t c memo united_states tax_court kurt anthony strode petitioner v commissioner of internal revenue respondent docket nos filed date on his and federal_income_tax returns p reported significant wage income from full-time employment and business_losses resulting from deductions claimed and for gross_receipts reported on schedules c profit or loss from business r issued notices of deficiency for both tax years in the notices r determined that the activity allegedly generating the gross_receipts reported and the expenses underlying the deductions claimed on p’s schedules c had not been engaged in for profit r further determined that p had not adequately substantiated the expenses underlying claimed deductions r also determined sec_6662 accuracy- related penalties for both years p contends that he engaged in his schedule c activity for profit and that he has adequately substantiated his expenses held p is liable for the deficiencies held further p is liable for the accuracy-related_penalties douglas e klein for petitioner willis b douglass eric m heller and jenny r casey for respondent memorandum findings_of_fact and opinion wherry judge respondent determined the following deficiencies in petitioner’s federal_income_tax and consequent sec_6662 accuracy-related_penalties determination deficiency penalty-- sec_6662 dollar_figure dollar_figure big_number big_number the issues presented for decision are whether for and the activity reported on petitioner’s schedule c profit or loss from business was an activity_not_engaged_in_for_profit within the meaning of sec_183 whether and to what extent petitioner is entitled to the deductions claimed on his schedules unless otherwise indicated all section references are to the internal_revenue_code_of_1986 code as amended and in effect for the tax years at issue and all rule references are to the tax_court rules_of_practice and procedure we round all amounts to the nearest dollar c for and and whether and to what extent petitioner is liable for sec_6662 accuracy-related_penalties for the tax years at issue findings_of_fact some of the facts and exhibits have been stipulated and are incorporated herein by this reference petitioner kurt anthony strode lived in california when he filed his petitions petitioner neither appeared nor testified at the trial and the only evidence submitted at the trial consists of the stipulated facts and exhibits respondent mailed separate notices of deficiency and petitioner filed separate petitions in this court for petitioner’s and tax years for the tax_year respondent mailed the notice on date and petitioner timely mailed his petition on date see sec_6213 sec_7502 the court assigned docket no to that petition case for the tax_year respondent mailed the notice on date and petitioner’s petition was timely filed on date see sec_6213 the court assigned docket no to that petition case we granted respondent’s motion to consolidate the and cases on date this court previously issued an opinion in two consolidated cases involving petitioner’s and tax years earlier cases and presenting facts and issues nearly identical to those now before us see strode v commissioner tcmemo_2012_59 103_tcm_1276 as to those tax years we agreed with the commissioner that p had not shown intcom was an activity engaged in for profit and because p reported no gross_receipts for intcom we disallowed his claimed deductions id t c m cch pincite n on date petitioner appealed our decisions to the u s court_of_appeals for the ninth circuit which assigned the cases docket nos and petitioner thereafter sought and obtained three consecutive stays of appellate proceedings pending our ruling in the and cases on date the stay was lifted the cases on appeal are now fully briefed but have not been set for argument during the tax years at issue petitioner worked at least hours per week as an attorney for and employee of monarch healthcare a medical group inc monarch the court takes judicial_notice of the state bar of california’s records reflecting that petitioner has been a member of the california bar since date petitioner filed form sec_1040 u s individual_income_tax_return for the and tax years on each of those returns he reported salary income presumably from monarch with each return he also filed a schedule c on which he claimed deductions for expenses and for reported limited gross_receipts the schedules c identified petitioner’s business activity as international consulting and the name of his business as intcom intcom’s business address is petitioner’s home address for the through tax years petitioner reported on his form sec_1040 salary income gross_income expenses and net_profit_or_loss from intcom and adjusted_gross_income as follows the copies of petitioner’s and income_tax returns admitted into evidence do not include forms w-2 wage and tax statement from intcom gross_income expenses net profit loss --- --- --- --- --- --- dollar_figure --- --- --- big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number adjusted_gross_income dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number year total salary income dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number respondent examined petitioner’s and tax returns in connection with or during respondent’s examination of the return petitioner sent respondent a document entitled attachment responses to questions on form 866-a sic in that document petitioner claimed the court admitted this document into evidence as exhibit 40-p over respondent’s objection because respondent conceded that a copy of the document was in the government’s administrative file in addressing respondent’s hearsay objection we noted that the document need not be introduced for its truth but for the purpose of proving its existence--ie that petitioner disputed respondent’s proposed adjustments to his tax_return in writing in the manner reflected in the document he introduced no evidence to corroborate the statements made in continued inter alia that intcom provides services such as i dentify ing potentially lucrative business opportunities that will generate substantial income and profit for intcom and its clients d etermin ing the best markets for your company’s products through isa and industrial analysis reports d evelop ing an effective marketing strategy for your product e valuat ing international competition i dentify ing legal and regulatory issues l ocat ing financing and development sic projects that support manufacturing and promotion of products and i dentify ing programs ie usaid exim bank world bank united nations etc this list also includes the entries n egotiat ing licens ing manufactur ing writ ing contracts and settl ing trade disputes and procurement and contract bid ding on subsequent pages the document describes various business ventures in which intcom allegedly engaged from through the listed ventures which range from establishing a beauty salon in to exploring the possibility of importing non-weapon military equipment in to exploring the continued the document we therefore treat the document as what it is the embodiment of petitioner’s claims concerning his intcom activity we give it less evidentiary weight than we would oral trial testimony having identical content because it was not subject_to cross-examination and because the court has had no opportunity in these cases or the earlier cases to evaluate petitioner’s credibility in both sets of cases he neither testified nor appeared for trial feasibility of investing in real_estate in and were generally sited in the philippines or in las vegas and had nearly all been abandoned the document describes intcom’s business plan as follows engage in international trade of u s companies into foreign markets engage in international trade of foreign companies into u s markets and invest in developing businesses in foreign markets all with the intent to produce income and profit some projects have specific business plans or prospectus sic for respondent determined that petitioner had not establish ed that the activity on schedule c was engaged in for profit and that the activity did not meet the guidelines of carrying_on_a_trade_or_business within the meaning of sec_162 respondent therefore disallowed all of the in his posttrial brief petitioner analogizes intcom to berkshire hathaway one of the largest publicly traded companies in the world whose controlling shareholder and chairman warren buffett consistently ranks among the world’s wealthiest people and has earned the moniker the sage of omaha for his striking business investment acumen although we agree with petitioner that berkshire hathaway operates as a conglomerate holding significant stakes in numerous other companies engaged in myriad lines of business we do not think petitioner’s comparison of intcom to that company an apt one from what little evidence petitioner introduced it appears that intcom does not operate any businesses the only ventures not described as having been abandoned are its ownership of an interest in a graphic design company headquartered in the philippines possible establishment of a filipino jewelry export business and alleged efforts to determine the feasibility of establishing a bakery to serve call center workers and a reit to invest in a real_estate project both in the philippines deductions petitioner had claimed on his schedule c as there was no gross_income in that year from this activity for respondent again determined that petitioner had not establish ed that the activity on schedule c was engaged in for profit and that he had in any event not substantiated the expenses underlying his claimed deductions as actually paid ordinary and necessary to his business or profession in addition to disallowing the deductions claimed on schedule c respondent moved petitioner’s dollar_figure of reported gross_receipts from intcom to his form_1040 as other income opinion as a general_rule the commissioner’s determination of a taxpayer’s tax_liability is presumed correct and the taxpayer bears the burden of proving that the determination is improper rule a 290_us_111 no sec_7491 or rule basis exists for deviating from the general_rule in these cases so petitioner bears the burden_of_proof i intcom’s for-profit status under sec_183 the code divides the universe of a taxpayer’s activities into two groups those engaged in for profit and those not engaged in for profit generally expenses attributable to activities in the first group are deductible whereas expenses attributable to activities in the second group are deductible only to the extent of the income they generate subject_to other limitations including those on deductions for personal expenses see sec_183 defining an activity_not_engaged_in_for_profit as any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 or under paragraph or of sec_212 thus an individual taxpayer may deduct ordinary and necessary expenses paid_or_incurred during the taxable_year for the production_or_collection_of_income sec_212 for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income sec_212 or in carrying on any trade_or_business sec_162 but if the activity generating the expenses the taxpayer seeks to deduct is not engaged in for profit no deduction attributable to such activity shall be allowed except for deductions that would be allowable regardless of the taxpayer’s profit_motive and a deduction equal to the amount of the deductions which would be allowable if the taxpayer had a profit_motive to the extent that his gross_income derived from the activity exceeds the deductions allowable regardless of profit_motive sec_183 and