t c memo united_states tax_court arthur g krol petitioner v commissioner of internal revenue respondent docket no 3332-08l filed date in p received a notice_of_deficiency for p’s attorney a timely filed a petition for redetermination on p’s behalf neither p nor a appeared when the case was called for trial after the court issued a show cause order a appeared and consented to the dismissal of the case r assessed the deficiency after p failed to pay the amount owing r proposed to levy in p through a requested administrative review and sought only to challenge the underlying liability r rejected the challenge on the basis of sec_6330 and issued a notice_of_determination sustaining the proposed levy in p through a filed a levy action with this court seeking only to challenge the underlying liability r filed a motion for summary_judgment the court then issued a show cause order requiring a to explain why a personally should not be liable under sec_6673 for multiplying the proceedings unreasonably and vexatiously held r’s motion for summary_judgment shall be granted sec_6330 held further a is liable personally under sec_6673 for excessive costs jerry r abraham for petitioner john w stevens and steven l karon for respondent memorandum opinion armen special_trial_judge this case is a collection action involving a proposed levy see sec_6330 rules pending before the court are respondent’s motion for summary_judgment filed date pursuant to rule and the court’s order and order to show cause dated date in his motion respondent moves for a summary adjudication in respondent’s favor because pursuant to sec_6330 petitioner’s receipt of the statutory_notice_of_deficiency precludes him from challenging the underlying tax_liability for taxable_year the only error assigned in the petition in its order the court directed petitioner’s counsel of record jerry r abraham to show cause why the court should not all section references are to the internal_revenue_code_of_1986 as amended all rule references are to the tax_court rules_of_practice and procedure conclude that he ie jerry r abraham did not multiply the proceedings unreasonably and vexatiously and why therefore the court should not require him pursuant to sec_6673 to pay personally the excess costs expenses and attorney’s fees reasonably incurred because of his conduct at the time that the petition was filed both petitioner and attorney jerry r abraham resided in the state of michigan background our summary of the relevant facts necessarily begins with petitioner’s prior action in this court dkt no because that prior action is not only the linchpin of respondent’s summary_judgment motion in the instant action docket no 3332-08l but also central to our show cause order a petitioner’s action for redetermination at dkt no by a notice_of_deficiency dated date respondent determined a deficiency in petitioner’s federal_income_tax for the taxable_year see sec_6212 the deficiency was attributable to respondent’s determination that petitioner had for convenience we shall hereinafter generally refer to petitioner’s counsel of record jerry r abraham as attorney jerry r abraham in that notice respondent also determined an addition_to_tax under sec_6651 for failure to timely file and an accuracy-related_penalty under sec_6662 for negligence or disregard of rules or regulations failed to include on his income_tax return for gambling winnings in the aggregate amount of dollar_figure as reported by casinos in las vegas nevada and detroit michigan in response to the notice_of_deficiency petitioner commenced a case in this court by timely filing a petition for redetermination of deficiency which case was assigned docket no see sec_6213 sec_7502 sec_7503 the petition which was filed by and through counsel was subscribed by attorney jerry r abraham as attorney for petitioner attorney jerry r abraham was and remains a member of the bar of this court in the petition for redetermination petitioner disputed the deficiency in tax as well as the addition_to_tax and accuracy- related penalty the substantive paragraphs of the petition and the prayer for relief recited as follows the amount of the tax_liability as set forth in said notice_of_deficiency is based upon an erroneous computation of taxpayer’s gambling winnings as no offset is provided for taxpayer’s gambling_losses as allowed by sec_165 commissioner’s inaccurate calculations stem from resulting inaccuracies relating both to taxpayer’s gambling winnings and losses wherefore petitioners sic respectfully request that this court disallow these revisions as pertaining to petitioner’s gambling winnings and losses and abate the inclusion in income of unreported gambling winnings also served to decrease otherwise allowable itemized_deductions claimed by petitioner on schedule a itemized_deductions see sec_68 the relevant portion of the existing liability with any accompanying penalties in due course and pursuant to notice provided by certified mail dkt no was called for trial on date at detroit michigan however at that time there was no appearance by or on behalf of petitioner in contrast counsel for respondent appeared and filed a stipulation of facts also counsel for respondent orally moved to dismiss the case for lack of prosecution in response to the court’s inquiry regarding the absence of attorney jerry r abraham counsel for respondent surmised as follows i talked to mr abraham a month and a half ago he returned my calls the only issue he said was his client still needed to get documentation to him showing the losses from the gambling income that was his only issue that’s why he didn’t originally get a tax_court memo because when attorney jerry abraham got them to me i was going to take them and if he had some losses then make an adjustment my guess is his client never gave him any evidence of any losses to offset the gambling income the case was called at detroit because attorney jerry r abraham acting on behalf of petitioner had designated that city for all trial proceedings in this matter the stipulation of facts had been executed by attorney jerry r abraham on date and by respondent’s counsel on date subsequently respondent’s counsel reduced his motion to writing and on date filed a motion to dismiss for lack of prosecution counsel for respondent served his motion on attorney jerry r abraham by mail on date the court responded as follows well that might be so but this is an opportunity for petitioner’s counsel to come to court and indicate to the court what he wants the petitioner to do with his case merely not to show is not a satisfactory response therefore the court is going to order a show cause hearing to mr abraham as to why he should not be sanctioned for failure to appear on date the court served an order to show cause dated date on attorney jerry r abraham directing him to appear on date at detroit michigan and show cause why the court should not impose a sanction on him for excessive costs pursuant to sec_6673 at the show cause hearing attorney jerry r abraham appeared as did counsel for respondent the transcript for that hearing includes the following colloquy mr abraham basically back on june the 6th i made a call to the district_counsel attorney and i advised him that my client still had not given us the documents that we needed and that i told him in addition that if he did not give it to me by june the 7th we would sign a consent the court a consent to what mr abraham to judgment notwithstanding the professed lack of documentation attorney jerry r abraham never filed a motion for continuance either before or at the trial session the court and counsel are you now saying you don’t object to the granting of that motion to dismiss for lack of prosecution mr abraham at this time i do not the court well first let me say this sir that i can see perhaps some room for confusion but as counsel of record it’s your obligation to make sure that either the matter is properly taken care of or you appear here to inform the court as to the status you understand that mr abraham yes i do the court all right i’m going to grant the motion to dismiss for lack of prosecution and deem that you have satisfied the motion to show cause mr abraham thank you very much mr abraham thank you thereafter by order of dismissal and decision entered and served date the court granted respondent’s motion to dismiss for lack of prosecution thereby sustaining all of respondent’s determinations in the date notice_of_deficiency petitioner did not file any posthearing motion or a notice of appeal accordingly the court’s order of dismissal and decision at dkt no became final in due course see sec_6214 sec_7481 sec_7483 thereafter respondent assessed the deficiency addition_to_tax and accuracy-related_penalty together with statutory interest see sec_6215 sec_7459 see also sec_6601 b petitioner’s collection action at dkt no 3332-08l as previously stated the instant case dkt no 3332-08l is a collection action involving a proposed levy the commencement of that action had as its origin petitioner’s failure to pay upon notice_and_demand made pursuant to sec_6303 the liability arising out of petitioner’s above- described action for redetermination of deficiency the collection action developed as follows on date respondent sent petitioner a notice_of_intent_to_levy and notice of your right to a hearing final notice_of_intent_to_levy in respect of petitioner’s outstanding liability for in response to the final notice_of_intent_to_levy petitioner acting through his power_of_attorney poa jerry r abraham filed with respondent a form request for a collection_due_process or equivalent_hearing the reason given for objecting to the proposed levy was as follows taxpayer requests a re-open audit he know sic has located evidence of gambling_losses to offset winnings and negate the assessed tax following a telephone conference between attorney jerry r abraham and respondent’s settlement officer respondent’s appeals petitioner’s power_of_attorney jerry r abraham is the same jerry r abraham who was petitioner’s counsel of record in the action for redetermination of deficiency at dkt no and is the same jerry r abraham who is petitioner’s counsel of record in the instant collection action dkt no 3332-08l for convenience we shall hereinafter refer to petitioner’s power_of_attorney