internal_revenue_service number release date index number ------------------------------------ -------------------- ---------------------------- in re ----------------------------------------------------- -------------- department of the treasury washington dc third party communication none person to contact --------------------- id no ----------------- telephone number --------------------- refer reply to cc ita b01 plr-127559-11 date date ein --------------- legend trust ---------------------------------------------------------- year ------- firm ----------------------- date ----------------- dollar_figurea -------------- dollar_figureb ------------ dollar_figurec ------------ dear ------------------- this is in response to your letter requesting permission to revoke an election made by trust pursuant to sec_1_163_d_-1 of the income_tax regulations to treat net_capital_gain income as investment_income under sec_163 and sec_163 of the internal_revenue_code for year facts for year trust hired an accounting firm firm to prepare its form_1041 u s income_tax return for estates and trusts return the firm prepared the return by entering the relevant data into a tax software computer_program software but a keying error was made on line 4g of form_4952 investment_interest expense deduction that resulted in an inadvertent election to include the entire amount of qualified_dividend plr-127559-11 income and net_capital_gain of dollar_figurea as investment_income for purposes of the deduction for investment_interest expense the actual amount of investment_interest was dollar_figureb an amount significantly less than dollar_figurea the firm manually reviewed the return in accordance with the firm's quality control policies and procedures because all of the investment_interest expense of dollar_figureb was allowed on form_4952 there was an oversight in discovering that an excessive election amount had been made on line 4g of form_4952 which affected the calculation the firm uses the software to prepare many form sec_1040 during filing season for form sec_1040 the software automatically limits an election to include qualified_dividend_income and net_capital_gain as investment_income for purposes of calculating the deduction for investment_interest expense to the amount of investment_interest the firm relied on the software to calculate investment_interest expense in the same manner for the taxpayer’s return however the software does not do this automatically for a form_1041 the firm was unaware of the differences in the computer tax software in identifying this type of error the error was discovered by the beneficiary’s business manager the firm was contacted by the business manager on date and was advised of the form_4952 election law analysis sec_163 provides that in the case of a taxpayer other than a corporation the amount allowed as a deduction for investment_interest shall not exceed the net_investment_income of the taxpayer for the taxable_year sec_163 defines the term investment_income in general as the sum of i gross_income from property_held_for_investment other than gain taken into account under clause ii i ii the excess if any of i the net gain attributable to the disposition of property_held_for_investment over ii the net_capital_gain determined by only taking into account gains and losses from dispositions of property_held_for_investment plus iii so much of the net_capital_gain referred to in clause ii ii or if lesser the net gain referred to in clause ii i as the taxpayer elects to take into account under this clause sec_163 also provides that the term includes qualified_dividend_income as defined in h b only to the extent the taxpayer elects to treat such income as investment_income for purposes of this subsection plr-127559-11 sec_1_163_d_-1 provides that the elections for net_capital_gain and qualified_dividend_income under sec_163 must be made on or before the due_date including extensions of the income_tax return for the taxable_year in which net_capital_gain is recognized or the qualified_dividend_income is received sec_1_163_d_-1 provides that the election under sec_163 is revocable with the consent of the commissioner the trust is requesting permission to revoke an election to treat net_capital_gain income as investment_income this situation is analogous to those situations concerning taxpayers who have not made a particular election provided in the regulations because of inadequate or incorrect advice from knowledgeable tax professionals and are subsequently seeking extensions of time under of the regulations on procedure and administration see revrul_83_74 1983_1_cb_112 sec_301_9100-3 generally provides extensions of time for making regulatory elections for this purpose sec_301_9100-1 defines the term regulatory election to include an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides that requests for extensions of time for regulatory elections will be granted when the taxpayer provides evidence including affidavits described in the regulations to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government sec_301_9100-3 states that a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer - i requests relief before the failure to make the regulatory election is discovered by the 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 due diligence the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or v reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election plr-127559-11 in this case trust may be considered to have acted reasonably and in good_faith because trust relied on the firm a qualified_tax professional to prepare the return the firm used a software program that made an erroneous election that was not discovered by the firm despite reasonable efforts under sec_301_9100-3 a taxpayer will not be considered 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 taking into account any qualified_amended_return filed within the meaning of sec_1 c and the new position requires 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 if specific facts have changed since the original deadline that make the election advantageous to a taxpayer the service will not ordinarily grant relief in this case trust is not seeking to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time relief is requested trust was not informed in all material respects of the related tax consequences of making the election because trust was unaware an election had been made furthermore trust is not using hindsight in requesting relief specific facts have not changed since the filing of the return and making of the original election that made the election disadvantageous to the trust sec_301_9100-3 provides in part that the interests of the government are prejudiced if granting relief would result in the 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 provides in part that the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been timely made are closed by the period of limitations on assessment under these criteria the interests of the government are not prejudiced in this case allowing the revocation of the election would not result in a lower tax_liability in the aggregate for all taxable years affected by the election than would have been the case if the election had been timely made taking into account the time_value_of_money furthermore when the request was filed the taxable_year in which the regulatory election that is sought to be revoked here and any taxable_year affected by it was not closed by the period of limitations on assessment plr-127559-11 in addition granting the revocation in the present situation would not cause undue administrative burden nor would it be inconsistent with the objectives of the underlying statute and the regulatory election conclusion the consent of the commissioner is hereby granted to revoke in part the election under sec_163 to include dollar_figurea as investment_income for year and to include only amount dollar_figurec as investment_income for year 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 the rulings contained in this letter are based upon information and representations submitted by trust 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 a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely john p moriarty chief branch income_tax accounting


internal_revenue_service department of the treasury significant index no washington dc contact person telephone number in reference to pateep rasta1 feb 20n inre plan company this letter constitutes notice that waivers of the percent tax under sec_4971 of the internal_revenue_code have been granted for the above-named defined_benefit_plan for the first third and fourth quarters of the plan_year ending date the waivers of the percent tax have been granted in accordance with sec_4971 of the internal_revenue_code which was added to the code by the small_business job protection act of publaw_104_188 for any quarter for which these waivers have been granted the amount of the waiver is equal to percent of the amount of the excess of the liquidity_shortfall of the pian as determined under sec_412 of the code for the quarter over the aggregate amount of any contributions paid in the form of liquid_assets which served to reduce the liquidity_shortfall for the quarter and which were paid to the plan between the last day of the quarter and the due_date of the required_installment under sec_412 for such quarter the liquidity_shortfall for the quarters arose as a result of the inability of the company to satisfy the liquidity requirement of sec_412 of the code for the quarters ending date date and date in mid-1996 the company discovered that single sum benefits from the plan in prior years had been incorrectly calculated the effect of this error was twofold large disbursements were paid in order to correct the miscalculations and the inclusion of the individuals who received the corrected benefits as plan participants caused the plan to have in excess of participants for the plan_year ending date in addition in the company lost a contract with the customer who provided its largest single source of revenue for the years through the company experienced substantial net losses the company is now in the process of restructuring its debt and refocusing its marketing efforts to correct the liquidity_shortfall the company made contributions in the second half of and throughout the plan currently satisfies the liquidity requirements of sec_412 of the code and has satisfied these requirements since date a full correction of the liquidity shortfalls within the prescribed periods would have imposed a substantial financial hardship on the company accordingly we conclude that the liquidity shortfalls were due to reasonable_cause and not willful neglect and that the company has taken reasonable steps to remedy the liquidity shortfalls that existed in the plan_year beginning date because the liquidity requirement of sec_412 of the code was satisfied for the quarter ending date the percent excise_tax of sec_4971 f does not apply with respect to the liquidity_shortfall that existed for the first third and fourth quarters of the pian year this ruling letter is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited by others as precedent a copy of this letter has been sent to the area office in a copy of this letter is also being furnished to your authorized representative pursuant to a power_of_attorney form on file sincerely fi cae dee svg rr kén-yednock manager employee_plans technical tax_exempt_and_government_entities_division