b respondent’s principal contention in these cases is that intcom was an activity_not_engaged_in_for_profit such that the foregoing sec_183 restriction applies under our caselaw as well as that of the u s court_of_appeals for the ninth circuit the key element that distinguishes an activity engaged in for profit from one not engaged in for profit is the taxpayer’s motive an activity is engaged in for profit if the taxpayer’s predominant primary or principal objective in engaging in the activity is to realize an economic profit independent of tax savings see 4_f3d_709 9th cir aff’g tcmemo_1991_212 an activity need not show a profit if the taxpayer has an actual and honest objective of making one see 78_tc_642 aff’d without published opinion 702_f2d_1205 d c cir so long as it is genuine the taxpayer’s profit expectation need not even be reasonable see id to ascertain a taxpayer’s motive we conduct a careful analysis of all the surrounding objective facts and greater weight is given to such facts than to his mere statement of intent id the regulations under sec_183 set forth a nonexclusive list of factors to be considered in determining whether an activity is engaged in for profit see sec this court follow s a court_of_appeals decision which is squarely in point where appeal from our decision lies to that court_of_appeals and to that court alone 54_tc_742 aff’d 445_f2d_985 10th cir when he filed his petition petitioner lived in california a state within the ninth circuit so we will follow decisions of that court_of_appeals that are squarely in point see sec_7482 b income_tax regs these factors are the manner in which the taxpayer carries on the activity the taxpayer’s expertise or that of his or her advisers the taxpayer’s time and effort expended on the activity the expectation that assets used in the activity may appreciate in value the taxpayer’s success in carrying on other similar or dissimilar activities the activity’s history of income or losses the amount of occasional profits if any from the activity the taxpayer’s financial status and the activity’s elements if any of personal pleasure or recreation for the taxpayer id as he did in the earlier cases petitioner in his posttrial brief challenges this regulation’s validity petitioner’s myriad objections may be loosely classified as challenges to the regulation’s validity either on its face or as applied with regard to the as-applied challenges petitioner is tilting at windmills there is no evidence in the record that respondent applied the standards or took the actions that petitioner claims he applied and did and we will not adjudicate hypothetical questions as for the on-its-face challenges--to wit petitioner’s contentions that sec_1_183-2 income_tax regs violates the regulatory flexibility act rfa u s c secs the administrative_procedure_act apa u s c secs and 467_us_837 --we found them so patently meritless in the earlier cases that we declined to even address them although the court sees no more merit in petitioner’s arguments on this round that petitioner has raised them again suggests he fails to see their flaws so we will briefly note them first the rfa applies only to rules for which a notice of proposed rulemaking is issued on or after date see rfa pub_l_no sec_4 stat pincite so the regulations under sec_183 which were published for notice and comment on date see fed reg date and issued in final form on date see fed reg continued this court regularly analyzes the foregoing factors among other facts and circumstances in cases in which the commissioner challenges the taxpayer’s claim of a profit_motive see eg metz v commissioner tcmemo_2015_54 continued date cannot be subject_to it second petitioner contends that the regulation violates the apa but has not alleged that in adopting the regulation the secretary failed to comply with any of the apa’s substantive provisions such as the notice-and-comment requirement see generally u s c sec_553 to the extent that petitioner desires to invoke the apa’s omnibus judicial-review provision which permits suit for violations of numerous statutes of varying character that do not themselves include causes of action for judicial review see lexmark int’l inc v static control components inc u s ___ ___ 134_sct_1377 petitioner has not clearly identified the statute he believes the secretary has violated he does assert that the regulation is at odds with sec_183 and or sec_162 and we agree that his reading of the regulation does not align with those statutes but petitioner’s reading of the regulation is entirely without foundation in its text the regulation does not require proof of any actual profit to establish a profit_motive nor has respondent taken the position that it does indeed the regulation does not require any particular form of proof at all rather the regulation’s list of factors purports to serve as no more than a guide it cautions that n o one factor is determinative that the list of factors is nonexclusive and that a determination should not be made on the basis that the number of factors indicating a lack of profit objective exceeds the number of factors indicating a profit objective or vice versa sec_1_183-2 income_tax regs a ll facts and circumstances with respect to the activity are to be taken into account id far from being arbitrary and capricious or contrary to law the regulation reflects a reasonable construction of sec_162 sec_183 and sec_212 and provides helpful guidance to taxpayers seeking to ascertain whether they may properly deduct expenses associated with a particular activity in any event the factors listed in the regulation were derived from caselaw see 72_tc_28 so even if the regulation were invalid which it is not we would consider the very same factors in deciding whether petitioner had a profit_motive at shah v commissioner tcmemo_2015_31 at savello v commissioner tcmemo_2015_24 at and the court_of_appeals for the ninth circuit has approved our application of the factors see eg 204_f3d_1214 9th cir wolf v commissioner f 3d pincite 645_f2d_784 9th cir aff’g tcmemo_1978_202 the regulation’s list of factors is nonexclusive and n o one factor is determinative sec_1_183-2 income_tax regs further we do not simply tally up the factors that favor each party’s position see id rather we take into account all facts and circumstances with respect to the activity assigning each fact or circumstance the weight appropriate to its overall context see id in an effort to divine from these objective facts ‘the taxpayer’s subjective intent’ wolf v commissioner f 3d pincite quoting 864_f2d_93 9th cir aff’g 88_tc_1086 we apply these principles to ascertain whether in and intcom was an activity engaged in for profit we conclude that it was not it is questionable whether intcom writ large is the proper focus for our analysis petitioner listed only one activity intcom on his schedules c but he claims that intcom has explored and in some cases launched a wide variety of business ventures under sec_1_183-1 income_tax regs for purposes of continued a the manner in which the taxpayer carries on the activity the fact that the taxpayer carries on the activity in a businesslike manner may indicate that the activity is engaged in for profit sec_1_183-2 income_tax regs what is relevant is whether the taxpayer maintained continued ascertaining whether a taxpayer has a profit_motive where the taxpayer is engaged in several undertakings each of these may be a separate activity or several undertakings may constitute one activity the court must consider all facts and circumstances to determine whether a taxpayer’s separate undertakings constitute one activity for purposes of sec_183 id these include the degree of organizational and economic interrelationship of various undertakings the business_purpose served by carrying on the various undertakings separately or together and the similarity of various undertakings id we also consider inter alia w hether the undertakings are conducted at the same place whether the undertakings were formed as separate businesses whether one undertaking benefited from the other the degree to which the undertakings shared management the degree to which one caretaker oversaw the assets of both undertakings whether the taxpayer used the same accountant for the undertakings and the degree to which the undertakings shared books_and_records see mitchell v commissioner tcmemo_2006_145 92_tcm_17 petitioner’s claims regarding intcom’s activities suggest that these activities should not be analyzed in the aggregate facts weighing against aggregation include that there was no apparent organizational or economic interrelationship among its activities that carrying on such a range of dissimilar activities served no evident business_purpose that none of intcom’s activities appears to have benefited from any other activity and that there is no evidence the undertakings maintained books_and_records let alone that these books_and_records were shared facts weighing in favor of aggregation include that intcom’s activities were largely conducted in two locations the philippines and las vegas and that the activities allegedly shared management although the relevant factors thus weigh heavily in favor of disaggregation because we would reach the same ultimate conclusion regardless we analyze intcom’s activities in the aggregate complete and accurate books_and_records whether the activity was conducted in a manner substantially_similar to other comparable businesses which are profitable and whether changes were attempted in order to improve profitability 72_tc_659 petitioner claims that r ecords are kept and that s ome of intcom’s ventures have specific business plans and or prospectus except for petitioner’s schedules c which are part of his federal_income_tax returns the record contains no evidence that petitioner prepared any budgets profit or loss statements balance sheets or other financial analyses for intcom and no evidence that he maintained any books of accounting for intcom as a whole or for any of its various ventures the only business plan petitioner offered into evidence consists of a vaguely worded sentence fragment in a document he prepared in connection with the audit of his return cf eg mcmillan v commissioner tcmemo_2013_40 at noting that although the taxpayer claimed to have a written business plan she did not present it at trial and did not attempt to orally explain her business plan during the trial although petitioner compares intcom to the famously profitable conglomerate berkshire hathaway this comparison does not survive even superficial scrutiny see supra note and even if it did petitioner has not established that intcom and berkshire hathaway conduct their activities in a substantially_similar manner petitioner further asserts that he a bandoned unsuccessful projects but there is no evidence that he changed his investment methodology or business practices in response to these failures in sum the record is devoid of the usual indicators of businesslike activity the evidence that is in the record--a hodgepodge of receipts credit card statements invoices and bills none of which bears any clear relationship to intcom’s alleged operations and all of which could as easily represent personal expenditures--is not indicative of a commercial venture cf eg metz v commissioner at describing how taxpayers used quickbooks for bookkeeping and hired a cpa firm to perform monthly bank reconciliations accounts-payable listings and monthly profit-and-loss statements hired legal counsel to prepare standard contracts prepared annual written business plans and