jerry r abraham as attorney jerry r abraham office sent petitioner a notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination dated date in the notice_of_determination respondent’s appeals_office sustained the proposed levy the attachment to the notice_of_determination states in part as follows issues raised by the taxpayer in your written request form your poa raised the liability as an issue at the telephone conference your poa was advised you are not able to raise the liability as an issue under cdp collection_due_process because you had a prior opportunity to do so your poa agreed other issues raised no other issues were raised your poa did not ask for a collection alternative in response to the notice_of_determination petitioner timely filed the instant collection action levy action which action was assigned docket number 3332-08l the petition was subscribed by both petitioner individually and by attorney jerry r abraham as counsel for petitioner the two and only substantive paragraphs of the petition provide as follows the underlying liability is not accurate the original deficiency assessment was based primarily upon gambling winnings but it did not include any information relating to relevant offsetting losses these offsetting losses will greatly reduce this taxpayer’s taxable_income as well as his corresponding tax_liability evidence of these losses was provided to the service but no adjustments have been made to decrease the current_liability therefore taxpayer requests that collection ceases pending the accurate adjustment of the tax_liability taxpayer has presented documentary_evidence of gambling_losses which should be offset against his recorded gambling winnings this evidence has been presented to the service but has not yet resulted in any adjustment after filing an answer respondent filed his motion for summary_judgment see rule sec_36 sec_121 as previously stated respondent moves for a summary adjudication in respondent’s favor because pursuant to i r c section c b petitioner’s receipt of the statutory_notice_of_deficiency precludes him from challenging the underlying tax_liability for taxable_year the only error assigned in the petition the heart of respondent’s motion lies in paragraph sec_11 and sec_12 thereof which paragraphs state as follows because the petitioner received the notice_of_deficiency in sufficient time to petition the tax_court and did do so it was improper for petitioner to challenge the tax_liability to which the statutory_notice_of_deficiency related because it was improper for the taxpayer to challenge in the cdp hearing the existence or amount of petitioner’s liability with respect to taxable_year the validity of petitioner’s underlying tax_liability is not properly at issue before this court 114_tc_604 on date petitioner through attorney jerry r abraham filed a response in opposition to respondent’s motion therein petitioner contends that respondent’s reliance on sec_6330 is erroneous for two reasons first the general statutory directive of sec_6330 is to allow an aggrieved taxpayer to raise any and all alternatives to collection which are appropriate in any given context second while sec_6330 does limit the scope challenges sic to the accuracy of a liability it does not do so when the taxpayer did not otherwise have an opportunity to dispute such tax_liability id on date the court issued its order and order to show cause the court’s order directed attorney jerry r abraham to show cause why the court should not conclude that he ie attorney jerry r abraham multiplied the proceedings unreasonably and vexatiously and why therefore the court should not require him pursuant to sec_6673 to pay personally the excess costs expenses and attorneys’ fees reasonably incurred because of his conduct on date attorney jerry r abraham filed a response to order to show cause in it attorney jerry r abraham asserts that petitioner steadfastly continues to request an accurate re-determination of hi sec_2002 tax_liability and toward that end has sought this forum to request a re-open audit as an alternative to the full collection of a tax_liability which he knew to be inaccurate attorney jerry r abraham further asserts that a request for a re-open audit is a collection alternative and that a collection alternative is specifically identified by sec_6330 as an appropriate issue to be considered at a collection-related hearing attorney jerry r abraham then concludes as follows sec_6330 clearly limits the ability to challenge an underlying tax_liability as generated through a deficiency assessment however the statute sec_6330 also clearly provides that such limitation for challenge cannot apply when a taxpayer did not otherwise have an opportunity to dispute such tax_liability in the present action this petitioner was not afforded such an opportunity granted that this taxpayer availed himself of the full appeals process surrounding hi sec_2002 liability but he simply could not have been afforded any reasonable opportunity to challenge the assessment without further corroboration or evidence of his losses without this kind of evidence he could not have been afforded an effective opportunity to challenge the deficiency based on all the merits of his case a hearing on the court’s date order and order to show cause was held in washington d c on date having filed the aforementioned date response to order to show cause attorney jerry r abraham chose not to attend in person so did petitioner in contrast counsel for respondent did appear and argued in support of a finding that attorney jerry r abraham unreasonably and vexatiously multiplied proceedings and as a result should pay personally excess costs expenses and attorney’s fees pursuant to sec_6673 respondent’s motions counsel also introduced a declaration by respondent’s field counsel john w stevens of detroit michigan detailing the time spent a total of hours dealing with dkt no 3332-08l counsel requested that respondent be compensated at the rate of dollar_figure per hour following the aforementioned hearing the court issued an order dated date directing attorney jerry r abraham to file a response to the declaration from respondent’s field counsel attorney jerry r abraham complied with that order by filing a response on date in his response attorney jerry r abraham argues that respondent’s field counsel’s ten hour computation is disproportionate and inaccurate attorney jerry r abraham further argues that he ie attorney jerry r abraham pursued an accepted administrative strategy of audit_reconsideration which appeared to fall within the broad statutory mandate of internal_revenue_code ‘irc’ sec_6330 and that he acted neither vexatiously nor in bad faith discussion a respondent’s motion the record is clear that respondent sent petitioner a notice_of_deficiency for and that petitioner received it in sufficient time to file a petition for redetermination of deficiency with this court indeed petitioner timely filed such a petition thus petitioner had an opportunity to dispute his underlying tax_liability the fact that petitioner squandered that opportunity by failing to appear at trial and by consenting to the dismissal of the case is irrelevant in view of the foregoing sec_6330 bars petitioner from challenging the existence or amount of his underlying liability in the instant collection action this court so held in 114_tc_604 and has continued to so hold in an uninterrupted line of casesdollar_figure in short petitioner is statutorily barred from challenging the existence or amount of his underlying liability in the instant collection action the record is equally clear that petitioner did not and has not offered a collection alternative a collection alternative which may include the posting of a bond the substitution of other assets an installment_payment agreement or an offer-in- compromise see sec_6330 does not contemplate a challenge to the existence or amount of the underlying liability in the guise of a request for a re-open audit petitioner’s assertion to that effect the general statutory directive of sec_6330 is to allow an aggrieved taxpayer to raise any and insofar as sec_6330 is concerned we are not aware of a single case from any other federal court that is contrary to 114_tc_604 and its numerous progeny indeed petitioner cites no case from this or any other court in support of his position regarding sec_6330 all ‘alternatives to collection’ which are appropriate in any given context is nothing but sophistry because petitioner raised no issue other than his underlying liability and because petitioner is statutorily barred from raising that issue the court shall grant respondent’s motion for summary_judgment sec_6330 b order to show cause we turn now to the court’s order and order to show cause dated date we must first decide whether attorney jerry r abraham is liable under sec_6673 for excessive costs if we decide that attorney jerry r abraham is so liable then we must also decide the amount of his liability counsel’s liability for excessive costs sec_6673 provides as follows counsel’s liability for excessive costs -- whenever it appears to the tax_court that any attorney or other person admitted to practice before the tax_court has multiplied the proceedings in any case unreasonably and vexatiously the tax_court may require- a that such attorney or other person pay personally the excess costs expenses and attorneys’ fees reasonably incurred because of such conduct see estate of allison v commissioner tcmemo_2008_149 for the most recent case applying sec_6673 as a sanction against an attorney for a taxpayer see also rule b dollar_figure attorney jerry r abraham commenced and has prosecuted the instant collection action seeking only to challenge the existence or amount of petitioner’s underlying liability notwithstanding the clear statutory bar of sec_6330 attorney jerry r abraham has done so notwithstanding his knowledge that rule b deserves to be quoted thus in relevant part b effect of signature the signature of counsel or a party constitutes a certificate by the signer that the signer has read the pleading that to the best of the signer’s knowledge information and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good_faith argument for the extension modification or reversal of existing law and that it