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-145907-13 date april x ------------------------------------------------------------------------------------------------------ ------------------------ state -------------- date ---------------------- dear ------------------ this letter responds to a letter dated date 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 treated as an association_taxable_as_a_corporation for federal tax purposes the information submitted provides that x was formed on date as a state limited_liability_company x’s single member intended that x be an association_taxable_as_a_corporation for federal tax purposes effective date however x failed to timely file form_8832 entity classification election electing to be an association_taxable_as_a_corporation 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 sec_301_7701-3 provides in part that except as provided in sec_301 b unless the entity elects otherwise a domestic eligible_entity is a a partnership plr-145907-13 if it has two or more members or b disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 cannot be more than days prior to the date on which the election is filed and cannot be more than months after the date on which the election is filed if an election specifies an effective date more than days prior to the date on which the election is filed it will be effective days prior to the date it was 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_9100-2 provides the standards the commissioner will use to determine whether to grant an automatic_extension of time for making certain elections sec_301_9100-3 provides the guidelines for granting extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government 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 an association_taxable_as_a_corporation effective date a copy of this letter should be attached to the form_8832 plr-145907-13 this ruling is contingent on x and the owners of x filing within days from the date of this letter all required returns including amended returns consistent with the requested relief granted in this letter a copy of this letter should be attached to any such returns 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 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 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely associate chief_counsel passthroughs special industries by ____________________________ melissa c liquerman chief branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c jun z y tax_exempt_and_government_entities_division uniform issue list s e ep’ ka legend taxpayer a ira b custodian c account d account e amount amount dear this letter responds to your request for a letter_ruling dated date as supplemented by correspondence dated date and date in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code’ you submitted the following facts and representations in support of your request under penalties of perjury taxpayer a represents that she received a distribution from ira b totaling amount to use the funds to the extent necessary for a home purchase taxpayer a asserts her failure to roll over the unused funds within the 60-day period prescribed by section 90133602f d was due to an unexpected delay in the closing on the sale of her existing home resulting in her inability to return the unused funds to ira b in a timely manner taxpayer a withdrew amount from ira b she represents that on april because she was unemployed at the time she would not receive a large mortgage loan and would need a large cash down payment she also represents that she was uncertain how much cash she needed but that she intended to return any unused funds to ira b after the closing and she believed the closing would occur within the 60-day period taxpayer a has further represented that the unused funds amount remained in either her savings account d or her checking account e from the date of distribution to the date of return to ira b taxpayer a further represented that her financial situation subsequently caused her to withdraw those funds from ira b to use for living_expenses taxpayer a represents that the purchase of her new home was contingent on the sale of her existing home the purchasers of her existing home lost their financing which delayed the closing on her existing home by two weeks correspondingly the closing on taxpayer a’s new home was also pushed back two weeks until june funds amount were not returned to ira b until july after the expiration of the 60-day period despite being after the 60-day period taxpayer a was able to deposit amount in ira b with custodian c the taxpayer a indicated that she is unable to recall specifically the events related to the rollover because she suffers from medical conditions that affected her memory taxpayer a submitted documentation including a letter from her physician dated may beginning september _ indicating that taxpayer a had been under his care for these medical conditions based on the facts and representations you request a ruling that the internal_revenue_service service waive the 60-day rollover requirement with respect to the distribution of amount from ira b sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if- i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the 60th day after the day on which the individual received the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible retirement_plan other than an ira for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 of the code where the failure to waive such requirement would be against equity and good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement revproc_2003_16 i r b provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability or hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred in essence taxpayer a made a short-term loan from ira b when she withdrew taxpayer a has not presented sufficient evidence showing how the factors outlined in revproc_2003_16 affected her ability to roll over the distribution of amount from ira b amount with the intention to use as much of amount as necessary to purchase a home in doing so taxpayer a assumed the risk that she might not be able to return the unused funds timely amount therefore pursuant to sec_408 of the code the service declines to waive the 60-day rollover requirement with respect to the april distribution to taxpayer a of amount thus the contribution of amount which taxpayer a deposited back into ira b after the expiration of the 60-day period will not be considered a valid rollover_contribution 20133602f because the 60-day requirement under sec_408 of the code with respect to this contribution was not satisfied no opinion is expressed as to the tax treatment of the transactions described herein under the provisions of any other section of either the code or regulations which may be applicable thereto 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 if you wish to inquire about this ruling please contact id number at se t ep ra t please address all correspondence to sincerely yours cllr a widteins carlton a watkins manager employee_plans technical group enclosures deleted copy of letter_ruling notice


acknowledged significant advice may be disseminated office_of_chief_counsel internal_revenue_service memorandum cc dom it a rmweber tl-n-8841-97 date apr sca released to assistant district_counsel kansas-missouri district kansas city cc msr kmd kcy from assistant chief_counsel income_tax and accounting cc dom it a subject significant service_center advice backup withholding as applied to pure trust organizations this responds to your request for significant advice dated date in connection with a question posed by the large_corporation unit of the kansas city service_center disclosure statement unless specifically marked acknowledged significant advice may be disseminated above this memorandum is not to be circulated or disseminated except as provided in ccdm d and e this document may contain confidential information subject_to the attorney-client and deliberative_process privileges therefore this document shall not be disclosed beyond the office or individual s who originated the question discussed herein and are working the matter with the requisite need to know in no event shall it be disclosed to taxpayers or their representatives issue whether backup withholding is appropriate when a payee describing itself as a pure trust organization refuses to provide a taxpayer_identification_number tin to the payor conclusion based solely on the facts presented and assuming the dividends described constitute reportable payments within the meaning of sec_3406 of the internal_revenue_code backup withholding is appropriate when a payee describing itself as a pure trust organization refuses to provide a tin to the payor facts tl-n-8841-97 a payor of dividends requested that a payee provide its tin the payor furnished the payee with the appropriate substitute forms w-9 request for taxpayer_identification_number and certification and w-8 certificate of foreign status the payee describing itself as a pure trust organization refused to provide its tin specifically an employer_identification_number ein instead the payee certified