extensively advertised and promoted their business as a result this factor favors respondent b the taxpayer’s expertise or that of his advisers preparation for the activity by extensive study of its accepted business economic and scientific practices or consultation with those who are expert therein may indicate that the taxpayer has a profit_motive where the taxpayer carries on the activity in accordance with such practices sec_1 b income_tax regs although a taxpayer need not make a formal market study he should undertake a basic investigation of the factors that would affect profit see westbrook v commissioner tcmemo_1993_634 66_tcm_1823 aff’d 68_f3d_868 5th cir see also burger v commissioner tcmemo_1985_523 50_tcm_1266 finding that taxpayers who undertook the activity with no concept of what their ultimate costs might be how they might operate at the greatest cost efficiency how much revenues they could expect or what risks could impair the generation of revenues did not operate in a businesslike manner aff’d 809_f2d_355 7th cir petitioner works full time as an attorney at a health care company he claims that intcom has an experienced and seasoned international management team and that it works with inter alia d iplomats u s attaché sic u s embassies foreign consulates trade organizations trade delegating sic international trade shows and various other resources within the united_states and abroad these generalized assertions carry little weight petitioner has offered in his posttrial brief petitioner makes additional claims concerning among other things his own experience and background and the identities of agencies continued no evidence of the qualifications of his alleged management team nor evidence that he himself possesses expertise relevant to eg launching startup businesses operating a bakery importing military hardware or investing in real estate--all of which intcom allegedly did or attempted to do petitioner contends that he retained consultants with the necessary expertise to identify lucrative opportunities and advise on abandoning projects that m a y not generate profits the evidence he provided to substantiate intcom’s claimed contract labor expenses consists entirely of receipts for and records of money transfers to a single individual avigel hernandez on two of the western union money transfer forms in the record petitioner identified ms hernandez as his girlfriend the record does not establish ms hernandez’s role in intcom her qualifications as an international business consultant or what services she performed for intcom petitioner’s monthly summary sheet included as an aspect of his substantiation evidence for date lists lunch at traders with continued with whom he allegedly consulted before launching intcom’s various ventures statements in briefs do not constitute evidence and cannot be used as such to supplement the record 99_tc_202 n see also rule c we disregard all factual assertions not supported by the evidence in the record consultant g ferrer et al discuss various legal business matters other monthly summary sheets list expenses exceeding dollar_figure for gifts of clothing to g ferrer and nichibei anime - gift to g ferrer for date and date respectively as with ms hernandez petitioner has not by the mere note client development established g ferrer’s role or qualifications or what services he or she performed for intcom otherwise the record does not disclose the existence identity or qualifications of any other consultant furthermore petitioner has not shown that on the front end he took any steps to investigate the factors that would affect the profitability of each new venture nor has he established that on the back end he explored the reasons for a venture’s failure and sought to learn from it so as to bring an end to intcom’s string of annual losses cf metz v commissioner at k nowledge of the activity itself apart from its economics is not enough to clear the hurdle a taxpayer must demonstrate expertise and attempts to improve results in a money- losing business thus this factor favors respondent c the taxpayer’s time and effort expended on the activity t hat the taxpayer devotes much of his personal time and effort to carrying on an activity particularly if the activity does not have substantial personal or recreational aspects or withdraws from another occupation to devote most of his energies to the activity may indicate an intention to derive a profit sec_1_183-2 income_tax regs petitioner had a full-time attorney job during the tax years at issue in the document he submitted to respondent objecting to respondent’s adjustments to his tax_return he claimed that he spent hours per week on intcom during in his posttrial brief he asserts that he devoted on average approximately hours per week petitioner introduced no evidence to corroborate either number although the evidence does show that petitioner traveled to the philippines he did not elaborate on the nature of his activities there and how they related to intcom’s profitability cf mitchell v commissioner tcmemo_2001_ 82_tcm_732 finding this factor neutral where the taxpayer worked on the farm to big_number hours per year but did not explain how the work he performed there related to making a profit a taxpayer need not personally devote substantial time to an activity if the taxpayer employs competent and qualified persons to carry on such activity sec_1_183-2 income_tax regs as noted above petitioner introduced evidence of money transfers to his girlfriend ms hernandez allegedly as payments for contract labor in connection with intcom but there is no evidence of what she did let alone whether she was competent and qualified the record is similarly devoid of evidence showing the competence or qualifications of any other alleged intcom consultant or employee this factor favors respondent d the expectation that assets used in the activity may appreciate in value the term profit encompasses appreciation in the value of assets such as land used in the activity thus the taxpayer may intend to derive a profit from the operation of the activity and may also intend that even if no profit from current operations is derived an overall profit will result when appreciation in the value of land used in the activity is realized since income from the activity together with the appreciation of land will exceed expenses of operation sec_1_183-2 income_tax regs petitioner contends that intcom t ook an equity position as payment for present and future services to a graphic design company allegedly launched in and that as of he continued to own stock in the company was on the board_of directors and acted as its legal counsel he did not introduce evidence that he was paid for his services or that the stock had increased in value since its acquisition or was likely to do so in future cf mcmillan v commissioner at where the taxpayer argued that she believed her activity’s only significant asset would appreciate in value but objective facts indicated this belief was wholly unfounded finding that this factor weighed in favor of respondent the record contains no other evidence concerning any assets used in intcom’s activities the appreciation of which might offset or exceed the continual losses from its operation this factor is neutral e the taxpayer’s success in carrying on other similar or dissimilar activities t hat the taxpayer has engaged in similar activities in the past and converted them from unprofitable to profitable enterprises may indicate that he is engaged in the present activity for profit even though the activity is presently unprofitable sec_1_183-2 income_tax regs aside from his involvement in intcom petitioner works full time as an attorney for monarch he earns substantial wage income from which we infer that he has proven at least reasonably successful in that role in our opinion in the earlier cases we noted that petitioner had apparently successfully run and operated a legal practice some elements of which may be similar to intcom’s needs see strode v commissioner tcmemo_2012_59 103_tcm_1276 he has not however introduced evidence that he has ever converted any enterprise from unprofitable to profitable or that he conducts intcom in a manner similar to legal work cf gardner v commissioner tcmemo_2014_148 at where the taxpayer had also engaged successfully in real_estate and insurance activities but introduced little evidence as to the manner in which he conducted these businesses finding this factor neutral this factor is neutral f the activity’s history of income or losses with respect to this factor sec_1_183-2 income_tax regs provides as follows a series of losses during the initial or start-up stage of an activity may not necessarily be an indication that the activity is not engaged in for profit however where losses continue to be sustained beyond the period which customarily is necessary to bring the operation to profitable status such continued losses if not explainable as due to customary business risks or reverses may be indicative that the activity is not being engaged in for profit if losses are sustained because of unforeseen or fortuitous circumstances which are beyond the control of the taxpayer such as drought disease fire theft weather damages other involuntary_conversions or depressed market conditions such losses would not be an indication that the activity is not engaged in for profit a series of years in which net_income was realized would of course be strong evidence that the activity is engaged in for profit petitioner has filed schedules c for intcom since at least so the activity was in at least its sixth and seventh years during the years at issue while it is plausible that the start-up stage for an international consulting business might embrace these years cf eg engdahl v commissioner t c pincite noting that t he start-up phase of an american saddle-bred breeding operation is to years we can only speculate on this point as petitioner introduced no evidence concerning it for the tax years at issue petitioner reported net losses from intcom of dollar_figure and dollar_figure five continuous years of net losses preceded them in each of the three subsequent years petitioner again reported net losses from intcom all evidence in the record indicates that intcom has never been profitable in fact petitioner reported gross_receipts from intcom on only of the consecutive income_tax returns in the record for petitioner reported earning gross_receipts of dollar_figure from intcom as against dollar_figure of expenses although intcom reported lesser net losses for through than it had in prior years it reported no income for those years as was true in the earlier cases t here is no indication that losses are subsiding with time see strode v commissioner t c m cch pincite or that intcom would be profitable in and or this factor favors respondent petitioner claims without any other proof that three of intcom’s ventures--a beauty salon and two livestock projects in the philippines--were abandoned because a typhoon destroyed their business_assets and because dollar_figure of profits was stolen during a robbery floods and theft would qualify as unforseen factors outside petitioner’s control we note however that for petitioner reported no gross_receipts let alone dollar_figure of profit on his schedule c and did not claim a theft_loss deduction in any event we considered his tax_year in the earlier cases g the amount of occasional profits if any from the activity the amount of profits in relation to the amount of losses_incurred and in relation to the amount of the