is not interposed for any improper purpose such as to harass or to cause unnecessary delay or needless increase in the cost of litigation the signature of counsel also constitutes a representation by counsel that counsel is authorized to represent the party or parties on whose behalf the pleading is filed if a pleading is signed in violation of this rule the court upon motion or upon its own initiative may impose upon the person who signed it a represented party or both an appropriate sanction which may include an order to pay to the other party or parties the amount of the reasonable expenses_incurred because of the filing of the pleading including reasonable counsel’s fees see gillespie v commissioner tcmemo_2007_202 affd on other issue sec_102 aftr 2d ustc par big_number 7th cir for a case in which we justified sanctions against a taxpayers’ attorney under both sec_6673 and rule b petitioner received the date notice_of_deficiency in sufficient time to file an action for redetermination with this court as demonstrated by the fact that he himself ie attorney jerry r abraham commenced and prosecuted the action for redetermination of deficiency at dkt no the fact that attorney jerry r abraham agreed to the granting of the respondent’s motion to dismiss for lack of prosecution and never even filed a motion for continuance in no way avoids the fact that attorney jerry r abraham himself commenced and prosecuted the action for redetermination and was therefore fully aware of that action further attorney jerry r abraham has cited no case from this or any other federal court that would even remotely justify given the clear statutory bar of sec_6330 the commencement and prosecution of the instant collection action that seeks only to challenge the existence or amount of the underlying liability the argument by attorney jerry r abraham suggesting that petitioner did not otherwise have an opportunity to dispute such tax_liability constitutes a reckless disregard of both fact and well-established law the argument by attorney jerry r abraham that appears to equate a challenge to the existence or amount of the underlying liability to a collection alternative is specious in our view litigation that is commenced and prosecuted without regard to sec_6330 is frivolous and we cannot imagine any purpose for such litigation other than to delay collection see infra note the present case does not involve a lay person untutored in the law rather it involves an attorney who is a member of the bar of this court practicing as he does before this court attorney jerry r abraham should possess knowledge of sec_6330 the statute that regulates pre-levy procedures and specifically subsection c b thereofdollar_figure that statute has been part of the internal_revenue_code since and has been the subject of numerous opinions of this court see internal_revenue_service restructuring and reform act of publaw_105_206 112_stat_685 114_tc_604 and its progeny in commencing the instant action attorney jerry r abraham has disrespected the clear bar of sec_6330 and he if attorney jerry r abraham wishes to impugn his level of competence then suffice it to say that he was expressly educated as to the bar of sec_6330 by respondent’s appeals settlement officer who in the attachment to the notice_of_determination told him that you are not able to raise the liability as an issue under cdp because you had a prior opportunity to do so attorney jerry r abraham has never contradicted the appeals settlement officer’s statement nor has attorney jerry r abraham ever contradicted the appeals settlement officer’s further statement that your poa agreed ie that attorney jerry r abraham agreed with the appeals settlement officer’s statement has done so without principled justificationdollar_figure in so doing we find that he acted not only recklessly but in bad faith in commencing and prosecuting the instant case see 119_tc_285 in sum attorney jerry r abraham has unreasonably and vexatiously multiplied the proceedings and should therefore pay personally the excess costs expenses and attorneys’ fees reasonably incurred by respondent because of his conduct sec_6673 amount of counsel’s liability we turn now to the amount that attorney jerry r abraham should pay this amount is a function of the time spent by respondent’s counsel and the rate at which counsel should be compensated see gillespie v commissioner aftr 2d ustc par big_number 7th cir a case in which the tax_court petition executed by the taxpayers’ attorney ignored sec_6330 and challenged the existence or amount of the underlying liability in its order the court_of_appeals cited sec_6330 and stated that the statute puts that subject how much the taxpayers owed off limits the court_of_appeals went on to state as follows the taxpayers’ lawyer comes close to conceding that the petition was frivolous and argues that counsel is entitled to file a petition in order to stall for time while trying to negotiate a settlement that effectively concedes an abuse of process there is no right to engage in frivolous_litigation in order to delay collection the record includes a declaration by respondent’s field counsel in detroit michigan detailing time spent by him in dealing with the instant case a total of hours other than hours to review requirements for filing a motion for summary_judgment we find the time spent reasonabledollar_figure in our view hours to review the petition and to file an answer to draft a motion for summary_judgment to attempt on more than one occasion to contact attorney jerry r abraham to ascertain petitioner’s position to revise the motion to review attorney jerry r abraham’s response in opposition to the motion to review the court’s date order and order to show cause to coordinate with other members of chief counsel’s office regarding that matter and provide them with documentation and to prepare the declaration is not disproportionate and inaccurate as alleged by attorney jerry r abrahamdollar_figure finally respondent’s request that attorney time be compensated at the rate of dollar_figure per hour is reasonable moreover that rate is consistent with other cases e g gillespie v commissioner tcmemo_2007_202 affd on other we emphasize that the declaration represents time spent by respondent’s field counsel in detroit michigan not included is time spent by any of counsel’s supervisors or by respondent’s other counsel or supervisors in preparing for and attending the hearing in washington d c that time has not been separately listed in any other declaration filed with the court we note that attorney jerry r abraham has not requested a hearing on this matter issue sec_102 aftr 2d ustc par big_number 7th cir see also takaba v commissioner supra pincite matthews v commissioner tcmemo_1995_577 affd without published opinion f 3rd 3d cir finally attorney jerry r abraham has not suggested that any specific lesser rate is more appropriate in sum the lodestar amount see 99_tc_533 for respondent’s counsel’s time is dollar_figure hrs x dollar_figure hr conclusion we shall enter an order and order and decision granting respondent’s motion for summary_judgment filed date deciding that respondent may proceed with collection for the taxable_year as determined in the notice_of_determination dated date upon which notice this case is based making our date order to show cause absolute and ordering attorney jerry r abraham to pay personally dollar_figure to the united_states as a penalty pursuant to sec_6673 an order and order and decision consistent with the foregoing shall be entered


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si - plr-109304-99 date date x y a d1 d2 d3 d4 dear this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representative requesting that x be given an extension of time in which to treat y as a qualified_subchapter_s_subsidiary qsub under sec_1361 of the internal_revenue_code the information submitted states that y was incorporated on d1 and since incorporation has been wholly owned by x which elected to be an s_corporation effective d4 a as president of x and y represents that y was intended to be a flow-through_entity as of d2 x and y relied on x’s tax and accounting advisors to prepare the necessary form relying on erroneous information from x’s chief financial officer that y was wholly owned by a the tax and accounting advisors mistakenly prepared a form_2553 election by a small_business_corporation for y rather than a form_966 corporate dissolution or liquidation on d3 y filed the form_2553 sec_1361 defines the term qualified_subchapter_s_subsidiary qsub as a domestic_corporation which is not an ineligible_corporation if percent of the stock of the corporation is owned by the s_corporation and the s_corporation elects to treat the corporation as a qsub the statutory provision does not however provide guidance on the manner in which the qsub election is made or the effective date of the election on date the service published notice_97_4 1997_1_cb_351 providing a temporary procedure for the making of a qsub election under notice_97_4 a taxpayer makes a qsub election with respect to a subsidiary by filing a form_966 corporate dissolution or liquidation subject_to certain modifications with the appropriate service_center the election may be effective on the date form_966 is filed or up to days prior to the filing of the form provided that the date is not before the parent’s first taxable_year beginning after date and that the subsidiary otherwise qualifies as a qsub for the entire period for which the retroactive election is in effect sec_301_9100-1 of the procedure and administration regulations provides that the commissioner has the discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election sec_301_9100-1 defines regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government in the present situation the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time for making the election to treat y as a qsub effective d2 until days following the date of this letter the election should be made by following the procedure set forth in notice_97_4 a copy of this letter should be attached except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transactions described above under any other provision of the code specifically no opinion is expressed concerning whether