280f sec_1_274-5t temporary income_tax regs supra the record is devoid of any documentary_evidence regarding petitioner’s office expenses at trial petitioner was unable to remember the items to which his office expense sec_5the items consist of walk boards double steppers extension ladders ladder jacks drills trailers bend breaks chaulk and staple guns air compressors saws and other pieces of equipment that would be of use to a siding contractor 6these figures are derived from prorating dollar_figure over months to obtain supply costs per month of dollar_figure the costs per month are then multiplied by to obtain supply costs of dollar_figure per year petitioner credibly testified that he spent roughly the same amount on supplies for both years at issue despite earning roughly percent less in than in therefore we will not adjust the supply cost figures to take into account the discrepancy in petitioner’s gross_income pertained mr harrod testified that the expenses related to petitioner’s use of a cellular telephone in and that he had estimated the amount of those expenses using the cellular telephone costs listed in petitioner’s checkbook because petitioner failed to produce any records pertaining to his use of a cellular telephone in we will deny his deduction for office expenses f travel_expenses expenses related to meals_and_lodging must be substantiated pursuant to sec_274 the court cannot estimate those expenses sec_274 sec_1_274-5t temporary income_tax regs supra the record is devoid of any documentary_evidence regarding petitioner’s meal and lodging_expenses for the years at issue accordingly we will deny petitioner’s deductions for those expenses ii gambling_losses gross_income includes all income from whatever source derived including gambling see sec_61 292_f2d_630 5th cir in the case of a taxpayer not engaged in the trade_or_business of gambling gambling_losses are allowable as an itemized_deduction but only to the extent of gains from such transactions sec_165 mcclanahan v united_states supra pincite n citing 230_f2d_766 1st cir in order to establish entitlement to a deduction for gambling_losses the taxpayer must prove the losses sustained during the taxable_year 429_f2d_182 6th cir affg tcmemo_1969_26 322_f2d_78 5th cir affg tcmemo_1962_19 petitioner did not maintain a diary or any other contemporaneous record reflecting either his winnings or his losses from gambling during however petitioner produced a letter from sam’s town indicating that he had net gambling winnings of dollar_figure in as sam’s town was the only source of petitioner’s gambling income and losses in we hold that petitioner proved he sustained gambling_losses of dollar_figure for iii additions to tax respondent determined that petitioner is liable for additions to tax under sec_6651 for failure_to_file income_tax returns for and and under sec_6654 for failure to make estimated_tax payments for and respondent bears the burden of production with respect to petitioner’s liability for the additions to tax see sec 7the parties stipulated that petitioner had gambling income of dollar_figure for the gambling_losses of dollar_figure are derived from deducting petitioner’s net gambling winnings of dollar_figure from his gross winnings of dollar_figure c 116_tc_438 to meet his burden of production with respect to sec_6651 respondent must come forward with sufficient evidence indicating that it is appropriate to impose the additions to tax see higbee v commissioner supra pincite sec_6651 imposes an addition_to_tax for failure_to_file a return on the date prescribed determined with regard to any extension of time for filing unless the taxpayer can establish that such failure is due to reasonable_cause and not due to willful neglect petitioner admitted that he did not file federal_income_tax returns for or respondent has met his burden of production petitioner argues that his failure_to_file his returns was due to reasonable_cause because he retained j k harris to file his returns and j k harris failed to do so we disagree the failure to timely file a tax_return is not excused by the taxpayer’s reliance on an agent and such reliance is not reasonable_cause for a late filing under sec_6651 469_us_241 we find that petitioner’s failure_to_file federal_income_tax returns for and was not due to reasonable_cause and was due to willful neglect therefore we hold that petitioner is liable for the sec_6651 additions to tax for and a taxpayer has an obligation to pay estimated_tax for a particular year only if he has a required_annual_payment for that year sec_6654 a required_annual_payment is equal to the lesser_of percent of the tax shown on the individual’s return for that year or if no return is filed percent of his or her tax for such year or if the individual filed a return for the immediately preceding_taxable_year percent of the tax shown on that return sec_6654 127_tc_200 affd 521_f3d_1289 10th cir heers v commissioner tcmemo_2007_10 respondent’s burden of production under sec_7491 with respect to the sec_6654 addition_to_tax has been satisfied by proof at trial that petitioner has a federal_income_tax liability for and and that petitioner made no estimated payments for either year the parties also stipulated that petitioner filed a federal_income_tax return for showing a tax of dollar_figure petitioner offered no evidence whatsoever to refute respondent’s evidence or to establish that one of the statutorily provided exceptions applies see 91_tc_874 consequently we hold that respondent’s determination that petitioner is liable for the sec_6654 additions to tax must be sustained however to the extent respondent failed to take into account a required_annual_payment of dollar_figure for under sec_6654 in his calculation of petitioner’s addition_to_tax we now direct respondent to do so in reaching our holdings we have considered all arguments made and to the extent not mentioned we conclude that they are moot irrelevant or without merit to reflect the foregoing decisions will be entered under rule