taxpayer’s investment and the value of the assets used in the activity may provide useful criteria in determining the taxpayer’s intent sec_1_183-2 income_tax regs from the evidence in the record it appears that intcom has yet to turn a profit indeed according to its income_tax returns it has yielded income in only year of out of and then in an amount dwarfed by its expenses moreover nothing in the record indicates the source s of that income the dollar_figure of gross_receipts petitioner reported on his schedule c the only evidence of the income’s existence is the number on petitioner’s tax_return petitioner has not shown intcom actually generated these receipts thus he has not established that intcom’s operation has ever yielded income let alone profit petitioner contends that a bona_fide profit_motive may exist in the absence of profit we do not disagree but over time where no objective facts manifest a profit_motive the continual absence of profit--indeed the continual absence of income--renders the existence of such a motive increasingly less plausible this factor favors respondent h the taxpayer’s financial status on one hand that the taxpayer does not have substantial income or capital from sources other than the activity may indicate that an activity is engaged in for profit sec_1_183-2 income_tax regs on the other hand s ubstantial income from sources other than the activity particularly if the losses from the activity generate substantial tax benefits may indicate that the activity is not engaged in for profit id as we have explained t he regulation merely makes the commonsense point that the expectation of being able to arrange to have the tax collector share in the cost of a hobby may often induce an investment in such a hobby which would not otherwise occur see engdahl v commissioner t c pincite clearly the tax incentive for incurring large expenditures in a hobby-type business is much greater for one who has a great deal of income from other sources 59_tc_312 during and petitioner worked full time as an attorney he earned salary income of dollar_figure in and dollar_figure in netting his claimed losses from intcom against these figures reduced his adjusted_gross_income to dollar_figure for and to dollar_figure for petitioner had substantial income from another source and losses from intcom enabled him to cut his adjusted_gross_income approximately in half this factor favors respondent i the activity’s elements if any of personal pleasure or recreation for the taxpayer although it is not necessary that an activity be engaged in with the exclusive intention of deriving a profit or with the intention of maximizing profits a taxpayer’s personal motives in carrying on an activity may indicate that the activity is not engaged in for profit sec_1_183-2 income_tax regs nevertheless a business will not be turned into a hobby merely because the owner finds it pleasurable suffering has never been made a prerequisite to deductibility jackson v commissioner t c pincite the evidence in the record indicates that the activities petitioner attributes to intcom may have entailed substantial personal pleasure or recreation to him and that petitioner deducted as business_expenses expenditures he would have incurred regardless for personal reasons see sec_262 to substantiate the expenses underlying his claimed deductions he introduced reams of receipts credit card statements invoices and bills aside from the money transfers to ms hernandez allegedly for contract labor discussed above the underlying expenses apparently consist of among other things air travel ground transportation lodging meal and incidental_expenses petitioner incurred for travel to and within the philippines as well as for on one occasion coincident travel within that country by ms hernandez petitioner’s subscriptions to the los angeles times and to the magazines the week esquire golf and saveur cable internet and telephone service apparently for petitioner’s home as well as mobile telephone service petitioner’s auto health and life_insurance petitioner’s annual california bar membership dues charges associated with his mandatory continuing legal education mcle requirement and his membership fee for the divers alert network meals mailing and office supplies and foreign transaction fees and finance_charges imposed by various credit card providers as well as records of atm withdrawals made against credit cards petitioner’s travel records suggest that he made at least six trips to the philippines in and and that while there he stayed in hotels including manila’s makati shangri-la mandarin oriental hyatt hotel and casino and traders hotel on at least two occasions with a guest he enjoyed in-room minibars and room service and also dined out petitioner prepared and included a business travel expense report for each trip on which he described the trips’ petitioner’s substantiation evidence for his health and life_insurance premium payments consists of earnings statements provided by his employer monarch which deducted them from his paychecks purpose as uniformly a ssist client with b usiness o pportunities in philippines p ursue b usiness o ps the records themselves do not in any way support this claimed purpose on the contrary traveling to a foreign and perhaps exotic locale and staying in fine hotels is not an uncommon leisure activity these records could as easily substantiate petitioner’s vacations as business_expenses associated with intcom similarly his other records bear the hallmarks of personal expenses and he has made no attempt to explain how they relate to intcom many people enjoy reading the newspaper and magazines to which petitioner subscribed watching cable television and using the internet we doubt that he derived pleasure per se from his california bar membership from participating in mcle or from maintaining life health and auto insurance but even assuming that these expenses bore some relationship to intcom’s business an assumption that is dubious at best petitioner surely derived personal satisfaction or contentment from incurring and paying these expenses under the umbrella of intcom given that he would likely have had to incur and pay them in any event although life and health insurance were for the years at issue elective petitioner presumably needed to maintain his california bar membership to continue working as an attorney at monarch and california law obliged him to insure his vehicle cal veh code sec west supp in sum the evidence in the record suggests that intcom’s alleged activities may have yielded considerable pleasure to petitioner and may as likely have been personal as business_expenses see sec_162 sec_262 as is true in the present cases in the earlier cases petitioner did not testify at trial and no witness testified on his behalf we noted in our opinion that petitioner’s failure to introduce evidence ‘which if true would be favorable to him gives rise to the presumption that if produced it would be unfavorable’ strode v commissioner t c m cch pincite quoting 6_tc_1158 aff’d 162_f2d_513 10th cir the same presumption applies here this factor favors respondent j conclusion among the foregoing factors none provides an objective foundation for petitioner’s claim that he operated intcom with a subjective expectation of and motivation to obtain profit taking into account all of the relevant facts and circumstances we conclude that petitioner has not carried his burden of establishing that intcom was an activity engaged in for profit our opinion in dreicer v commissioner t c pincite supports this conclusion and provides a remarkably fitting coda to our analysis mr strode would have us find that he was like the wildcat driller or the inventor continuing his endeavors in the face of adverse results in the hope of one day reaping a large profit however such statement of intent is not supported by the objective facts of this case for many years he sustained large losses there was no realistic possibility that he could ever earn sufficient income from his activity to offset such losses he was able to continue to bear such losses only because of his large resources a review of the entire record fails to convince us that mr strode conducted his activities in a businesslike manner calculated to earn a profit rather there is a strong indication that he enjoyed his life of travel we will sustain respondent’s disallowance of petitioner’s claimed schedule c deductions for and except as otherwise determined below ii availability of deductions under sec_183 sec_183 allows a taxpayer two categories of deductions with respect to an activity_not_engaged_in_for_profit under sec_183 the taxpayer may deduct expenses attributable to the activity to the extent the code allows them regardless of the activity’s for-profit status under sec_183 a taxpayer may deduct expenses attributable to an activity_not_engaged_in_for_profit to the extent that they do not exceed his gross_income from the activity for that year reduced by the amount_of_deductions allowable under sec_183 and would have been allowable under the code had the activity been engaged in for profit in other words sec_183 permits the taxpayer to deduct expenses that would be allowable under sec_162 sec_212 and or if the activity were engaged in for profit subject_to a cap equal to gross_income from the activity less sec_183 deductionsdollar_figure deductions are a matter of legislative grace and taxpayers bear the burden of proving entitlement to any claimed deduction rule a 503_us_79 a taxpayer must identify each deduction any deductions allowable under sec_183 are subject_to the limit of sec_67 ie as ‘miscellaneous itemized deductions’ allowable only to the extent that in the aggregate they exceed percent of adjusted_gross_income because they are not among those excluded from that limit by sec_67 bailey v commissioner tcmemo_2012_96 103_tcm_1499 aff’d wl 1st cir see also eg 39_fedclaims_413 d eductions solely permitted pursuant to sec_183 are miscellaneous_itemized_deductions sec_1_67-1t temporary income_tax regs fed reg date examples of expenses that if otherwise deductible are subject_to the 2-percent floor include but are not limited to e xpenses for an activity for which a deduction is otherwise allowable under sec_183 shifting petitioner’s allowable deductions with respect to intcom if any from schedule c to schedule a itemized_deductions aligns with respondent’s determination in the notice_of_deficiency transferring the dollar_figure of gross_receipts petitioner reported on schedule c to form_1040 line other income petitioner has not established specifically what intcom did to earn the alleged gross_receipts and from whom and under what circumstances it received them petitioner has not specifically disputed respondent’s determination regarding the gross_receipts and we will sustain it available show that he or she has met all requirements therefor and keep books_or_records that substantiate the expenses underlying the deduction sec_6001 62_tc_834 the fact that a taxpayer claims a deduction on an income_tax return is not sufficient to substantiate the underlying expense 71_tc_633 rather an income_tax return is merely a statement of the taxpayer’s claim it is not presumed to be correct roberts v commissioner t c pincite a sec_183 deductions the court has reviewed the expenses reported on petitioner’s and schedules c and the evidence he submitted to substantiate them for we have identified no expenses for which deductions are permitted by the code regardless of profit_motive and thus allowable under sec_183 for however we have found two types