x is an s_corporation or whether y otherwise qualifies as a qsub for federal tax purposes this ruling is directed only to the taxpayer on whose behalf it was requested sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely yours paul f kugler assistant chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court brendon james delong petitioner v commissioner of internal revenue respondent docket no filed date brendon james delong pro_se nicole c lloyd for respondent memorandum findings_of_fact and opinion kroupa judge respondent determined a dollar_figure deficiency in and a dollar_figure accuracy-related_penalty under sec_6662 a with respect to petitioner’ sec_1all monetary amounts are rounded to the nearest dollar 2all section references are to the internal_revenue_code in effect for and all rule references are to the tax_court rules_of_practice and procedure continued federal_income_tax for after concession sec_3 we must decide two issues the first issue is whether petitioner is entitled to deduct as alimony certain family support payments he made to his legally_separated spouse we hold that he is the second issue is whether petitioner is liable for an accuracy-related_penalty we hold that he is not findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts with accompanying exhibits is incorporated by this reference petitioner resided in california when he filed the petition petitioner was married to tamsin delong ms delong before separating in petitioner and ms delong had two children who resided with ms delong after the separation ms delong filed for divorce in the superior court of california county of el dorado superior court while the divorce case was pending petitioner and ms delong entered into a stipulated agreement that was incorporated into a temporary order of the continued unless otherwise indicated 3respondent conceded at trial that petitioner was entitled to deduct dollar_figure of spousal support payments made during september through date superior court on date first support order the first support order required petitioner to pay ms delong dollar_figure as family support for date the superior court issued a findings and order after hearing second support order two months after the first support order was issued petitioner was obligated under the second support order to continue to pay ms delong family support payments of dollar_figure per month until a trial in the divorce case was held the superior court indicated in the second support order that the family support payments were for both spousal support and child_support it did not allocate however any specific_portion of the family support payments as spousal support or child_support in the second support order or the first support order the first support order and the second support order collectively support orders did not explicitly contain a condition that would terminate petitioner’s obligation to make the family support payments on ms delong’s death petitioner made dollar_figure in family support payments family support payments during under the support orders petitioner filed an individual_income_tax_return for he claimed on the return an alimony deduction for the family support payments respondent issued petitioner a deficiency_notice that disallowed the claimed alimony deduction for the family support payments petitioner timely filed a petition challenging respondent’s determination opinion we must decide whether petitioner is entitled to deduct as alimony any amount of the family support payments even though they constituted an unallocated combination of spousal support and child_support a deduction from gross_income is allowed for alimony payments to the extent such payments are includible in the gross_income of the recipient spouse under sec_71 sec_215 and b whether a payment constitutes alimony within the meaning of sec_71 and sec_215 is determined by reference to sec_71 which defines an alimony_or_separate_maintenance_payment as any payment in cash if-- a such payment is received by or on behalf of a spouse under_a_divorce_or_separation_instrument 4the taxpayer generally bears the burden of proving the commissioner’s determinations are erroneous rule a the burden_of_proof may shift to the commissioner if the taxpayer satisfies certain conditions sec_7491 resolving all factual issues here is based on a preponderance_of_the_evidence not on the burden_of_proof therefore we need not consider which party has the burden_of_proof see 124_tc_95 b the divorce_or_separation_instrument does not designate such payment as a payment which is not includible in gross_income under this section and not allowable as a deduction under sec_215 c in the case of an individual legally_separated from his spouse under a decree of divorce or of separate_maintenance the payee spouse and the payor spouse are not members of the same household at the time such payment is made and d there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment in cash or property as a substitute for such payments after the death of the payee spouse a payment satisfying the preceding criteria is nevertheless not includible in the recipient spouse’s gross_income under sec_71 and thus not deductible as alimony if it qualifies as child_support under sec_71 sec_215 and b a c we now turn to the general alimony requirements respondent does not dispute that the family support payments were made under a divorce or separation agreement or that petitioner and ms delong were members of different households when the family support payments were made see sec_71 c respondent contends however that the family support payments fail to satisfy the general alimony requirements because they were designated as nonalimony and petitioner’s liability to make them would have continued past ms delong’s death see sec_71 d we first consider whether petitioner had no liability to continue making the family support payments after ms delong’s death as required under sec_71 courts including this one have applied the following three-step approach to determining whether sec_71 is satisfied see 407_f3d_186 3d cir aff’g tcmemo_2003_163 45_fedappx_700 9th cir 293_f3d_1208 10th cir aff’g tcmemo_1999_273 102_f3d_842 6th cir aff’g tcmemo_1995_183 leventhal v commissioner tcmemo_2000_92 the court first looks for an unambiguous termination provision in the divorce decree fithian fed appx pincite if there is no such provision then the court looks to whether the payments would terminate at the payee’s death by operation of state law id and if state law is unclear the court will look solely to the divorce decree to determine whether the payments would terminate at the payee’s death id the support orders did not expressly state that petitioner’s liability for making the family support payments would terminate on ms delong’s death accordingly we must consider whether such termination would occur by operation of california law the california family code family code defines family support as an unallocated combination of spousal support and child_support cal fam code sec west california law provides that a spousal support obligation terminates upon the death of the payee spouse cal fam code sec west in contrast a child_support obligation survives the death of the payee spouse and continues as an obligation of the payor spouse under california law in re marriage of mccann cal rptr 2d ct app in re marriage of gregory cal rptr ct app whether a family support obligation terminates upon the death of the payee spouse is not specifically addressed in the family code additionally respondent fails to cite nor are we aware of any california case that conclusively decides the question this court more recently addressed the effect of a payee spouse’s death on a family support obligation under california law in berry v commissioner tcmemo_2005_91 the facts of berry are similar to the facts here in berry as here the taxpayer was obligated to make california family support payments and claimed an alimony deduction for those payments the commissioner in berry as here argued that the family support obligation did not terminate upon the death of the payee spouse as required by sec_71 after a careful and comprehensive analysis of california law we held in berry that there is no continuing payment_liability past the death of a payee spouse with respect to a family support obligation we stand by our reasoning and analysis in berry moreover we do not find any distinguishable facts in this case that merit a different result we therefore find that petitioner had no continuing liability for the family support payments past the death of ms delong and that the sec_71 requirement is met we now consider whether the family support payments were designated as nonalimony a payment will not be treated as alimony if it is designated as nonalimony sec_71 respondent argues that the family support payments were designated as nonalimony at least in part because the support orders indicate the family support payments were partly for child_support as defined in sec_71 accordingly respondent’s designation argument rests on whether any part of the family support payments constitute child_support child_support is defined as any part of a payment that the terms of a divorce or separation instrument6 specifically fix in terms of the amount of money or any 5child support is not includible in income under sec_71 and not deductible under sec_215 divorce_or_separation_instrument includes a court decree requiring a continued part of the payment as a sum that is payable for the support of the payor spouse’s children sec_71 the statutory directive that child_support payments be fixed is generally taken literally and child_support cannot be inferred from intent surrounding circumstances or other subjective criteria see 366_us_299 lawton v commissioner tcmemo_1999_243 raymond v commissioner tcmemo_1997_219 ambrose v commissioner tcmemo_1996_128 an amount fixed as payable for the support of the payor spouse’s children nevertheless includes any amount specified in the instrument if that amount will be reduced on the happening of a contingency specified in the instrument relating to a child eg attaining a specified age marrying dying leaving school or a similar contingency or at a time that can clearly be associated with such a contingency sec_71 the