on the form_w-9 that a tin was not required in part the payee relied on a copy of a letter dated date from the philadelphia service_center this letter is not addressed to the payee and responds to an unrelated taxpayer’s request for an ein in addition the form_w-8 as completed by the payee indicated that the payee is a citizen of america but also certified that for dividends i am not a u s citizen or resident the payee also returned a certificate of foreign status apparently drafted by the payee stating in part that t he united_states government is a foreign_corporation with respect to the state the payee lists an address in the united_states and presents no facts to support foreign status the payor did not honor the payee’s form_w-9 or w-8 and instituted backup withholding the payor then contacted the kansas city service_center to determine how to respond to the payee discussion for purposes of this advice we assume that the dividends_paid are subject_to information reporting under sec_6042 and also constitute reportable payments under sec_3406 we further assume therefore that the payor is required to obtain the payee's tin in order to comply with these information reporting requirements see sec_6109 and sec_301_6109-1 of the regulations on procedure and administration sec_3406 provides in pertinent part that in the case of any reportable_payment if the payee fails to furnish his tin to the payor in the manner required then the payor shall deduct and withhold from such payment a tax equal to percent of such payment for purposes of backup withholding tin means the identifying number assigned to a person under sec_6109 relating to identifying numbers generally a nine-digit social_security_number ssn for an individual and a nine-digit ein for a nonindividual eg a corporation partnership trust or tl-n-8841-97 estate see sec_31_3406_h_-1 of the employment_taxes and collection of income_tax at source regulations see also sec_301_6109-1 sec_3406 provides in part that in the case of any failure by a payee to furnish his tin to a payor in the manner required backup withholding shall apply to any reportable_payment made by such payor during the period during which the tin has not been furnished sec_31_3406_d_-1 describes the manner in which a payee is required to provide a tin ie under penalties of perjury and on form_w-9 see also sec_31_3406_h_-3 sec_3406 provides as follows backup withholding will not apply to any payment made to - a any organization or governmental_unit described in sec_6049 c d e or f or b any other person specified in regulations backup withholding will not apply to any amount for which withholding is otherwise required by this title the secretary shall prescribe regulations for exemptions from backup withholding during the period during which a person is waiting for receipt of a tin in this case the payee's assertion that a tin is not required does not satisfy an exception described in sec_3406 as a result the payor is required to institute backup withholding and to continue to backup withhold until the payee furnishes the tin regarding the form_w-8 and the payee-created certificate of foreign status the assertions made therein do not entitle such a payee to claim foreign status see sec_7701 an individual is a nonresident_alien if such individual is neither a citizen_of_the_united_states nor a resident_of_the_united_states see also sec_7701 and sec_7701 the term foreign_trust means any trust other than a_trust over which a court within the united_states is able to exercise primary supervision over the administration of the trust and one or more sec_31_3406_h_-1 applies to transactions or payments occurring after date for transactions or payments occurring on or before date see sec_35a q a-26 tl-n-8841-97 united_states persons have authority to control all substantial decisions of the trust we also note that similar assertions and claims of foreign status have consistently been rejected by the courts see eg jackson v commissioner tcmemo_1991_498 affd 990_f2d_1258 9th cir if we can provide further assistance please contact rose weber of this office at jody j brewster by __ s ____________________ rochelle l hodes assistant to the chief branch income_tax accounting


t c memo united_states tax_court timothy r and cindy i fuller petitioners v commissioner of internal revenue respondent docket no filed date anthony v diosdi and joy e gray for petitioners daniel j parent for respondent memorandum findings_of_fact and opinion cohen judge respondent determined deficiencies and penalties with respect to petitioners’ federal_income_tax as follows penalty year deficiency sec_6663 dollar_figure big_number big_number dollar_figure dollar_figure dollar_figure unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure after concessions by the parties the sole issue for decision is whether petitioners’ underpayments of taxes for the years in issue were due to fraud and subject_to the civil_fraud penalty under sec_6663 or in the alternative whether petitioners are liable for the accuracy-related_penalty pursuant to sec_6662 for substantial understatements in their federal tax_liability for the years in issue findings_of_fact some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference petitioners resided in vacaville california at the time that they filed their petition petitioners operated a residential painting business known as custom painting during and in early petitioners began an additional business known as tc’s discount parts in which they sold motorcycle accessories petitioners’ tax returns for the years in issue were prepared by wayne greenfield greenfield an enrolled_agent in chico california petitioners provided greenfield with schedules of gross_receipts cost_of_goods_sold and other expenses for and to aid him in the preparation of their tax returns for those years petitioner cindy i fuller mrs fuller maintained the books_and_records for both of petitioners’ businesses she prepared the figures to be entered on petitioners’ tax returns and provided them to greenfield other than contracts for the purchase of equipment mrs fuller did not provide to greenfield any underlying documents to substantiate how petitioners determined the figures that they submitted to him to be entered on their tax returns petitioners filed their federal_income_tax return on date they filed their tax_return on date they filed their tax_return on date after receiving from the irs a letter requesting that it be filed on their schedules c profit or loss from business petitioners understated their gross_receipts by dollar_figure for dollar_figure for and dollar_figure for they overstated their costs of goods sold for materials_and_supplies by dollar_figure for dollar_figure for and dollar_figure for they overstated their depreciation expenses by dollar_figure for dollar_figure for and dollar_figure for they overstated their car and truck expenses by dollar_figure for dollar_figure for and dollar_figure for they also overstated their workers’ compensation insurance expenses by dollar_figure for petitioners overstated their expenses for telephone and cell phone expenses for by dollar_figure reported those expenses correctly for and understated those expenses by dollar_figure for petitioners also understated their labor expenses by dollar_figure for and dollar_figure for despite these instances where petitioners understated their deductible expenses the combined discrepancies listed above substantially decreased petitioners’ reported net_income and income_tax_liability due to the understatement of net_income reported on their tax returns petitioners claimed and received earned_income tax_credits of dollar_figure for and dollar_figure for in various loan applications with redding bank of commerce redding bank from through petitioners represented that they had a monthly income of between dollar_figure and dollar_figure petitioners also provided to redding bank a copy of a form_1040 u s individual_income_tax_return that did not match the return that was actually filed with the irs by petitioners for that year the return that was provided to redding bank listed petitioners’ schedule c income as dollar_figure while the return that was actually filed by petitioners for reported only dollar_figure of schedule c income petitioners also submitted to redding bank a document entitled individual financial statement dated date in which they represented that they had wages of dollar_figure business net_income of dollar_figure and total income of dollar_figure for they also provided to redding bank a profit and loss statement for indicating gross_receipts of dollar_figure while petitioners’ filed tax_return reported only dollar_figure in gross_receipts petitioners purchased several vehicles in and in date they purchased a gmc van for a monthly payment of dollar_figure on the credit application_for that purchase petitioners represented that their annual gross_income was dollar_figure in date petitioners made a downpayment of dollar_figure to purchase a ford pickup truck for a monthly payment of dollar_figure on their credit application_for that purchase petitioners represented that their gross monthly income from employment was dollar_figure upon purchase of the ford pickup truck petitioners paid dollar_figure in cash to have off-road alterations made to the vehicle in date petitioners made a downpayment of dollar_figure to purchase a chevrolet pickup truck for a monthly payment of dollar_figure on the credit application_for that purchase petitioners represented that their combined monthly income was dollar_figure from date to date an irs agent sent to petitioners collectively and individually several letters requesting interviews and scheduling appointments to discuss their and tax years petitioners did not meet with the irs agent during that period on date petitioners scheduled a meeting with the irs agent for date in vallejo california which location was chosen for petitioners’ convenience the agent traveled approximately miles from redding california to vallejo for the meeting but petitioners failed to appear on date the irs sent to petitioners summonses directing them to appear on date to be interviewed and to produce documents regarding their and tax years petitioners did not appear on date or produce the requested documents on date the irs provided to petitioners’ counsel copies