of expenses that meet this test under sec_170 a taxpayer may deduct any charitable_contribution made during the taxable_year but only if the contribution is verified under regulations prescribed by the secretary a charitable_contribution is a contribution or gift_for the use of a donee identified in sec_170 sec_170 the secretary’s regulations call for verification of a cash charitable_contribution with a canceled check a receipt letter or other communication from the donee showing the organization’s name and the amount and date of the contribution or other reliable written records sec_1_170a-13 income_tax regs petitioner claimed dollar_figure of d onations as an other expense on his schedule c after perusing petitioner’s substantiation evidence we have found adequate documentation for dollar_figure of the claimed amount specifically petitioner introduced a receipt from kpfk radio showing total payments during of dollar_figure p remiums of dollar_figure provided in exchange and a net deductible amount of dollar_figure the tax identification_number listed on the receipt is that of pacific foundation radio which was in a qualified_organization within the meaning of sec_170 petitioner’s summary sheet for his date intcom expenses indicates that he made the donation on date he may deduct this dollar_figure charitable_contribution on schedule a in addition to the dollar_figure he originally claimed on that schedule under sec_212 an individual taxpayer may deduct all ordinary and necessary expenses paid_or_incurred during the taxable_year in connection with the determination collection_or_refund_of_any_tax in addition to the dollar_figure deduction for tax preparation fees petitioner claimed on schedule a he deducted dollar_figure for a ccounting as an other expense on schedule c among the items petitioner provided to substantiate his intcom expenses are an invoice from william wagstaff income_tax shelter reflecting a dollar_figure fee for the preparation of petitioner’s federal and california income_tax returns with dollar_figure shown as paid and dollar_figure as due and four canceled checks from petitioner to mr wagstaff for an aggregate amount of dollar_figure with notations on the memo lines indicating that they were for a retainer the balance of mr wagstaff’s fee for preparing petitioner’s tax returns and something related to tax mr wagstaff signed petitioner’s and form sec_1040 as the returns’ paid preparer it appears that petitioner double-counted his initial dollar_figure payment to mr wagstaff and respondent has not disallowed his schedule a deduction for that amount we conclude however that petitioner has adequately substantiated an additional dollar_figure of ordinary_and_necessary_expense paid_or_incurred during in connection with the determination of his tax obligations in sum under sec_183 for petitioner is entitled to an additional dollar_figure charitable_contribution_deduction and an additional dollar_figure deduction for tax_return preparation b sec_183 deductions for two reasons petitioner is not entitled to any deductions under sec_183 first deductions under sec_183 are limited to gross_income from the not-for-profit activity less deductions allowable under sec_183 petitioner reported no gross_receipts from intcom for for he reported gross_receipts of dollar_figure and we have already allowed a greater amount of expense under sec_183 consequently his sec_183 limitation is zero for both years second with the exception of those allowed above petitioner has not adequately substantiated his reported intcom expenses pursuant to sec_162 a taxpayer may deduct all of the ordinary and necessary business_expenses paid_or_incurred during the taxable_year in carrying on the taxpayer’s trade_or_business 79_tc_1 to qualify as an allowable deduction under section a an item must be ‘paid or incurred during the taxable_year ’ be for ‘carrying on any trade_or_business ’ be an ‘expense ’ be a ‘necessary’ expense and be an ‘ordinary’ expense 403_us_345 a taxpayer must establish these essential elements with credible_evidence see sec_1_6001-1 income_tax regs deductions are allowed under sec_212 and for ordinary and necessary expenses paid in connection with an activity engaged in for the production_or_collection_of_income or for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income a taxpayer must satisfy a heightened substantiation requirement with respect to certain types of expenses sec_274 provides that no deduction shall be allowed for among other things traveling expenses entertainment_expenses gifts and expenses with respect to listed_property as defined in sec_280f and including passenger automobiles computer equipment and in the years at issue and up until cellular telephones unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement the amount of the expenditure or use the time and place of the expenditure or use the business_purpose of the expenditure or use and the business relationship to the taxpayer of the party entertained using the facility or receiving the gift sec_274 while business_expenses and expenses for the production_of_income are generally deductible personal_living_and_family_expenses are typically nondeductible see sec_262 a business_expense claimed as a deduction must be incurred primarily for business rather than personal reasons see 72_tc_433 where an expense exhibits both personal and business characteristics the test requires a weighing and balancing of all the facts bearing in mind the precedence of sec_262 which denies deductions for personal expenses over sec_162 which allows deductions for business_expenses 66_tc_515 citing costs of commuting and ordinary clothing as examples of expenses helpful and necessary to an individual’s employment that are essentially personal and hence nondeductible aff’d per curiam 591_f2d_1273 9th cir petitioner’s remaining reported expenses are not deductible under these rules for purposes of sec_162 one critical element is missing from petitioner’s substantiation evidence he has not established with credible_evidence that the expenditures_for which he claimed deductions on his schedules c were directly connected with or pertaining to his trade_or_business see sec_1_162-1 income_tax regs indeed he has not established with credible_evidence that intcom was yet a trade_or_business moreover turning to sec_274 several categories of petitioner’s expenses including but not limited to his mobile telephone travel gifts and meal expenses are subject_to heightened substantiation requirements see sec_274 280f d i ii v petitioner’s evidence does not fulfill his burden of substantiating the business_purpose of any of the documented expenditures_for purposes of sec_212 and the record is silent as to the source of petitioner’s dollar_figure of income from intcom so we cannot ascertain whether any of his expenses were ordinary and necessary for the production or collection of that income finally in reference to sec_262 as discussed supra pp petitioner’s claimed intcom expenses exhibit characteristics of personal expenses and he has not established that he incurred them primarily for business rather than personal reasons see walliser v commissioner t c pincite for all of these reasons we conclude that petitioner has not adequately substantiated any of the expenses claimed on his schedule c other than those we have found deductible under sec_183dollar_figure iii accuracy-related_penalty under sec_6662 in each of the notices of deficiency respondent determined an accuracy- related penalty under sec_6662 and b and on the basis of negligence or disregard of rules and regulations a substantial_understatement of we have considered and rejected the possibility that petitioner’s california bar membership dues and mcle expenses may have been deductible under sec_67 and sec_162 as unreimbursed employee business_expenses related to his employment as an attorney for monarch it is well settled that an employee may not deduct otherwise valid unreimbursed business_expenses if the employee is entitled to reimbursement from his or her employer for such expenditures 788_f2d_1406 9th cir aff’g tcmemo_1984_533 48_tcm_1295 79_tc_1 an employee taxpayer bears the burden of proving that claimed business_expenses were not reimbursable by his or her employer see christine v commissioner tcmemo_2010_144 99_tcm_1591 aff’d 475_fedappx_259 9th cir petitioner has not met that burden here income_tax or a substantial_valuation_misstatement as a general_rule the commissioner bears the burden of production and must come forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty 116_tc_438 see also sec_7491 once the commissioner has met this burden of production the burden will shift to the taxpayer to prove that he has an affirmative defense or that he is otherwise not liable for the penalty see higbee v commissioner t c pincite sec_6662 and b and provides for the imposition of a penalty on the portion of an underpayment_of_tax attributable to negligence or disregard of rules and regulations or a substantial_understatement_of_income_tax respectively ‘ n egligence’ includes any failure to make a reasonable attempt to these represent alternative grounds for imposition of the penalty as the accuracy-related_penalties do not stack see sec_1_6662-2 income_tax regs sec_6662 and b provides for the imposition of a penalty on the portion of an underpayment_of_tax required to be shown on a return that is attributable to a substantial_valuation_misstatement for returns filed after date as is relevant here a substantial_valuation_misstatement occurs when the value of any property or the adjusted_basis of any property claimed on any return of tax_imposed_by_chapter_1 i sec_150 percent or more of the amount determined to be the correct amount of such valuation or adjusted_basis as the case may be sec_6662 the notice_of_deficiency does not explain what property’s value or adjusted_basis was allegedly misstated respondent did not discuss this issue at trial and has not addressed it on brief as the court can find no basis for this penalty in the record we find petitioner not liable for the substantial_valuation_misstatement penalty comply with the provisions of the internal_revenue_code sec_6662 it is ‘a lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under the circumstances ’ 89_tc_849 quoting marcello v commissioner 380_f2d_499 5th cir aff’g 43_tc_168 and t c memo aff’d 904_f2d_1011 5th cir aff’d 501_us_868 ‘negligence’ also includes any failure by the taxpayer to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs disregard of rules and regulations includes any careless reckless or intentional disregard of the code the regulations or certain irs administrative guidance id subpara a substantial_understatement_of_income_tax as to an individual taxpayer is generally an understatement that exceeds the greater of dollar_figure or of the tax required to be shown on the return sec_6662 respondent did not specifically address the negligence_penalty at trial or on brief nevertheless we note that petitioner’s failure to adequately substantiate expenses underlying any of his claimed schedule c deductions constitutes negligence for purposes of sec_6662 see sec_1_6662-3 income_tax regs likewise attempt s to deduct personal expenses in contravention of the plain language of sec_262 constitute negligence bond v commissioner tcmemo_2012_313 at fn ref omitted accord eg cor v commissioner tcmemo_2013_240 at wsb liquidating corp v commissioner tcmemo_2001_9 81_tcm_1007 petitioner failed to establish any business_purpose for the expenses he sought to deduct on schedule c