support orders make an unallocated award of spousal and child_support consequently they do not fix any portion of the family support payments as a sum that is payable for the support of petitioner’s children for purposes of sec_71 see commissioner v lester u s pincite ambrose v commissioner tcmemo_1996_128 additionally sec_71 does not continued spouse to make support payments to the other spouse see sec_71 apply here because there is no amount specified in the support orders that was to be reduced upon the occurrence of a contingency specified in the support orders relating to petitioner’s children or at a time that can clearly be associated with that kind of contingency accordingly we find that no amount of the family support payments qualifies as child_support under sec_71 we therefore reject respondent’s argument that the family support payments were designated as nonalimony in sum the family support payments constitute alimony not child_support we ultimately find therefore that petitioner is entitled to deduct the entire amount of the family support payments for we now address whether petitioner is liable for the accuracy-related_penalty under sec_6662 a taxpayer may be liable for a penalty on the portion of an underpayment_of_tax attributable to certain causes sec_6662 and b because we reject respondent’s disallowance of the alimony deduction for the family support payments there is no underpayment for and petitioner is therefore not liable for the accuracy-related_penalty we have considered all the arguments of the parties and to the extent we have not addressed them we find them to be irrelevant moot or meritless to reflect the foregoing decision will be entered for petitioner


t c summary opinion united_states tax_court curtis muhammad petitioner v commissioner of internal revenue respondent docket no 14743-05s filed date curtis muhammad pro_se harry j negro for respondent ruwe judge this case was heard pursuant to section in effect when the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated section references are to the internal_revenue_code in effect for the year in issue rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency in petitioner’ sec_2002 federal_income_tax of dollar_figure after concessions by the parties the issues for decision are whether petitioner can deduct dollar_figure on schedule a itemized_deductions for cash charitable_contributions dollar_figure on schedule c profit or loss from business for legal and professional expenses dollar_figure on schedule c for rental expenses and dollar_figure on schedule c for business use of the home some facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated by this reference when the petition was filed petitioner resided in west chester pennsylvania petitioner earned a biomedical engineering degree from a community college in or about and also graduated from lyons tech in while he served in the air force petitioner worked as an accountant during the taxable_year petitioner worked full time for septa and also worked as a financial adviser for waddell reed petitioner timely filed hi sec_2002 federal_income_tax return via electronic_filing petitioner’s return for was prepared the parties stipulated that the proper mortgage interest and real_estate_taxes on schedule a itemized_deductions are dollar_figure and dollar_figure respectively and that the proper mortgage interest and real_estate_taxes on schedule e supplemental income and loss are dollar_figure and dollar_figure respectively at trial petitioner also conceded that he is not entitled to a deduction for a dollar_figure noncash charitable_contribution by chalamar muhammad petitioner’s wife who worked for business management solutions inc bms chester muhammad chalamar muhammad’s father and petitioner’s father-in-law owned bms in petitioner claimed chalamar muhammad as a dependent on hi sec_2002 federal_income_tax return respondent issued petitioner a notice_of_deficiency discussion as a general_rule the commissioner’s determinations set forth in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving that these determinations are in error rule a 290_us_111 pursuant to sec_7491 the burden_of_proof as to factual issues may shift to the commissioner where the taxpayer introduces credible_evidence and complies with substantiation requirements maintains records and cooperates fully with reasonable requests for witnesses documents and other information petitioner has not met the requirements of sec_7491 because he has not met the substantiation requirements or introduced credible_evidence regarding the deductions at issue petitioner reported that his filing_status in was head_of_household respondent did not change petitioner’s status in the notice_of_deficiency nevertheless petitioner testified that he and chalamar muhammad were married in while chalamar muhammad testified that they were not married chalamar muhammad also testified that she could not remember the date when she and petitioner married sec_6001 and sec_1_6001-1 income_tax regs require that any person subject_to tax or any person required to file a return of information with respect to income shall keep such permanent books of account or records as are sufficient to establish the amount of gross_income deductions credits or other matter required to be shown by such person in any return of such tax or information deductions are strictly a matter of legislative grace and the taxpayer bears the burden of proving entitlement to the claimed deduction rule a 503_us_79 292_us_435 a charitable_contribution deductions claimed on schedule a respondent disallowed a deduction of dollar_figure that petitioner claimed as charitable_contributions respondent argues that petitioner failed to retain adequate_records and that the documents provided by petitioner to support cash contributions should be disregarded because they do not constitute credible_evidence sec_170 allows as a deduction any charitable_contribution the payment of which is made within the taxable_year deductions for charitable_contributions are allowable only if verified under regulations prescribed by the secretary sec_170 in general the regulations require a taxpayer to maintain for each contribution one of the following a canceled check a receipt from the donee or in the absence of a check or receipt other reliable written records sec_1_170a-13 income_tax regs sec_1_170a-13 income_tax regs provides special rules to determine the reliability of records on the basis of all the facts and circumstances of the particular case and further provides factors to consider in making this determination including whether the writing that evidences the contribution was written contemporaneously and whether the taxpayer keeps regular records of the contributions petitioner had a checking account in however because he claimed to have made only cash charitable_contributions petitioner provided no canceled checks to substantiate his claimed deductions petitioner testified that the total cash charitable_contributions he claimed were based on receipts he received from his mosque but that he could not provide the receipts because he shredded them petitioner produced two documents to substantiate his charitable_contributions the first is the computer-generated list of charitable_contributions prepared by bms the computer- generated document lists weekly contributions of dollar_figure to muhammad mosque no the mosque from january to date a receipt is required to contain the name of the donee the date of the contribution and the amount of the contribution sec_1_170a-13 income_tax regs dollar_figure total at trial petitioner testified that this document was inaccurate the second is a two-page undated document purportedly from the mosque consisting of a cover letter and a list of total contributions to a variety of mosque funds at the bottom of the first page of the document there is an address line but white correction fluid has been applied to obscure a telephone number on that line the contributions totaling dollar_figure are listed on the second page of the document as follows saviours’ day feb dollar_figure no poor charity dollar_figure obligatory charity dollar_figure mosque no bldg fund dollar_figure local charity dollar_figure year economic plan dollar_figure this document does not show the dates or amounts of the individual contributions petitioner testified that he received the latter document on date nearly years after the alleged charitable_contributions were made and only provided it petitioner had previously submitted another erroneous document to respondent although petitioner eventually conceded that he was not entitled to a noncash charitable_contribution_deduction he originally submitted to respondent a letter that was allegedly from the salvation army the letter is addressed to petitioner and thanks him for donations of furniture and clothing respondent obtained from a supervisor in the vehicle donation program of the salvation army a certification of business records declaring that the letter submitted by petitioner purporting to be from the salvation army was not genuine the certification states that the division of the salvation army from which petitioner’s letter appears to have been sent does not handle furniture and clothing but only vehicle donations to respondent on date the day before trial the first page indicates that the document was issued by sister laverne muhammad delaware valley regional secretary however petitioner testified that laverne muhammad is not the current delaware valley regional secretary petitioner did not provide a statement of charitable_contributions from the current regional secretary or any current recordkeeper at the mosque applying the previously mentioned standards for substantiating deductions for contributions we find that petitioner failed to provide reliable evidence of his purported contributions and failed to meet his burden_of_proof we hold that respondent’s determination disallowing petitioner’s claimed charitable_contribution_deduction is sustained b business_expense deductions claimed on schedule c sec_162 permits a taxpayer to deduct expenses paid_or_incurred during the taxable_year in carrying on the taxpayer’s trade_or_business and requires a taxpayer to prove that the expenses deducted were paid_or_incurred