of document requests previously sent to petitioners petitioners still failed to provide any of the requested information on date petitioners were served with additional summonses requiring their appearance on date the irs agent again traveled to vallejo to meet with petitioners but petitioners again failed to appear in the irs began issuing summonses to redding bank and to petitioners’ paint suppliers in order to obtain information regarding petitioners’ tax_liability for the years in issue from this third-party information the irs began to reconstruct petitioners’ gross_income and expenses on date the irs mailed to petitioners the statutory_notice_of_deficiency after the notice_of_deficiency was sent petitioners’ counsel notified the irs that the previously requested documents were available for review at his office petitioners’ counsel also provided copies of the documents to the irs much of the information regarding particular payments made by or to petitioners however was gathered from third parties such as from petitioners’ bank and was not evident from the books_and_records provided by petitioners petitioners themselves never provided any explanation of the documents or how they had calculated their gross_income and expenses for the years in issue opinion the penalty 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 the taxpayer’s fraud 303_us_391 113_tc_99 respondent has the burden of proving by clear_and_convincing evidence an underpayment for those years in issue and that some part of the underpayment for each of those years was due to fraud sec_7454 rule b 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 a 75-percent penalty unless the taxpayer establishes that some part of the underpayment is not attributable to fraud sec_6663 respondent must show that the taxpayer intended to conceal mislead or otherwise prevent the collection_of_taxes 90_tc_1130 the existence of fraud is a question of fact to be resolved upon consideration of the entire record 98_tc_511 fraud will never be presumed id 55_tc_85 fraud may however be proved by circumstantial evidence and inferences drawn from the facts because direct proof of a taxpayer’s intent is rarely available 99_tc_202 the taxpayer’s entire course of conduct may establish the requisite fraudulent intent 56_tc_213 fraudulent intent may be inferred from various kinds of circumstantial evidence or badges_of_fraud including the consistent understatement of income inadequate records failure_to_file tax returns implausible or inconsistent explanations of behavior concealing assets and failure to cooperate with tax authorities 796_f2d_303 9th cir affg tcmemo_1984_601 dealing in cash is also considered a badge of fraud by the courts because it is indicative of a taxpayer’s attempt to avoid scrutiny of his finances see id pincite respondent’s burden regarding the underpayment_of_tax in support of the fraud_penalty has been met petitioners have conceded overstatements of expenses and of costs of goods sold and understatements of gross_receipts for the years in issue those misstatements resulted in substantial understatements of petitioners’ tax_liability for those years the evidence in this case establishes many badges_of_fraud it is undisputed that petitioners substantially understated their income for each of the years in issue for petitioners did not file a tax_return until date and then only after receiving a letter from the irs requesting that a return be filed petitioners’ substantial understatements of income for all tax years in issue and their initial failure_to_file a tax_return for are both indicia of fraud see id pincite petitioners failed to cooperate with respondent by not responding to several letters from the irs requesting interviews and information not submitting documents requested by the irs agent conducting the audit and failing to appear at scheduled interviews petitioners did not provide the agent with any requested documentation until after the notice_of_deficiency was sent to them the documentation eventually provided by petitioners was inadequate leaving the irs to depend substantially on the records of third parties in the course of its audit of petitioners petitioners knew that there was insufficient documentation to support the figures entered on their tax returns they failed to cooperate with the irs’s multiple requests for interviews and they presented no plausible explanation written or oral regarding their computation of their tax_liabilities for the years in issue petitioners’ refusal to cooperate with respondent in determining their correct_tax liability until this case was being prepared for trial is a further indication of fraud bradford v commissioner supra pincite mrs fuller provided greenfield who prepared petitioners’ tax returns for the years in issue with totals for gross_receipts costs of goods sold and other expenses to be used for preparing returns for the tax years in issue but she did not provide him with any information regarding how the figures she provided were calculated or with substantiating documentation other than some contracts for the purchase of equipment petitioners still have not provided to the irs or to this court any plausible explanation of how they arrived at the figures reported on their tax returns or how the misstatements occurred petitioners’ failure to provide a plausible explanation of their behavior with regard to the calculation of the figures provided to their tax preparer is indicative of fraud see id pincite petitioners represented on several loan applications with various financial institutions during the years in issue that they had vastly larger incomes than they had represented either to greenfield in the course of his preparation of their returns for those years or to the irs they also provided a copy of a purported tax_return to redding bank that showed income four times the amount that was actually reported to the irs for petitioners argue that the inconsistent information that they provided to financial institutions consisted of mere estimations of their income and thus should not be viewed as evidence of fraudulent intent to conceal income from the irs to which petitioners reported substantially lower incomes however the large discrepancies in the income that petitioners reported to the irs and the income reported to the lending institutions coupled with the tax_return submitted to redding bank that was selectively altered to show four times more income to petitioners than the return that was actually filed with the irs for are convincing evidence of petitioners’ dishonesty and of fraudulent intent to conceal income from the irs petitioners have not presented any plausible explanation of these discrepancies petitioners attempt to shift the responsibility for the understatements of their tax_liabilities to greenfield and claim that greenfield should have conducted his own investigation into the accuracy of the information that petitioners provided to him in the course of his preparation of their returns however in the course of his preparation of petitioners’ tax returns greenfield was not provided with documentation to support petitioners’ calculations of the figures given to him other than some contracts for the purchase of equipment petitioners’ reliance on greenfield to discover the errors in the reported figures is no defense to fraud because they failed to provide greenfield with complete and accurate information regarding their income and expenses see 781_f2d_1566 11th cir affg per curiam tcmemo_1985_63 301_f2d_484 5th cir affg tcmemo_1959_172 although greenfield testified that it was obvious that the tax_return wasn’t correct he was able to reach this conclusion only after petitioners provided him with their books_and_records after the returns had been filed the responsibility of filing accurate returns remains principally with the taxpayers especially where the taxpayers have taken an active and controlling role in the process of preparing the tax returns and the information used for their preparation see medlin v commissioner tcmemo_2003_224 affd 138_fedappx_298 11th cir petitioners cannot blame greenfield for the misstatements and errors in reporting their tax_liabilities when petitioners provided greenfield with the incorrect figures to be entered on their tax returns and when they alone possessed the information that would have indicated discrepancies between petitioners’ actual tax_liabilities and the amounts reported on their returns see bacon v commissioner tcmemo_2000_257 affd without published opinion 275_f3d_33 3d cir furthermore petitioners’ failure to provide to greenfield the documentation necessary for his accurate preparation of their tax returns is indicative of fraud see medlin v commissioner supra ishler v commissioner tcmemo_2002_79 respondent has proven by clear_and_convincing evidence an underpayment_of_tax due to fraud for each year petitioners have not proven that any part of the underpayments was not attributable to fraud see sec_6663 on consideration of the entire record we conclude that petitioners are liable for the fraud penalties determined under sec_6663 to reflect the foregoing and the concessions of the parties decision will be entered under rule