nearly all of which had a personal character respondent has satisfied his burden of production with regard to the negligence_penalty he has also met that burden with regard to the substantial_understatement_penalty on his form sec_1040 petitioner reported total_tax of dollar_figure for and dollar_figure for we have concluded above that we will sustain all of respondent’s adjustments in the notices of deficiency to petitioner’s and income_tax returns as recomputed in the notice_of_deficiency petitioner’s total_tax liability for was dollar_figure therefore for petitioner understated his income_tax by dollar_figure which is more than both dollar_figure and of the tax required to be shown on his return as recomputed in the notice_of_deficiency petitioner’s total_tax liability for was dollar_figure and his understatement of income_tax was dollar_figure those recomputed numbers do not in the notice respondent determined that petitioner was not entitled to the dollar_figure making work pay and government_retiree_credit he had claimed on his tax_return and so reduced the amount of tax reported on the return from dollar_figure to dollar_figure take into account the additional schedule a deductions allowed in this opinion but even leaving aside that the additional sec_212 deduction will be subject_to the haircut it is readily apparent that petitioner’s understatement will exceed both dollar_figure and of his tax_liability consequently he is liable for the accuracy-related_penalty for underpayments attributable to substantial understatements of income_tax for both tax years petitioner did not specifically dispute the penalties in his petition presented no evidence or argument concerning them at trial and did not address them in his posttrial brief he has not proved that he has an affirmative defense or that he is otherwise not liable for the penalties see higbee v commissioner t c pincite so we will sustain respondent’s determination of the penalty for both tax years the court has considered all of the parties’ contentions arguments requests and statements to the extent not discussed herein we conclude that they are meritless moot or irrelevant to reflect the foregoing decisions will be entered under rule


office_of_chief_counsel internal_revenue_service memorandum number release date cc pa br6 jcschwartz gl-116854-07 uilc date date to ---------------------------- ---------------------------------------- --------------- small_business self-employed cc sbse from richard goldman branch chief procedure administration cc pa br6 subject disclosure in state tax proceeding this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend taxpayer a and b -- ------------------------------------------ state g - ------ state g tax agency - ------------------------------------- state g tax agency component - ---------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- issue sec_1 whether a state may redisclose to the irs the tax information it received from the irs under sec_6103 in order for the irs to assist the state in making disclosure determinations in a state tax_administration proceeding gl-116854-07 whether a state may redisclose in a state tax_administration proceeding tax information it received from the irs under sec_6103 conclusion sec_1 yes a state may share with the irs tax information the irs has disclosed to the state under sec_6103 in fact when entering into information sharing agreements with the irs states agree to consult with the irs prior to disclosing tax information in a state tax_administration proceeding state tax officials state are authorized under sec_6103 to disclose returns and return_information in a state tax proceeding only that tax information that meets the requirements of sec_6103 b or c may be disclosed pursuant to information sharing agreements entered into between the state and the irs the irs must be consulted prior to disclosure of tax information in a state tax_administration proceeding so the irs can determine whether disclosing the tax information will seriously impair a civil or criminal tax investigation and advise the state to object to such disclosure under sec_6103 if impairment is a possibility facts petitioners a and b are involved in a state judicial tax proceeding before the state g tax commission in the state tax proceeding petitioners served interrogatories and requests for production of documents on respondent the state g tax agency component respondent failed to produce all records requested by petitioner claiming that any such disclosure would violate sec_6103 the provision under which the respondent received the information from the irs petitioners have filed a motion to compel production of the documents and respondent has asked the irs assist in responding to the motion to compel according to the motion to compel the petitioners allege that the respondent has relied on documents and information received from the irs in making its determination that petitioners underpaid state income taxes also according to the motion to compel the respondent has refused to produce certain of the documents and information received from the irs state g tax agency like those of all other states has an agreement on the coordination of tax_administration with the irs for the sharing of return_information under sec_6103 under the terms of this agreement the respondent on december and date requested the return_information of specifically identified individuals the irs responded by providing information and authorizing specified irs employees to discuss the cases of the taxpayers requested by the respondent this office has not seen the information provided to respondent nor have we seen an accounting of the information provided to respondent we have been told by respondent that the information provided by the irs was responsive to the requests gl-116854-07 made under sec_6103 this office also has not seen a copy of the interrogatories and requests for production of documents underlying this motion to compel based on information received from your office we understand that information provided by irs to respondent is responsive to the discovery requests according to your date memorandum to this office while the state g attorney general’s office has requested irs assistance in responding to the motion to compel it has been reluctant to supply the responsive information to your office as it is concerned doing so would violate sec_6103 thus you have received a request to provide assistance but lack the information to do so law and analysis sec_6103 provides in general returns and return_information with respect to taxes imposed by chapter sec_1 and and subchapter_d of chapter shall be open to inspection by or disclosure to any state_agency body or commission or its legal_representative which is charged under the laws of such state with responsibility for the administration of state tax laws for the purpose of and only to the extent necessary in the administration of such laws such inspection shall be permitted or such disclosure made only upon written request by the head of such agency body or commission and only to the representatives of such agency body or commission designated in such written request as the individuals who are to inspect or to receive the returns or return_information on behalf of such agency body or commission however such return_information shall not be disclosed to the extent that the secretary determines that such disclosure would identify a confidential informant or seriously impair any civil or criminal tax investigation each state including state g has entered into two agreements with the irs referred to generally as the basic and implementing agreements to put into place information sharing programs between the state and the irs in accordance with sec_6103 while these agreements serve to establish routine bulk sharing of certain agreed upon information between the state and the irs the agreements also establish a procedure for the state to request information on an individual basis where appropriate based on what we have received from your office it appears as though information requested under such individualized sec_6103 requests is what is at issue here sec_6103 provides gl-116854-07 disclosure in judicial and administrative tax proceedings a return or return_information may be disclosed in a federal or state judicial or administrative_proceeding pertaining to tax but only - a if the taxpayer is a party to the proceeding or the proceeding arose out of or in connection with determining the taxpayer’s civil or criminal liability or the collection of such civil liability in respect of any_tax imposed under this title b if the treatment of an item reflected on such return is directly related to the resolution of an issue in the proceeding c if such return or return_information directly relates to a transactional relationship between a person who is a party to the proceeding and the taxpayer which directly affects the resolution of an issue in the proceeding or however such return or return_information shall not be disclosed as provided in subparagraph a b or c if the secretary determines that such disclosure would identify a confidential informant or seriously impair a civil or criminal tax investigation thus under the authority and in accordance with the requirements of sec_6103 a state or its representatives can use the tax information received under sec_6103 in a state judicial or administrative_proceeding pertaining to tax the current proceeding in which the motion to compel is pending is such a state judicial proceeding pertaining to tax respondent therefore is authorized to use and disclose the information it received from the irs pursuant to its request under sec_6103 in the proceeding including in response to discovery requests irm dollar_figure contains procedures that are agreed to by the state and irs when entering into the basic and implementing agreements for sharing of tax information that must be followed when federal returns or return_information are to be disclosed in a state tax_administration proceeding a state is obligated to notify the irs in writing of its intention to disclose any such returns or return_information in a state judicial proceeding or to any party other than the taxpayer or his her designee in a state administrative_proceeding irm the notice required to be sent at least days prior to disclosure to the disclosure_office or manager from which the information was originally received must include certain details about the information to be disclosed including names and other identifying information tax periods and type of tax involved a description of the information to be disclosed the purpose for which the proceeding is to be conducted and the manner in which the provision of sec_6103 will apply irm thus not only does sec_6103 permit respondent to share the information with the irs in making decisions about responding to discovery requests gl-116854-07 but respondent is obligated to notify consult and share information with the irs in making such disclosures prior to the initial disclosure to the state the irs should have reviewed the responsive information to ensure it is not covered by a tax_treaty or sec_6105 wagering tax information under sec_4424 bank secrecy act information governed by the bank secrecy act re-dissemination guidelines grand jury information or information obtained under immunity procedures as all of this information should not be disclosed to the state the irs disclosure official receiving the notice about redisclosure however should ensure that none of the information