during the taxable_year incurred to carry on the taxpayer’s trade_or_business and ordinary and necessary expenditures of the business see sec_162 403_us_345 legal and professional expenses respondent argues that petitioner failed to substantiate his legal and professional expenses because the receipts submitted by petitioner are untrustworthy petitioner produced four sales receipts from bms the company that employed petitioner’s wife and that was owned by his father-in-law to substantiate his legal and professional expense deductions although he had a checking account each bms receipt indicates a dollar_figure cash payment petitioner testified that the charges on the receipts represented costs incurred while chester muhammad helped him set up a limited_liability_company for his rental real_estate activity the receipts indicate that they were for services including monthly accounting bookkeeping and payroll petitioner testified that he hired an employee whom he paid sometimes with both a check and cash and sometimes just with cash petitioner issued neither a form_w-2 wage and tax statement nor a form_1099 and claimed no deduction for the employee’s wages petitioner testified that he did not deduct his employee’s wages because he did not want the employee to have to pay taxes on them petitioner’s testimony indicates that although the receipts he received from bms represent charges for payroll services his payments to his only purported employee would not necessitate such services other than the bms receipts petitioner failed to produce any substantiation that he actually made payments to his father- in-law or bms or that the purported payments actually related to a trade_or_business given the relationship between petitioner and the people who operated bms the fact that the payments were allegedly made in cash and the fact that the receipts indicate that they were for payroll work that would seem unnecessary we find that petitioner has failed to meet his burden_of_proof respondent’s determination disallowing petitioner’s claimed legal and professional expense deductions is sustained rental expenses respondent argues that petitioner failed to substantiate the dollar_figure rental equipment expense deduction because the invoices submitted by petitioner lack credibility and are generally untrustworthy to substantiate his rental expenses petitioner submitted five invoices from cb associates indicating that he leased a laptop computer for dollar_figure and a printer for dollar_figure from january to date at monthly rates of dollar_figure and dollar_figure for the computer and printer respectively craig brown the invoice dates and amounts purportedly paid in are as follows january 7-dollar_figure april 7-dollar_figure august 7-dollar_figure november 7-dollar_figure december 7-dollar_figure the return address for cb associates on the invoices was incorrect because it had the wrong continued petitioner’s brother-in-law owns cb associates petitioner claimed a deduction for the rental expense of the printer but not the computer on his return although the total lease price referenced in the invoices is based on a 12-month lease_term the term referenced on the invoices is for only the months between january and date petitioner had a checking account in but purports to have paid dollar_figure using multiple money orders for the lease of the computer and printer from cb associates petitioner did not produce any money order receipts or a lease agreement to substantiate the expense he claimed on his return for the lease of the printer petitioner testified that after months he returned the computer and printer via mail to his brother-in-law in houston texas bearing in mind the questionable nature of several other documents that petitioner produced in this case invoices purporting to be from a family_member at an address that does not exist are insufficient to substantiate petitioner’s rental expense deductions we find that petitioner has failed to meet his burden_of_proof and hold that respondent’s determination continued zip code petitioner initially testified that craig brown was his father’s son but he refers to him as his brother-in-law throughout the rest of his testimony disallowing petitioner’s claimed rental_expense_deduction is sustained business use of home respondent argues that petitioner is not eligible for a business use of home deduction because his residence was not his principal place of trade_or_business if the court decides that petitioner’s residence was his principal place of trade_or_business respondent argues that the deductions petitioner claimed in relation to the business use of home other than mortgage interest and real_estate_taxes should be disallowed for a lack of substantiation mortgage interest and real_estate_taxes on petitioner’s home have already been allowed sec_280a provides as a general_rule that no deduction otherwise allowable to an individual shall be allowed with respect to the use of a dwelling_unit which is used by the taxpayer during the taxable_year as a residence the seemingly prohibitory rule_of sec_280a is ameliorated by sec_280a which provides exceptions for certain business uses as petitioner submitted to respondent a form_1098 mortgage interest statement former form in support of mortgage interest_expenses of dollar_figure and real_estate_taxes of dollar_figure for petitioner’s personal_residence petitioner also produced an identical form_1098 latter form except for the fact that the amount for real_estate_taxes was changed from dollar_figure to dollar_figure an amount which petitioner originally included on schedule a of his return the parties stipulated that the former form_1098 was correct and the latter form_1098 was incorrect because it indicated an improper amount for real_estate_taxes relevant herein sec_280a provides that the general_rule of sec_280a is not applicable to any item to the extent it is allocable to a portion of the dwelling_unit which is exclusively used on a regular basis as the principal_place_of_business for any trade_or_business of the taxpayer or as a place of business which is used by patients clients or customers in meeting or dealing with the taxpayer in the normal course of his trade_or_business_expenses deducted as a business use of home must be deductible under sec_162 or some other code section see sec_280a petitioner testified that he used his basement as his home_office the evidence and testimony available do not indicate that petitioner met with clients or customers in his basement therefore petitioner’s deductions for business use of home can only be sustained if he used the basement on a regular basis as the principal_place_of_business for a trade_or_business petitioner argues that an income statement which lists operating_expenses and which he testified had been created by bms was created from a log petitioner kept of his expenses and was averaged over the year petitioner argues that this income statement is sufficient to substantiate his business use of home expenses petitioner testified that from date to date he was being trained as a financial adviser for waddell reed and worked out of an office in langhorne pennsylvania after date petitioner was assigned to a waddell reed district_office located in philadelphia pennsylvania where petitioner had a desk from which to work petitioner also testified that he received assistance from chester muhammad in setting up a limited_liability_company for his rental real_estate but petitioner failed to establish that he actually operated this enterprise from his basement in terms of working in a business petitioner refers mostly to his job as a financial adviser for waddell reed the evidence and testimony indicate that petitioner’s principal_place_of_business was the office of waddell reed in langhorne pennsylvania until date and in philadelphia pennsylvania for the rest of we find that petitioner has failed to establish that his basement was his principal_place_of_business in because petitioner has failed to meet the requirements necessary to apply a sec_280a exception to the general_rule of sec_280a it is unnecessary to examine whether petitioner substantiated the expenses he deducted in relation to the purported business use of home respondent’s determination disallowing petitioner’s claimed business use of home deduction is sustained to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number ---------------------------------------------------------- --------------------------------------------- -------------------------------------- ---------------------------------- in re ---------------------------------------------------- ------------------------------------------------------ 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 intl b05 plr-123739-13 date date x cfc country a ------- parent us sub agency month y ------------------ ----------------------------------------- ---------------- ---------------------------------------------- ---------------------------------- -------------- dear --------------- in a letter dated x you requested rulings allowing cfc to use certain foreign statement insurance reserves in computing its taxable_income on grounds that these insurance reserves are an appropriate means of measuring income within the meaning of sec_954 specifically you requested permission to use the underwriting reserves and loss_reserves for life and annuity_contracts reported by cfc on its country a annual report the underwriting reserves and loss_reserves for noncancellable and guaranteed renewable accident and health contracts reported by cfc on its country a annual report and the underwriting reserves and loss_reserves and associated asset basis attributable to cfc’s separate_accounts as reported on its country a annual report the rulings given in this letter are based on facts and representations submitted by parent and cfc and accompanied by a statement executed under penalty of perjury by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process facts parent is a publicly-traded domestic_corporation that is engaged through its subsidiaries in various lines of business which primarily include domestic life_insurance asset management and international life_insurance parent directly and indirectly owns all the stock of us sub us sub directly and indirectly owns