t c memo united_states tax_court starvest u s inc petitioner v commissioner of internal revenue respondent docket nos filed date david finkelstein for petitioner william r mccants for respondent memorandum findings_of_fact and opinion couvillion special_trial_judge these consolidated cases are before the court on the parties' motions to dismiss for lack of jurisdiction in docket no petitioner moves to dismiss on the ground that the notice_of_deficiency is invalid because it was not mailed to petitioner's last_known_address respondent argues that the notice_of_deficiency was mailed to petitioner's last_known_address in docket nos and respondent moves to dismiss for lack of jurisdiction on the grounds that petitioner a corporation dissolved under state law did not have the capacity to initiate the subject litigation and if it had the capacity to do so did not authorize the filing of the petitions with this court in docket no respondent moves to dismiss for lack of jurisdiction on the grounds that the petition was not filed timely and is duplicative of docket no findings_of_fact some of the facts were stipulated those facts and the accompanying exhibits are so found and are incorporated herein by reference petitioner a florida corporation had its principal_place_of_business at tierra verde florida at the time the petitions were filed respondent determined the following deficiencies in petitioner's federal income taxes additions to tax and penalties additions to tax and penalties docket no year deficiency sec_6651 a sec_6662 fye s big_number s big_number s big_number fye big_number fye big_number big_number docket no addresses the same tax years challenged in docket no starvest u s inc starvest was incorporated under the laws of florida in jacques de bruijn served as president secretary and treasurer of starvest at its inception and the directors were jacques de bruijn and mario boon starvest adopted a fiscal tax_year ending on may of each year on date jacques de bruijn as president of starvest signed a power_of_attorney internal_revenue_service irs form authorizing allen swartz c p a to represent starvest before the irs for its tax years ending date and these are the years before the court in this litigation on date starvest elected new officers and directors mario boon was elected to the offices of president secretary and treasurer mario boon willem van weert and maria verstraeten were elected as directors of starvest unless otherwise indicated section references hereafter are to the internal_revenue_code in effect for the years at issue all rule references are to the tax_court rules_of_practice and procedure additionally attorney warren knaust was appointed as starvest's registered agent starvest's annual report to the florida secretary of state’ reflected the results of the officer and director elections the report also identified warren knaust as starvest's registered agent revenue_agent denise traum conducted the irs audit of starvest during the course of the audit jacques de bruijn informed agent traum that he was no longer an officer or director of starvest on date agent traum requested in writing that jacques de bruijn produce copies of starvest's corporate resolutions naming its officers and directors the letter explained that the information was needed to extend the period of limitations irs form_872 for the tax years in guestion as well as to complete a tax_information_authorization irs form in order that agent traum could continue to deal with mr de bruijn during the audit mr de bruijn complied with agent traum's request and provided documents identifying starvest's officers and directors as those elected in date on date mario boon as president of starvest signed irs form_8821 authorizing jacques de bruijn to receive confidential tax information on behalf of starvest for its tax the annual report was the last such report filed by starvest with the florida secretary of state years ending date and subsequent to receiving the tax_information_authorization agent traum issued a letter and copy of the form to mr de bruijn the letter explained that the tax_information_authorization allowed mr de bruijn to inspect and receive confidential information relating to starvest the letter pointed out however that mr de bruijn could not sign documents on behalf of the corporation unless a power_of_attorney was secured throughout the remainder of the audit agent traum continued to deal with mr de bruijn as starvest's representative in date warren knaust resigned as starvest's resident agent starvest failed to appoint another registered agent on date starvest was administratively dissolved by the state of florida for its failure to have a registered agent as required by florida law on date irs issued a notice_of_deficiency notice_of_deficiency to petitioner for its date tax form_8821 tax_information_authorization is authorization to irs by a taxpayer designating any individual corporation firm organization or partnership to inspect and or receive any confidential information regarding the taxpayer in any office of the irs with regard to the tax and for the years or periods listed in the form form_8821 however does not constitute authority to such designee to execute waivers consents closing agreements or to otherwise represent the taxpayer before the irs form_2848 power_of_attorney and declaration of representative is the necessary form for such purposes year the notice was sent to starvest at its tierra verde florida address and to allen swartz to whom starvest had granted a power_of_attorney subsequent to issuance of the notice_of_deficiency agent traum issued a letter to mario boon president of starvest at his address in the netherlands informing him of the issuance of the notice_of_deficiency and providing him with a copy of the audit report the letter indicated that the notice_of_deficiency had been sent to starvest's corporate address in tierra verde florida the letter also indicated that allen swartz had reviewed the audit report jacques de bruijn retained the law firm of gibbs and runyan gibbs to represent starvest in matters relating to the notice_of_deficiency gibbs filed a petition in the name of starvest with this court on date fora redetermination of the taxes determined in the notice_of_deficiency that petition was filed as docket no in date gibbs filed a motion to withdraw as starvest's counsel in the motion which was granted gibbs represented that jacques de bruijn was starvest's president and that all future correspondence should be addressed to him subsequently on date gibbs filed what was styled as a status report amending some of the statements made in the motion to withdraw gibbs represented that while mr de bruijn had originally claimed to have authority to act on starvest's behalf mr de bruijn now claimed that he was not and had never been an officer or director of starvest gibbs further represented that his firm had not had contact with any party related to petitioner other than de bruijn and did not name any individual or party who had authority to represent starvest on date respondent filed a motion to dismiss for lack of jurisdiction in docket no with respect to the notice_of_deficiency on the grounds that petitioner did not have the capacity to initiate the action because it was dissolved and petitioner had not authorized any person to initiate such litigation jacques de bruijn then retained the law firm of ruden mcclosky et al ruden to represent starvest in matters relating to the notice_of_deficiency on date ruden filed an opposition to respondent's motion to dismiss then on date ruden filed a motion to dismiss for lack of jurisdiction on the grounds that the notice_of_deficiency had not been sent to petitioner's last_known_address on date ruden filed a motion to withdraw as counsel for starvest in this motion counsel represented that starvest could be contacted at tivoliweg 85b hk hulst netherlands and care of jacques de bruijn first street west tierra verde florida this motion to withdraw was also granted on date irs issued a notice_of_deficiency notice_of_deficiency to petitioner for its date and tax years irs sent copies of the notice to starvest at its florida address to jacques de bruijn to alan swartz and to mario boon at his address in the netherlands jacques de bruijn retained the law firm of finkelstein and associates finkelstein to represent starvest in regard to the notice_of_deficiency and the notice_of_deficiency finkelstein filed a petition in the name of starvest with this court on date requesting a redetermination of the notice_of_deficiency that case is docket no on date respondent filed a motion to dismiss docket no for lack of jurisdiction on the same grounds as the motion to dismiss docket no ie lack of capacity and authorization on date another petition was filed in starvest's name for the redetermination of the taxes determined in the notice_of_deficiency this petition was submitted by mario boon pursuant to the notice_of_deficiency he received at his address in the netherlands that petition was filed as docket no boon mailed the petition from his address in the netherlands on date respondent filed a motion to dismiss docket no for lack of jurisdiction on the ground that the second petition filed with respect to the notice_of_deficiency was not filed timely nor did petitioner a dissolved corporation have the capacity to file nor did the person filing the petition have the authority to file on behalf of petitioner on date the parties agreed to consolidate these cases for hearing on the parties' respective motions opinion this court's jurisdiction to redetermine a deficiency is based upon the issuance of a valid notice_of_deficiency anda petition filed timely see rule a c 93_tc_22 90_tc_142 in the cases here the parties filed motions to dismiss for lack of jurisdiction as described above respondent contends petitioner lacked the capacity to file petitions because it had been dissolved under florida law and even if petitioner had such capacity it did not authorize the petitions filed in its name petitioner contends that the notice_of_deficiency with respect to the date tax_year was not sent to its last_known_address the question of jurisdiction is a fundamental question that can be raised at any time by either party or by the court see -- - 81_tc_879 when jurisdictional issues are raised the court has jurisdiction to decide whether it has jurisdiction in the case id pincite the capacity of starvest and the authority to file the petitions on behalf of starvest respondent questioned this court's jurisdiction on the ground that petitioner a dissolved florida corporation did not have the legal capacity to file petitions in this court respondent further argued that even if petitioner had the capacity to file the petitions in this case the petitions were not filed by a person authorized to represent petitioner a case in this court must be brought by the proper party see rule a this court does not have jurisdiction to consider a petition filed by a person or entity not qualified by law 100_tc_353 quoting 95_tc_51 affd without published opinion 995_f2d_235 9th cir and cases cited therein the capacity of a corporation to maintain litigation before this court is determined according to the law of the jurisdiction in which the entity was organized see rule c prior to florida law provided that the dissolution of a corporation shall not take away or impair any remedy available to or against such corporation or its directors officers or shareholders