falls within these categories irm and irm additionally the disclosure official reviewing the information must ensure that if redisclosed in the state tax proceeding the information would not identify a confidential informant or seriously impair a civil or criminal tax investigation even if such potential impairment did not exist at the time of the initial disclosure of returns and return_information to the state irm and irm states will be advised to edit any documents which they intend to disclose in a judicial or administrative tax proceeding in order to delete federal returns and return_information where their disclosure is not permitted by sec_6103 irm thus if the irs determines that disclosure of the information in the state judicial proceeding will seriously impair a civil or criminal tax investigation even if the impairment did not exist at the time the information was released to the respondent it can direct respondent to withhold the information under sec_6103 likewise the irs is charged with assisting respondent to ensure that all provisions of sec_6103 are met prior to disclosure this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions furthermore this office has previously opined and it has been memorialized in the irm that the sec_6103 need to know access extends to federal tax information disclosed to other agencies under title_26 irm thus even if the agreements between the state and the irs regarding the disclosure of information under sec_6103 and the subsequent use of that information under sec_6103 did not require notification consultation and sharing of the information sec_6103 authorizes the appropriate irs employees access to that information when they need to know it for tax_administration reasons


sn g45 oe -0 internal_revenue_service department of the treasury washington dc contact person telephone numbe in reference to datgtjn _ op eeo tf f i e w dear sir or madam this is in reference to your letter of date requesting advance approval of your grant procedures under sec_4945 of the internal_revenue_code the information submitted shows that the grants will be administered by f program the c and or the d option a publicly_supported_organization under its b organizations operating under the b program may elect for purposes of the c scholarship awards option f selects after the test the initial phase of the competition is the x test individual scholarship recipients in the b program through a competition which is given annually in participating high schools by high school officials students scoring in a group that represents the top two percent of graduating high school seniors nationwide and designates a number that represents less than one percent of the graduating high school seniors in each state as semifinalists semifinalists then take a second test earlier performance those who repeat their prior performance who demonstrate high academic standing in high school and who meet other standard requirements are designated as finalists f identifies and honors to confirm their the y f's selection procedures in its d scholarship awards opr ron generally parallel those applied in the option howeve eligibility in the d option is limited to the top - scoring black students feast four geographic reaions each semifinalists in the d option designated i at tag f according to the distribution of the black population throughout the united_states you have entered into an agreement with f whereby you have e to under the b program f the actual number of b scholarships to be supported agreed to sponsor a specific number of scholarships each year be awarded to children of employees of may award scholarships only to students who are designated as finalists by you will not exceed the number of employees' children who qualify as finalists in their respective competitions list of finalists is obtained f reviews the finalist group to determine which students are eligible for grants under an employer related scholarship program no application is required from the students to enter the b program therefore neither you nor f can determine the number of eligible applicants there is qualify as finalists the total number of scholarships to be awarded in a particular year is automatically reduced or some foundations may permit scholarships to be offered to finalists who are not children of employees employers to ensure a sufficiently large base of employees' children from which at least one or more b finalists would ordinarily be expected to emerge than one out of one hundred seventy-five students in class achieves the b finalist level an insufficient number of employees children who this is necessary since fewer f monitors participating after the a senior if the selection of individual grant recipients is made by f confirms the individual scholarship recipient's selection committees designated by f selection committee are totally independent and separate from you enrollment at award through the appropriate financial aid office of the educational_institution and supervises and investigates the use of the grant funds by the recipients in their educational program the educational_institution makes payment of the the members of the the scholarships will not be used as a means of inducement to recruit employees nor will a grant be terminated if employee parent leaves the company awarded to students who plan to enroll in an institution that meets the requirements of sec_170 b and which may further be limited by f awarded the recipient will not be restricted in his her course of study selection to individuals who propose to study in certain broad fields enable you f witli supply statistical information to you which will a ii of the code after the scholarship is ta maintain the records required by rev in rare cases sponsors may ask f scholarships will only be prac to give preference in gto an x sec_4945 of the code provides for the imposition of taxes on each taxable_expenditure of a private_foundation sec_4945 d of the code provides that the term taxable_expenditure means any amount_paid or incurred by a private_foundation as or other similar purposes by such individual unless such grant satisfies the requirements of sec_4945 a grant to an individual for travel study sec_4945 of the code provides that section shall not apply to an individual grant awarded on an d objective and nondiscriminatory basis pursuant to a procedure approved in advance by the secretary if is demonstrated to the satisfaction of the secretary that the grant constitutes a scholarship or fellowship_grant which is subject_to the provisions of sec_117 and is an educational_organization described in sec_170 b a ii to be used for study at it revproc_76_47 1976_2_cb_670 sets forth guidelines to a scholarship grant subject_to the provisions of section be used in determining whether a grant made by a private_foundation under an employer-related program to a child of employee of the particular employer to which the program relates i sec_117 conditions set forth in sections dollar_figure through dollar_figure of rev and meets the percentage_test described in sec_4 the service will assume the grant will be subject_to the provisions of sec_117 a private foundation's program satisfies the seven proc an if section dollar_figure of revproc_76_47 provides a percentage_test a program that awards it states that in the case of guideline grants to children of employees of program meets the percentage_test if the number of grants awarded under that program in any year to such children does not exceed percent of the number of employees' children who eligible ii were applicants for such grants and considered by the selection committee in selecting the recipients of grants in that year or percent of the number of employees' children who can be shown to be eligible for grants not they submitted an application in that year a particular employer the whether or i iii were were as stated in sec_4 of revproc_76_47 if a sponsor's program satisfies the seven conditions set forth in sections dollar_figure through but does not meet the percentage_test of section dollar_figure applicable to grants to employees’ children the question whether the grants are scholarship or fellowship grants subject_to the provisions of sec_117 on the basis of all determination the service will consider as percentage_test the facts and circumstances be resolved in making this of the code will a substitutes for ane of section dollar_figure all the relevant facts the to provide extra compensation or other employment circumstances to determine whether the primary purpose of the program is incentive or whether the primary purpose is recipients in their individual capacities circumstances will be considered in the context of the probability that a grant will be available to any eligible applicant these facts and to educate such relevant facts and circumstances could include the history of the program such as the source of the program's funding the courses of study for which the grants are available any eligibility requirements imposed by the program other than employment of the applicants or their parents and the age and grade level prerequisites for the studies for which the grants are available the publicity given the grant program the degree of independence of the selection committee the particular standards used for selection the specific means used to determine whether those standards have been met nature of the employee limitation or preference the number of grants available the number of employees or their children who would be eligible for them the percentage of eligible employees er their children applying for grants who normally eg average basis receive grants under the program and whether and how many grants are awarded to individuals who do not qualify as employees or children of employees the precise on an in this instance the following facts and circumstances are no application is required aside from the employment preference f considered relevant public charity operates its private_foundation sponsored b program in a substantially_similar manner to its nationwide college scholarship program for academically talented high school students individuals must achieve finalist status in their respective competitions recipients are chosen by selection committees totally independent of the private_foundation or the employer involved no limitations are placed on the recipients' choice of course of study after the grant is awarded number of employees' children who qualify as finalists f provided an average of one scholarship for every big_number employees' children in its programs the number of actual grants made may not exceed the in a under the facts and circumstances as stated above there is only an insignificant probability that any particular employee's child will be selected and the grant's primary purpose is not one of providing extra compensation or other employment incentive and facets and circumstances test thus proc sec_4 rev the of is met accoreinialy based upon the information presented and vssuming your scholarship program will be soandueted as proposed cf ‘ r e o with a view to providing objectivity and non-discrimination in the awarding of scholarship grants we rule that your grants to for the awarding of scholarship grants to children of employees of code procedures will not constitute taxable_expenditures within the meaning of sec_4945 e comply with the requirements of sec_4945 such expenditures made in accordance with those of the code of the thus f the recipient of the scholarship is responsible for determining whether all or part of the scholarship is includible in gross_income under sec_117 of the code that f will advise the recipient that amounts granted are taxable_income if the aggregate scholarship amounts received by the recipient exceed tuition and fees required for enrollment or attendance at the educational_institution and fees books supplies and equipment required for courses of instruction not including room and board we understand this ruling will remain in effect as long as the procedures in awarding grants under your program remain in compliance with sections dollar_figure through dollar_figure of revproc_76_47 please note that this ruling is only applicable to grants before you enter into any other awarded under the b program scholarship or educational loan program you should submit a request for advance approval of that program for awarding grants under the b program are considered to satisfy the facts_and_circumstances_test of rev and therefore will not be counted in determining whether the percentage_test of rev other such program for which prior approval has been granted proc is met with respect to any your procedures proc we are informing the ep eo key district_office of this ruling organization's permanent records please keep a copy of this ruling with your this ruling is directed only to the organization that requested it may not be used or cited as precedent sec_6110 of the code provides that it sincerely ‘ to vv bock gerald v sack chief exempt_organizations technical branch