all the stock of cfc cfc was formed under the laws of country a and is engaged in the life_insurance business in country a cfc is a controlled_foreign_corporation as defined in sec_957 country a regulates any insurance_business conducted in country a through its insurance laws and regulations a government agency the agency is responsible for enforcing insurance laws and regulations in country a an insurance_company must obtain a license from the agency to conduct an insurance_business in country a cfc is licensed by the agency to sell life_insurance and annuity_contracts to residents of country a and is subject_to regulation by the agency as a life_insurance_company cfc is not engaged in any insurance_business outside of country a cfc derives more than percent of its aggregate net written premiums from its issuance of life_insurance and annuity_contracts covering risks in connection with the lives or health of residents of country a and with respect to which no policyholder insured annuitant or beneficiary is a related_person as defined in sec_954 cfc is prohibited by country a from carrying on non-life insurance businesses other than certain activities which are incidental to the life_insurance business the life_insurance and annuity_contracts issued by cfc are regulated as life_insurance and annuity_contracts by the agency parent has represented that cfc would be subject_to tax under subchapter_l if it were a domestic_corporation as part of its insurance_business cfc issues health and personal accident insurance contracts that are noncancellable or guaranteed renewable cancellable or are riders to a life_insurance_contract for country a tax and insurance regulatory purposes cfc treats these policies as life_insurance policies treats its underwriting reserves and loss_reserves attributable to these policies as life_insurance_reserves and computes the underwriting reserves and loss_reserves on these policies using a methodology similar to that of life_insurance_reserves cfc’s reserves for these policies are reported on the country a annual report required to be filed for regulatory purposes with the agency cfc also issues separate account-type variable life_insurance and annuity_contracts which are separately identified and maintained and supported by separately identifiable pools of assets the assets in such pools are marked to market for local regulatory reporting purposes and the associated reserves follow movements in the value of assets with limited exceptions for country a tax and insurance regulatory purposes cfc is required to make asset basis and reserve-related adjustments to its separate_accounts as required by country a’s insurance laws and regulations cfc files an annual report and financial statements with the agency the annual report of cfc is audited by an outside accounting auditor in addition to the company’s auditor the accounting_records of cfc that form the basis for preparing the annual report is subject_to inspection by the agency at any time the annual report of cfc is made available to the public cfc's annual report is used for financial purposes in addition to regulatory purposes such as for credit rating purposes month y is the official year-end for life_insurance_companies operating in country a to comply with country a’s insurance laws and regulations cfc must establish and maintain certain reserves for obligations to holders of their life_insurance and annuity_contracts and must set forth the amount of such reserves on the annual report these reserves are underwriting reserves including reserves for variable_contracts and loss_reserves the rules for calculating these reserves are prescribed by insurance laws regulations and other agency guidance and are summarized below underwriting reserves must be held to secure the performance of obligations arising in the future from the life_insurance and annuity_contracts issued by cfc in country a underwriting reserves are comprised of insurance premium interpolated terminal reserves unearned_premium reserves and risk reserves the sum of insurance premium reserves and unearned_premium reserves referred to as the standard valuation reserve for life_insurance and annuity_contracts may not be less than the amount calculated in accordance with the designations of the agency concerning the reserve_method interest rate mortality rate and other coefficients in accordance with required rules for life_insurance_companies conducting business in country a cfc sets forth the computation method for its underwriting reserves on its license application the computation method must be based on an actuarial calculation must be reasonable and appropriate and must conform to any other standards prescribed by the agency any change in the method of calculating such reserves requires advance notice to the agency and might not be allowed by the agency the agency requires life_insurance_reserves to be determined as follows the prescribed reserve_method for life_insurance is the net_level_premium nlp method the prescribed mortality_table is the standard mortality_table generated by the institute of actuaries of country a and the prescribed standard interest rate assumption is based on 10-year government bonds of country a cfc is also required to carry expense adjustments which are embedded in the underwriting reserve computation the agency requires fixed annuity reserves to be determined using the same assumptions as life_insurance_reserves except that a different mortality_table is prescribed under the prescribed rules for variable_annuity reserves the total of amounts credited to the separate_accounts for policyholders must be held as premium reserves notwithstanding that the nlp reserve_method is the agency-prescribed reserve_method the agency has granted cfc approval to use the account value as the reserve on account value products when the account value is used cfc's standard valuation reserves may be less than those reserves would be under the nlp reserve_method in such a case the agency also requires cfc to maintain additional special risk reserves currently cfc holds reserves determined under the nlp method cfc also holds reserves for account value products and special risk reserves comprising both mortality risk reserves and interest rate assumption risk reserves with respect to their account value reserves the account value reserves and special risk reserves of cfc are less than or equal to the reserve amount that would be computed under the nlp method cfc may also hold loss_reserves for outstanding claims including incurred but not reported claims under life_insurance and annuity_contracts issued by cfc cfc calculates the reserves using the company’s individual loss experience in accordance with rules and regulations prescribed by the agency in accordance with required rules for life_insurance_companies licensed to do business in country a cfc has appointed a qualified actuary to be involved in matters prescribed by the agency as actuarial matters including the method of calculating reserves the actuary must have knowledge and experience concerning actuarial matters and must meet requirements prescribed by the agency the actuary is required to submit a written opinion to the board_of directors of the company and to the agency concerning whether or not the reserves relating to the insurance contracts prescribed by the agency are established and maintained in accordance with actuarial soundness parent represents that cfc is not engaged in any insurance_business outside of country a any difference in the methods under country a law used to calculate the reserves related to an insurance_policy issued by cfc as compared to the methods used to calculate such reserves for the same insurance_policy under subchapter_l if cfc were a us insurance_company would not cause a material difference in the measurement of cfc’s income during the life of such policy and the foreign reserve_method used to calculate cfc’s underwriting reserves and loss_reserves is not contrary to the rules and principles applicable to the calculation of reserves under subchapter_l as modified by sec_954 law in general a united_states_shareholder of a controlled_foreign_corporation cfc must include in gross_income its pro_rata share of the cfc’s subpart_f_income for each year sec_951 subpart_f_income includes among other types of income insurance_income under sec_953 and foreign_base_company_income under sec_954 sec_952 and sec_953 defines the term_insurance income to include any income which is attributable to issuing or reinsuring of an insurance_or_annuity_contract and which would be taxed under subchapter_l if such income were the income of a domestic insurance_company sec_953 provides that sec_953 insurance_income does not include exempt_insurance_income derived by a qualifying_insurance_company sec_953 provides that reserves for any insurance_or_annuity_contract shall be determined in the same manner as under sec_954 sec_954 defines the term foreign_base_company_income to include among other types of income foreign_personal_holding_company_income sec_954 sets forth the types of income eg interest and dividends that are considered to be foreign_personal_holding_company_income sec_954 provides that for purposes of sec_954 foreign_personal_holding_company_income does not include qualified_insurance_income of a ualifying insurance_company in general sec_953 defines a qualifying_insurance_company as any controlled_foreign_corporation which a is subject_to regulation as an insurance_company by its home_country and is licensed authorized or regulated by the applicable_insurance_regulatory_body for its home_country to sell insurance or annuity_contracts to persons other than related_persons within the meaning of code sec_954 in such home_country b derives more than percent of its aggregate net written premiums from the issuance by such controlled_foreign_corporation of contracts covering applicable_home_country_risks of such corporation and with respect to which no policyholder insured annuitant or beneficiary is a related_person as defined in code sec_954 and c is engaged in the insurance_business and would be subject_to tax under subchapter_l if it were a domestic_corporation sec_954 defines the term qualified_insurance_income to mean income of a qualifying_insurance_company