for any right or claim existing or any liability incurred prior to such dissolution if action or other proceeding thereon is commenced within years after the date of such dissolution see sec florida statutes this court has previously held that the issuance of a notice_of_deficiency within the above mentioned 3-year period constitutes the commencement of an action or other proceeding under the florida statute that preserves the right of the officers and directors to file valid petitions in this court see 77_tc_1194 american police fire found inc v commissioner tcmemo_1981_704 in the florida legislature made substantial changes to the state's corporate laws the statutes relating to dissolved corporations were among those that were amended section florida statutes effect of dissolution was amended to provide in relevant part a dissolved corporation continues its corporate existence but may not carry on any business except that appropriate to wind up and liquidate its business and affairs dissolution of a corporation does not a transfer title to the corporation's property e prevent commencement of a proceeding by or against the corporation in its corporate name g terminate the authority of the registered agent of the corporation similarly section florida statutes procedure for and effect of administrative dissolution was amended to provide in relevant part a corporation administratively dissolved continues its corporate existence but may not carry on any business except that necessary to wind up and liguidate its business and affairs under s and notify claimants under s the administrative dissolution of a corporation does not terminate the authority of its registered agent while pre-1989 florida law provided a 3-year limitation period for commencing actions in the name of a dissolved corporation the amended florida statutes do not require such a limitation a dissolved florida corporation now continues in existence indefinitely to the extent necessary to wind up and liquidate its business and affairs including the right to sue and be sued in its own name see cyqnet homes inc v kaleny ltd so 2d fl dist ct app starvest therefore had the legal capacity to file petitions with this court even though it was dissolved at the time the petitions herein were filed whether the filing of the petitions here was authorized or ratified by starvest is a question of fact to be determined based on principles of agency see 85_tc_359 70_tc_623 authority to do an act can be created by written or spoken words or other conduct of the principal which reasonably interpreted causes the agent to believe that the principal desires him to so act on the principal's account see restatement agency 2d sec_26 unless otherwise provided by statute a written authorization is not necessary for the execution of a writing see restatement agency 2d sec_30 the actions of a corporation are manifested through the actions of its corporate officers directors and employees as well as through those acting on behalf of or at the direction of the aforementioned corporate representatives starvest's current directors and officers have limited knowledge of the company further they have limited involvement in the day-to-day operations of the business the company does not appear to have had regular shareholder board officer or other meetings instead starvest was operated and represented on a daily basis by jacques de bruijn while mr de bruijn was the former president secretary treasurer and director of starvest he held no official position with the corporation at the time the petitions in these cases were filed there is however ample evidence in the record to conclude that mr de bruijn was intimately involved in the daily workings and affairs of the corporation regardless of his lack of official title moreover the record shows that jacques de bruijn was authorized to act on behalf of and to protect the interests of starvest in its tax matters for the years at issue jacques de bruijn served as starvest's president secretary and treasurer and as one of starvest's directors from the company's inception in until officer and director changes were formally made at starvest in and mr de bruijn ceased to have any official title with the corporation starvest's new officers and directors were all foreign nationals domiciled outside of the united_states mr de bruijn continued to represent the company and look after its affairs on a daily basis despite the management changes starvest's president mario boon signed a tax_information_authorization vesting jacques de bruijn with authority to receive and inspect confidential information relating to starvest's tax matters for its through tax years mr de bruijn acted as starvest's representative during the irs audit of the corporation starvest's officers and directors did not have any contact with the irs or involvement in the handling of the audit when the notices of deficiency were issued de bruijn retained legal counsel to protect the corporation's interests -- - importantly during this process starvest's officers and directors never indicated that mr de bruijn's actions were inconsistent with their wishes or that his authority was limited in handling these matters moreover one of starvest's directors willem van weert testified at the hearing that jacques de bruijn had been given broad discretion to handle starvest's tax matters for the years at issue in considering whether de bruijn was authorized to cause petitions to be filed on behalf of starvest respondent has urged the court to take into account the fact that jacques de bruijn was not an officer or director of the corporation at the time the petitions were filed respondent further points out that there was no power_of_attorney or other express grant of authority authorizing jacques de bruijn to sign documents or institute suit on behalf of starvest while no irs power_of_attorney or other authorizing document was in effect with respect to mr de bruijn such forms are not required for a petition to be filed on behalf of a corporation in this court it suffices that a petition is authorized by an appropriate representative or agent of the corporation although starvest may not have been structured or operated in the mold of a typical business it was nevertheless a legal entity that acted through and was bound by its representatives the record clearly establishes that jacques de bruijn was authorized to handle the affairs of and protect the interests of starvest with respect to its tax matters for the years at issue regardless of the title under which he acted causing the petitions to be filed in starvest's name was among the duties that he performed on the corporation's behalf based upon the foregoing facts and the principles of agency therefore the court holds that jacques de bruijn was authorized to cause the petitions in these cases to be filed on behalf of starvest even if the court were to conclude that starvest did not authorize mr de bruijn to cause the petitions to be filed on its behalf there is ample evidence that starvest ratified the filing of the petitions in this regard this court has held that a taxpayer can ratify a previously filed petition even in the absence of express approval through action or inaction implicitly approving the filing of the petition see 100_tc_353 kraasch v commissioner supra in kraasch v commissioner supra pincite this court found that the accountant in filing the petition acted as the authorized agent of the taxpayers and that even if this were a situation where the accountant acted upon the taxpayers' behalf without authority the taxpayers are still bound because they subsequently ratified the accountant's actions the ratification was implied because it was found to be based upon the taxpayers' conduct subsegquent to the filing of the petition even though the taxpayers had not expressly approved or authorized the act of filing or signing their names to the petition in reaching that conclusion it was noted that the taxpayers were informed and knowledgeable about documents received from the government and actions taken by their accountant the kraasch rationale is rooted in concepts of agency and ratification in kraasch the person who signed the taxpayers' names was representing their interests before the irs in the handling of their tax matters even though the agent did not have specific authority to file a petition on their behalf a petition was filed the taxpayers were aware of it and they were deemed to have ratified it florida case law has long recognized that ratification of an agreement occurs where a person expressly or impliedly adopts an act or contract entered into on his or her behalf by another without express authority see deutsche credit corp v peninger so 2d fla dist ct app carolina georgia carpet textiles inc v pelloni so 2d fla dist ct app an agreement is deemed ratified where the principal has full knowledge of all material facts and circumstances relating to the act or transaction at the time of ratification see ball v yates fla so 2d deutsche credit corp v peninger supra subsequent to mr de bruijn's causing the second petition to be filed starvest's president mario boon filed a petition with this court asking for a redetermination of the taxes determined in the notice_of_deficiency additionally at the hearing on the motions here one of starvest's directors clearly stated that the company's directors and officers were aware of and approved of mr de bruijn's causing the petitions to be filed further this director testified that the company wished to challenge respondent's determinations in these matters the filing of the petition by mr boon and the testimony of starvest's director clearly indicate and satisfy the court that starvest desired to challenge respondent's determinations for the years at issue and approved of the actions of mr de bruijn in causing the petitions to be filed therefore as in kraasch v commissioner supra and mishawaka properties co v commissioner supra the court holds that a ratification was implied based upon the officers' and directors' conduct subsequent to the filing of the petitions even if such officers and directors may not have expressly approved or authorized the act of filing the petitions last_known_address a notice_of_deficiency is valid if the taxpayer actually receives the notice and thereafter files a petition timely with the court