t c memo united_states tax_court herman w beacham petitioner v commissioner of internal revenue respondent docket no filed date marion f walker for petitioner john f driscoll for respondent memorandum opinion scott judge this case is before us on petitioner's motion to reconsider our order of dismissal on date respondent filed a motion to dismiss this case for lack of jurisdiction on the ground that the petition was not filed within the time prescribed by sec_6213 a or code and all rule references are to the tax_court rules of all section references are to the internal revenue sec_7502 on date petitioner filed a response to respondent's motion stating that the envelope in which the petition was mailed reflected a mailing date from birmingham alabama of date which was within the 90-day period for filing the petition on date this court entered an order of dismissal for lack of jurisdiction in this case on the ground that the petition was not timely filed the motion to reconsider this order of dismissal was calendared for hearing at the trial session of the court commencing in birmingham alabama on date and pursuant to this order the motion to reconsider came on for hearing petitioner by agreement with respondent offered several affidavits and the testimony of two witnesses with respect to the timeliness of the mailing and receipt of the petition in this case the record here shows that on date respondent mailed to petitioner at his last_known_address by certified mail a notice_of_deficiency in income_tax and additions to tax for the year ended date the 90th day after the mailing of the notice_of_deficiency was date which was a monday petitioner's witnesses testified that on date the petition in this case was prepared by an assistant to petitioner's attorney in this case and a summer law clerk in her office sometime in the afternoon of june petitioner's practice and procedure unless otherwise indicated attorney returned to her office reviewed and signed the petition and because of the late hour actually assisted the assistant and the summer law clerk in making some necessary photostatic copies to file with the petition her assistant and summer law clerk put the petition signed by petitioner's attorney in an envelope properly addressed to this court placed the proper amount of metered postage on the envelope and placed a metered postmark of date on the envelope after this was done this envelope together with other mail from the office of petitioner's attorney that was to be sent out that date was taken by petitioner's attorney's assistant and he and petitioner's attorney and petitioner's attorney's summer law clerk all left the attorney's office together and went down to the ground floor in the building in which the attorney's office was located in birmingham alabama the assistant placed all of the mail he had to mail for date in a u s postal service mailbox on the ground floor of the building petitioner's attorney's summer law clerk and petitioner's attorney saw the assistant place the mail in the mailbox sometime between and p m an envelope properly addressed to the u s tax_court in washington d c and mailed by regular mail from the birmingham alabama area bearing a u s postmark with a date in date would ordinarily take business days to reach the u s tax_court there were no circumstances or events known to or recorded by the post office in birmingham with respect to disruption in the normal postal service between the post office box in which petitioner's petition was mailed and washington d c in date an attorney practicing in birmingham who very often mails documents to washington d c primarily to the department of justice has found that the documents he mails from birmingham alabama to washington d c very often take business days to arrive when a weekend is involved it is not uncommon for receipt of the document to be a week after the date it was mailed it is petitioner's position that the evidence shows that the envelope in which the petition in this case was mailed was placed in a u s mailbox in birmingham alabama on june and that its receipt by the court on june should under the provisions of sec_7502 be sufficient to show that the petition was timely filed sec_7502 provides that a document including a petition to be filed with the tax_court which is properly mailed within the period prescribed for its filing and delivered to the tax_court after the expiration of such period will be deemed to be filed on the date of the u s postmark stamped on the envelope if the u s postmark date stamped on the envelope falls within the period prescribed for filing the document with respect to postmarks made by private postage meters as was the case here sec_7502 provides that sec_7502 shall apply in the case of postmarks not made by the u s post office only if and to the extent provided by regulations prescribed by the secretary or_his_delegate sec_301_7502-1 proced admin regs sets forth the conditions under which a private metered postmark which bears a date within the time allowed for filing a document will meet the requirements of sec_7502 that the postmark date is the filing_date these regulations provide that if a document containing a private metered postmark is delivered within the time ordinarily required for the delivery of a document properly mailed on the date of the postmark the date of the private metered postmark will be considered the filing_date if it falls on the last day or before the last day allowed for the filing of the document this regulation further provides that if the document is not delivered within the time ordinarily required for delivery of such a document the document will be considered timely filed only if the person who is required to file the document shows that the document was actually deposited in the mail in time to be collected from the place of deposit on or before the last day prescribed for filing that the delay in the delivery was attributable to delay in the transmission of the mail and the cause of such delay here if we accept that petitioner has shown that the document was actually deposited in the mail in time to be collected from the place of deposit on or before the last day prescribed for filing we cannot under these regulations find that the petition was timely mailed since petitioner has not shown that the delay in delivery was attributable to delay in the transmission of the mail or if any such delay occurred the reason therefor petitioner's first argument is that the document deposited in the mail was actually received in the ordinary time required for documents to be received in washington from birmingham however if we accept the june 15th postmark which was on the envelope in which the petition was mailed and the testimony of petitioner's witnesses as showing date as the date of mailing of the petition the petition should have been received in washington on monday date the 90th day after the mailing of the notice_of_deficiency if saturday and sunday are not counted in the time of normal receipt of mail it would normally have been received at least by date we take the postal service's statement of the normal time for delivery of mail since in our view the experience of one lawyer primarily with mail addressed to one government agency even though the occurrence may be frequent is not sufficient proof of the normal time for delivery of mail however if the time experienced by the lawyer for mail delivery were used delivery would have been on date but was not until date therefore clearly delivery was not within the normal time for mailing if in fact the envelope containing the petition was mailed on date as petitioner contends since the final date for filing the petition was not until date we specifically asked petitioner's attorney to state whether petitioner was contending that receipt in the normal time from date would cause the filing_date of the petition to be timely petitioner made no argument in this regard however the delivery date of june was not within the normal time for transmission of mail from birmingham alabama to washington d c in date according to the experience of the u s postal service for a document mailed on date however since the actual private metered postmark date was june and the testimony is that june was the date of mailing it would appear that normal receipt would be judged from that date it is certainly unfortunate that a petition purportedly mailed days before the 90th day after the mailing of the notice_of_deficiency was not received by the court until the 11th day after its mailing however since petitioner used a private metered postmark rather than taking the envelope to the post office and having it postmarked the regulations have not been complied with in this case since petitioner has not shown that there was a delay in the transmission of the mail to which the delay in delivery was attributable and since petitioner has not shown any reason for the delay in the transmission of the mail if there was such a delay petitioner in effect argues that since there was a delay in the mail with respect to the envelope containing his petition the late receipt of the petition was due to a delay in the transmission of the mail we do not consider petitioner's interpretation of the regulation the proper interpretation however even if petitioner's interpretation were proper petitioner has failed to show the cause of the delay this court and other courts have upheld the regulations with respect to when a private metered postmark will be accepted as a filing_date 566_f2d_646 9th cir affg tcmemo_1975_195 51_tc_869 affd 420_f2d_491 2d cir based on the facts established by this record the regulations with respect to mail postmarked by a private postal meter and the cases of this and other courts upholding the regulations we conclude that petitioner has failed to show any reason why this case should not be dismissed for lack of jurisdiction and therefore we shall deny petitioner's motion to reconsider our order of dismissal for lack of jurisdiction of this case entered date petitioner's motion to reconsider the order of dismissal will be denied