falling into two categories first income received from unrelated persons and derived from investments made by a qualifying_insurance_company or qualifying_insurance_company_branch collectively referred to as a qic either of its reserves allocable to exempt contracts or of percent of its unearned premiums from exempt contracts as both are determined in accordance with sec_954 sec_954 second income received from unrelated persons and derived from investments made by a qic of an amount of its assets allocable to exempt contracts equal to in the case of property casualty or health insurance contracts one-third of the premiums earned on those contracts during such year and in the case of life_insurance or annuity_contracts percent of the reserves described in sec_954 for such contracts sec_954 exempt contracts are defined under sec_953 to include insurance or annuity_contracts issued by a qualifying_insurance_company in connection with the lives or health of residents of a country other than the u s but only if such company derives more than percent of its net written premiums from otherwise exempt contracts which cover applicable_home_country_risks and with respect to which no policyholder insured annuitant or beneficiary is a related_person within the meaning of sec_954 sec_953 and sec_954 do not define the terms life_insurance or annuity_contract or property casualty or health contract sec_953 generally provides that for purposes of sec_953 and sec_954 the determination of whether a contract issued by a cfc is a life_insurance or annuity_contract shall be made without regard to sec_7702 if such contract is regulated as a life_insurance or annuity_contract by the corporation’s home_country and no policyholder insured annuitant or beneficiary with respect to the contract is a united_states_person sec_816 of the internal_revenue_code the code defines life_insurance_company as an insurance_company which is engaged in the business of issuing life_insurance and annuity_contracts or noncancellable contracts of health and accident insurance if- its life_insurance_reserves plus unearned premiums and unpaid_losses whether or not ascertained on noncancellable life accident or health policies not included in life_insurance_reserves comprise more than percent of its total_reserves sec_816 defines the term life_insurance_reserves for purposes of part i of subchapter_l of the code as amounts a which are computed on the basis of recognized mortality or morbidity tables and assumed rates of interest and b which are set_aside to mature or liquidate either by payment or reinsurance future unaccrued claims arising from life_insurance annuity and noncancellable accident_and_health_insurance contracts including life_insurance or annuity_contracts combined with noncancellable accident_and_health_insurance involving at the time with respect to which the reserve is computed life accident or health contingencies sec_954 generally provides that income credited under a separate account-type contract is allocable only to such contract sec_817 provides that with respect to any variable_contract reserves are adjusted by subtracting therefrom an amount equal to the sum of the amounts added from time to time for the taxable_year to the reserves separately accounted for by reason of appreciation in value of assets whether or not the assets have been disposed of and by adding thereto an amount equal to the sum of the amounts subtracted from time to time for the taxable_year from such reserves by reason of depreciation in value of assets whether or not the assets have been disposed of under sec_817 the basis of each asset in a segregated_asset_account is increased or decreased by the amount of appreciation or depreciation respectively to the extent the reserves or other items referred to in sec_817 are adjusted for purposes of part i of subchapter_l a life_insurance_company that issues variable_contracts shall separately account for the various income exclusion deduction asset reserve and other liability items properly attributed to such variable_contracts sec_817 sec_954 generally provides that in the case of life_insurance and annuity_contracts a qic’s reserves allocable to exempt contracts are equal to the greater of the net_surrender_value of the contract or the reserve determined under sec_954 sec_954 however provides the amount of the reserves under code sec_954 shall be the foreign statement reserve for the contract less any catastrophe deficiency equalization or similar reserves if pursuant to a ruling_request submitted by the taxpayer or as provided in published guidance the secretary determines that the factors taken into account in determining the foreign statement reserve provide an appropriate means of measuring income code sec_954 was enacted by sec_614 of the job creation and worker assistance act of the staff of the joint_committee on taxation explains this provision as follows the provision does however permit a taxpayer in certain circumstances subject_to approval by the irs through the ruling process or in published guidance to establish that the reserve for such contracts is the amount taken into account in determining the foreign statement reserve for the contract reduced by catastrophe equalization or deficiency reserve or any similar reserve irs approval is to be based on whether the method the interest rate the mortality and morbidity assumptions and any other factors taken into account in determining foreign statement reserves taken together or separately provide an appropriate means of measuring income for federal_income_tax purposes in seeking a ruling the taxpayer is required to provide the irs with necessary and appropriate information as to the method interest rate mortality and morbidity assumptions and other assumptions under the foreign reserve rules so that a comparison can be made to the reserve amount determined by applying the tax_reserve_method that would apply if the qualifying_insurance_company were subject_to tax under subchapter_l of the code with the modifications provided under present law for purposes of these exceptions the irs also may issue published guidance indicating its approval staff of the joint comm on taxation technical explanation of the ajob creation and worker assistance act of jcx-12-02 date analysis cfc is subject_to regulation as a life_insurance_company by country a cfc is licensed authorized and regulated by the agency which is the insurance regulatory body for country a to sell life_insurance and annuity_contracts to persons other than related_persons within the meaning of code sec_954 in country a cfc has represented that it derives more than percent of its aggregate net written premiums from its issuance of life_insurance and annuity_contracts covering risks in connection with the lives or health of residents of country a and with respect to which no policyholder insured annuitant or beneficiary is a related_person as defined in code sec_954 finally cfc is engaged in the life_insurance business and would be subject_to tax under subchapter_l if it was a domestic_corporation accordingly cfc is a qic cfc issues life_insurance and annuity_contracts in connection with the lives and health of residents of country a a country other than the u s such contracts are plr-123739-13 therefore exempt contracts within the meaning of sec_953 cfc uses the nlp method and another method that produces reserves not exceeding the nlp method for computing its foreign statement underwriting reserves and loss_reserves because the nlp method is a reasonable method for computing reserves the foreign statement reserves are an appropriate means of measuring income within the meaning of sec_954 cfc issued noncancellable and guaranteed renewable contracts and riders to life_insurance contracts as part of its life_insurance business for country a tax and insurance regulatory purposes cfc computes the underwriting and loss_reserves on these policies using a methodology similar to that used to compute life_insurance_reserves therefore the foreign statement underwriting reserves and loss_reserves for noncancellable and guaranteed renewable accident and health contracts are also an appropriate means of measuring income within the meaning of sec_954 cfc issued separate_account type contracts as part of its life_insurance business for country a insurance regulatory purposes cfc is required to mark-to- market its portfolio investment_assets held pursuant to its separate account-type contracts to adjust the basis of its marked portfolio investment_assets to fair_market_value and to adjust its underwriting reserves and loss_reserves to offset any gain loss attributable to the marked assets because these foreign statement insurance reserves are maintained under principles similar to sec_817 these reserves are also an appropriate means of measuring insurance_income within the meaning of sec_954 based on the information submitted and the representations made we rule as follows ruling sec_1 the foreign statement underwriting reserves including risk reserves and loss_reserves maintained by cfc with respect to its exempt life_insurance or annuity_contracts are an appropriate means of measuring income within the meaning of sec_954 the foreign statement underwriting reserves and loss_reserves maintained by cfc for its exempt noncancellable and guaranteed renewable accident and health contracts are an appropriate means of measuring income within the meaning of sec_954 the foreign statement insurance reserves maintained by cfc with respect to its exempt separate_account contracts are an appropriate means of measuring income under sec_954 caveats plr-123739-13 we express no opinion on any provisions of the code or regulations not specifically covered by the above ruling procedural statements this ruling is directed only to parent and cfc sec_6110 provides that it may not be used or cited as precedent parent should attach a copy of this ruling letter to its federal_income_tax return for the taxable years to which this letter applies in accordance with the power_of_attorney on file in this office a copy of this letter is being sent to your authorized representatives sincerely steven musher associate chief_counsel international by steven d jensen senior counsel branch office of associate chief_counsel international