see 81_tc_42 this rule applies regardless of the address to which the notice is mailed see id on date petitioner filed a timely petition with the court for the date notice_of_deficiency on date petitioner filed a timely petition with the court for the date notice_of_deficiency petitioner's actual receipt of the notices of deficiency and its subseguent filing of timely petitions with this court render moot any inquiry regarding the address to which the notices of deficiency were mailed the notices of deficiency therefore were valid the 90-day period for filing a petition with the court expired on date which was not a saturday sunday or legal_holiday in the district of columbia see sec_7503 the 90-day period for filing a petition with the court expired on date which date was not a saturday sunday or legal_holiday in the district of columbia see sec_7503 although the petition was not received until date it was deemed filed on date under sec_7502 dismissal of docket no a petition was filed by petitioner on date for redetermination of its and federal income taxes based on the notice_of_deficiency dated date said proceeding bears docket no on the docket of this court on date petitioner filed another petition with this court bearing docket no also for redetermination of its and federal income taxes based on the same notice_of_deficiency dated date since the latter petition filed as docket no duplicates the same notice_of_deficiency that is addressed in docket no docket no will be closed for duplication orders will be issued denying respondent's motions to dismiss docket nos and denying petitioner's motion to dismiss docket no and closing docket no for duplication


internal_revenue_service national_office technical_advice_memorandum date number release date index uil no case mis no tam-108530-00 cc corp b3 taxpayer’s name taxpayer’s address taxpayer’s identification no years involved date of conference legend corp p corp s corp b corp bb date date year x year y issue whether a subsidiary's permanently unrestored loss under sec_1_267_f_-1t c from a sale of assets to its parent reduces the subsidiary's earnings_and_profits e_p thereby requiring the parent to make a sec_1_1502-32 basis_reduction in its subsidiary's stock conclusion even if the subsidiary is required to reduce its e_p by the amount of the sec_1_267_f_-1t c unrestored loss from a sale of assets to its parent under the facts presented a sec_1_1502-32 basis_reduction is not required because the sec_1 tam-108530-00 b ii election excludes the subsidiary from being a member of the parent’s consolidated_group at the time the loss becomes permanently unrestored facts corp p was the common parent of an affiliated_group_of_corporations filing consolidated_returns the corp p group corp s a wholly owned subsidiary of corp p and corp s’s subsidiaries were members of the corp p group for simplicity corp s and its subsidiaries are hereinafter referred to as corp s in early year x corp p and corp b an unrelated third party began discussions about the possible purchase of corp s by corp b although corp b was interested in acquiring corp s’s business corp s held assets that corp b refused to acquire the unwanted assets after substantial negotiations corp p corp b and corp bb a subsidiary of corp b reached an agreement on date year x for corp p to sell its stock in corp s to corp bb but without the unwanted assets under the circumstances surrounding the transaction a distribution of the unwanted assets by corp s to corp p was not possible accordingly during year x corp s sold the unwanted assets to corp p for their fair_market_value which resulted in a loss to corp s the loss was deferred under sec_1 f -2t b and c on date year y corp p sold corp s to corp b as a result of the sale of corp s on date corp s and its subsidiaries were members of the corp p group for less than days in year y a sec_1_1502-76 election was made to exclude corp s from the corp p group for year y law1 and analysis law sec_1_267_f_-1t a provides that sec_1_267_f_-1t applies to loss on the sale of property between two members of a controlled_group that do not join in filing a consolidated_return for the taxable_year the loss is incurred while sec_1 f -2t applies if the members do join in filing a consolidated_return for purposes of sec_1_267_f_-1t and -2t the term group means controlled_group as defined in sec_267 sec_1_267_f_-1t b sec_267 defines a controlled_group as having the same meaning given to such term by sec_1563 except for certain modifications including substituting more than percent for at least percent the law cited above is as in effect for the years at issue tam-108530-00 sec_1563 as modified and as relevant here defines a controlled_group as one or more chains of corporations connected through stock ownership with a common parent_corporation if a stock possessing more than percent of the total combined voting power of all classes of stock entitled to vote or more than percent of the total value of shares of all classes of stock of each of the corporations except the common parent_corporation is owned by one or more of the other corporations and b the common parent_corporation owns stock possessing more than percent of the total combined voting power of all classes of stock entitled to vote or more than percent of the total value of shares of all classes of stock of at least one of the other corporations excluding in computing such voting power or value stock owned directly by such other corporations for purposes of sec_1_267_f_-1t and -2t the term separate_return_year means a taxable_year of a corporation for which it files a separate_return or for which it joins in the filing of a consolidated_return of another group sec_1_267_f_-1t b and e sec_1_267_f_-1t c provides that except as otherwise provided in this section the rules for deferred intercompany_transactions in sec_1_1502-13 apply under sec_267 to the deferral and restoration of loss on the sale of property directly or indirectly between the selling and purchasing members of a controlled_group as if i the taxable_year in which the sale occurred were a consolidated_return_year as defined in sec_1_1502-1 and ii all references to a group or an affiliated_group were to a controlled_group sec_1_267_f_-1t c provides that if under sec_1 267-1t a loss is deferred by a selling member on the sale of property to a purchasing member then such loss shall not be reflected in e_p until that amount is restored sec_1_267_f_-1t c provides if a selling member of property for which loss has been deferred ceases to be a member when the property is still owned by another member then for purposes of this section sec_1_1502-13 shall not apply to restore that deferred loss and that loss shall never be restored to the selling member the no restoration rule sec_1_267_f_-1t c provides in relevant part that if sec_1_267_f_-1t c precludes a loss from being restored on the date the selling member ceases to be a member the owning member's basis in the property shall be increased by the amount of the selling member's unrestored deferred loss at the time the selling member ceased to be a member of the controlled_group sec_1 f -2t b provides that if a loss is incurred on a sale by a selling member to a purchasing member of a controlled_group in a taxable_year during which they join in filing a consolidated_return sec_1_1502-13 applies except as otherwise provided tam-108530-00 sec_1 f -2t d provides in relevant part that if a selling member joins in filing a consolidated_return with a purchasing member of a controlled_group for a taxable_year during which the selling member sells property to the purchasing member at a loss and if either such member later has a separate_return_year then the event that results in the separate_return_year does not alone result in restoration of the selling member's deferred loss under sec_1_1502-13 except as otherwise provided such exceptions being nonapplicable here sec_1 f -2t d provides in relevant part that any amount that was not restored under sec_1 f -2t d shall be restored under sec_1_267_f_-1t sec_1_1502-1 provides that group means an affiliated_group as defined in sec_1504 sec_1_1502-13 defines in relevant part an intercompany_transaction as a transaction between two corporations that are members of the same consolidated_group immediately after the transaction sec_1_1502-13 defines a deferred_intercompany_transaction as including the sale_or_exchange of property sec_1_1502-13 provides to the extent gain_or_loss on a deferred_intercompany_transaction is recognized under the code for a consolidated_return_year such gain_or_loss shall be deferred by the selling member sec_1_1502-13 provides that deferred gain_or_loss shall be taken into account by the selling member immediately preceding the time when either the selling member or the member which owns the property ceases to be a member of the affiliated_group sec_1_1502-32 provides in relevant part that each member of a consolidated_group owning stock in a subsidiary shall adjust the basis of such stock for the difference between the positive adjustments and negative adjustments described in sec_1_1502-32 and b sec_1_1502-32 requires a negative adjustment to a subsidiary's stock for an allocable part of the deficit in e_p of the subsidiary for the taxable_year sec_1_1502-33 provides gain_or_loss on an intercompany_transaction shall be reflected in the earnings_and_profits of a member for its taxable_year in which such gain_or_loss is taken into account under sec_1_1502-13 sec_1_1502-76 provides in relevant part that for purposes of the regulations under sec_1502 if during a consolidated_return_year of a group a corporation has been a member of such group for a period of days or less then such corporation may at its option be considered as not having been a member of the group during such year the day election tam-108530-00 revrul_71_440 1971_2_cb_326 concerning elections under sec_1 b ii holds that for purposes of restoration of intercompany items such as deferred intercompany gains excess loss accounts etc the subsidiary is treated as having ceased to be a member of the group as of the end of the preceding_taxable_year analysis the examining agent has raised a number of arguments to support the position that corp s is required to reduce its e_p at the time it is determined that the loss is not restored to corp s under sec_1_267_f_-1t c the examining agent then argues that because corp s must reduce its e_p at the time the loss is disallowed corp p must reduce its basis in the stock of corp s pursuant to sec_1_1502-32 before corp s is sold to corp b taxpayer takes the following position concerning this transaction when corp s sells the unwanted assets at a loss in an intercompany sale to corp p corp s's loss is deferred under sec_1 f -2t b and c when corp p sells corp s to corp b the normal restoration rule for deferred intercompany losses of sec_1 f iii is specifically overridden by the special no restoration rule_of sec_1 f - 1t c which is applicable by reason of sec_1 f -2t d under the no restoration rule corp s's loss on the intercompany sale of the unwanted assets to corp p is permanently denied and corp p's basis in the unwanted assets is increased by the amount of corp s's permanently denied loss see sec_1_267_f_-1t c and under sec_1_1502-33 corp s's deferred loss on an intercompany_transaction including the sale of the unwanted assets to corp p would be reflected in corp s's e_p in the year in which that loss is restored in this case corp s's loss is never restored because of the no restoration rule and therefore never reflected in corp s's e_p under sec_1_1502-33 under sec_1_1502-32 and b corp p would reduce its basis in its corp s stock by an amount equal to any deficit in corp s's e_p as determined under sec_1_1502-33 since corp s's permanently denied loss is never reflected in corp s's e_p under sec_1_1502-33 that permanently denied loss never results in a reduction in corp p's basis in its corp s stock under sec_1_1502-32 for purposes of this discussion we assume without deciding that the examining agent is correct in concluding that corp s is required to reduce its e_p by the amount of unrestored loss when the loss becomes permanently unrestored to corp s because of the day election corp p and corp s are not considered members of the same consolidated or affiliated_group at any time during year y thus year y is considered a separate_return_year for corp s under sec_1_1502-13 the day election would cause a restoration of corp s’s loss immediately before the end of year x since corp s will be treated as leaving the corp p group at that time however sec_1 f -2t d provides that the separate_return_year of corp s does not tam-108530-00 restore the loss to corp s under sec_1_1502-13 rather the loss is to be restored in accordance with sec_1_267_f_-1t sec_1 267-2t d while the day election removes corp s from the corp p group at the end of year x the day election has no effect on the treatment of corp p and corp s as members of the same controlled_group thus corp p and corp s are members of the same controlled_group until date year y the date on which corp s was actually sold to corp b accordingly under sec_1_267_f_-1t c corp s’s loss is not permanently unrestored to corp s until date year y the date on which corp s ceased to be a member of the same controlled_group as corp p therefore if corp s’s e_p is reduced on account of the permanent nonrestoration of the loss to corp s as the examining agent argues corp s’s e_p adjustment would occur in year y however in year y corp p and corp s are not members of the same consolidated_group consequently corp p would not be required to reduce its basis in corp s under sec_1_1502-32 caveat a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


department of the treasury washington dc person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-126438-04 date date internal_revenue_service number release date index number ------------------------------------- ------------------------------- ----------------------- ----------------------------- - - company m ------------------------------- ----------------------- ----------------- ---------------------------------- --------------------------- ------------------------------------------------- n ------------------------------------------------------------- shareholders ------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ----------------------------------------------------------------------- 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------------------------------------------------------------------------------- ------------------------------------------------------------------------------ --------------------------------------------- plr-126438-04 a b c e f g d h dear this letter responds to a letter from your authorized representative dated date as well as additional correspondence submitted on behalf of company requesting a ruling under ' f of the internal_revenue_code that the termination of company's s_corporation_election was inadvertent company represents the facts as follows facts company elected under ' a to be an s_corporation effective a on b company issued shares of stock to m on c d and e company issued shares of stock to n neither m nor n are permitted s_corporation shareholders under sec_1361 the termination of company s s_corporation_election on b due to the transfer of stock to an ineligible shareholder was discovered in f by an outside accountant as company was in the preliminary stages of a potential transaction in response to this discovery company canceled all of the shares it had issued to m and n and issued promissory notes to these ineligible shareholders for the amounts they had paid for the company stock effective e company obtained new legal counsel in or around g at which time company was informed that its s_corporation status had terminated and that it would have to file a request with the service for a ruling granting relief for the termination plr-126438-04 company represents that it had no intent of terminating its s_corporation_election that the issuance of stock to m and n was not motivated by retroactive tax planning or the desire for tax_avoidance and that company and its shareholders have continued to treat company as an s_corporation since the date of termination company and shareholders agree to make adjustments during the termination period consistent with the treatment of company as an s_corporation as may be required by the service law except as provided in ' g ' a provides that a small_business_corporation may elect in accordance with the provisions of ' to be an s_corporation sec_1361 provides that for purposes of subchapter_s the term asmall business corporation means a domestic_corporation that is not an ineligible_corporation and that does not among other things have a nonresident_alien as a shareholder sec_1362 provides that an election under ' a terminates whenever the corporation ceases to be a small_business_corporation sec_1362 provides that if an election under ' a by any corporation was terminated under ' d or the secretary determines that the circumstances resulting in termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to ' f agrees to make the adjustments consistent with the treatment of the corporation as an s_corporation as might be required by the secretary regarding this period then notwithstanding the circumstances resulting in termination the corporation shall be treated as an s_corporation during the period specified by the secretary sec_1_1362-4 provides that the determination of whether a termination was inadvertent is made by the commissioner the corporation has the burden of establishing that under the relevant facts and circumstances the commissioner should determine that the termination was inadvertent the fact that the terminating event was not reasonably within the control of the corporation and was not part of a plan to terminate the election or the fact that the event took place without the knowledge of the corporation notwithstanding its due diligence to safeguard itself against such an event tends to establish that the termination was inadvertent plr-126438-04 sec_1_1362-4 provides that the commissioner may require any adjustments that are appropriate in general the adjustments required should be consistent with the treatment of the corporation as an s_corporation during the period specified by the commissioner in the case of a transfer of stock to an ineligible shareholder that causes an inadvertent termination under ' f the commissioner may require the ineligible shareholder to be treated as a shareholder of an s_corporation during the period the ineligible shareholder actually held stock in the corporation moreover the commissioner may require protective adjustments that prevent any loss of revenue due to a transfer of stock to an ineligible shareholder eg a transfer to a nonresident_alien conclusion based on the facts and representations submitted by company we conclude that the termination of company's s_corporation_election due to the transfer of company stock to m was inadvertent within the meaning of ' f consequently we rule that company will continue to be treated as an s_corporation for all tax years for which the statute_of_limitations has not expired presently from h onward unless company's s election otherwise terminates under ' d taking no account of the inadvertent stock transfers to n on c d and e as a condition for this ruling m and n must not be treated as shareholders for any time from h onward accordingly for the time during this period that m and n did hold company shares shareholders must include the prorata share of the separately and nonseparately computed items attributable to those shares in their income as provided in ' make adjustments to the stock basis of those shares as provided in ' and take into account any distributions with respect to those shares as provided in ' company must issue new schedules k-1 for this period and shareholders must file amended income_tax returns accordingly except for the specific rulings above no opinion is expressed or implied concerning the federal_income_tax consequences of the facts of this case under any other provision of the code specifically no opinion is expressed or implied regarding company's eligibility to be an s_corporation under a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative plr-126438-04 this ruling is directed only to the taxpayer who requested it according to ' k this ruling may not be used or cited as precedent s sincerely james a quinn senior counsel branch office of associate chief_counsel passthroughs and special industries enclosure cc copy of this letter copy for ' purposes