t c memo united_states tax_court mark n and marla r kantor petitioners v commissioner of internal revenue respondent docket no filed date mark n and marla r kantor pro sese diane r mirabito for respondent memorandum findings_of_fact and opinion beghe judge respondent determined a deficiency in petitioners' federal_income_tax for and the following additions to tax for through additions to tax_year deficiency sec_6653 b sec_6653 sec_6653 --- dollar_figure --- --- --- dollar_figure --- --- --- --- --- dollar_figure big_number big_number big_number --- 1addition i sec_50 percent of the underpayment as defined in sec_6653 2addition i sec_50 percent of the underpayment as defined in sec_6653 3addition i sec_50 percent of the interest payable under sec_6601 with respect to such portion of the underpayment attributable to fraud as alternatives to additions to tax for fraud under sec_6653 respondent determined that petitioners were liable for additions to tax under sec_6651 failure_to_file and a and negligence petitioners have conceded the deficiency and the additions to tax under sec_6651 failure_to_file the issue remaining for decision is whether petitioner mark n kantor mark is liable for additions to tax for fraud for his failure_to_file timely income_tax returns for the years in issue or in the alternative whether petitioners are jointly and severally liable for additions to tax for negligence for those years respondent has conceded that petitioner marla r kantor marla is not liable for the fraud addition but contends that if mark 1unless otherwise identified section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure is not liable for the fraud additions petitioners are jointly and severally liable for additions to tax for failure_to_file and negligence findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and attached exhibits are incorporated by this reference petitioners were residents of bellmore new york when they filed their petition mark's education work experience and drug use petitioners were married in the year mark began law school and have two children in mark graduated from st john's university-school of law ranked ninth in a class of mark took and passed two tax courses federal_income_tax and estate and gift_tax in he attended harvard law school in a master of laws degree program but failed to complete the program mark did not complete a required term paper because of an episode of drug abuse although he passed the new york state bar exam mark never became a member of the bar in mark went to work for goldman sachs co and remained employed there until he resigned in in mark became a vice president in the security sales division where he worked as a restricted_stock specialist brokering deals for wealthy clients to sell large blocks of corporate shares that were not tradable on a stock exchange as one of only two such specialists at goldman sachs co mark had attained a high- profile position in the firm that led to higher bonuses and overall compensation in his annual gross_income amounted to dollar_figure due almost entirely to bonuses beginning in mark's behavior in the workplace became increasingly erratic because of cocaine and marijuana consumption in in order to minimize the obviousness of his frequent drug-abuse-related absenteeism mark transferred to the less demanding position of sales trader coverer as part of a 10-person group buying and selling large blocks of stock on the exchanges mark also began to lie to his coworkers and to marla about his activities and his absences in one such absence in mark visited harrah's casino in atlantic city by himself ostensibly to gamble instead he stayed in his hotel room using drugs on a number of occasions mark called marla from work to say that he was having dinner with clients he would then not call again until or a m the next morning to say that he would not be home at all at other times having come home late at night mark would have trouble getting up in the 2also known as letter stock so named because the securities exchange commission rules require the purchaser of such stock which is not registered with the sec and thus may not be traded on any stock exchanges to file a letter with the sec affirming that it is held for investment and not resale downes goodman dictionary of fin investment terms 3d ed mornings despite being confronted during this period by at least one coworker friend who was concerned about his drug use mark made no effort to stop abusing drugs in and during mark's chaotic last years at goldman sachs co he stopped filing income_tax returns in just as his drug use was increasing and his behavior had begun to become more erratic mark prepared and filed a joint income_tax return for himself and marla for that included a detailed income_averaging computation although mark's income continued to rise in and he drew his bonuses from a pool based upon the performance of his group as a whole the bonus growth was mainly fueled by the resurgent stock market of the early 1980's and not by mark's particular expertise and efforts in over dollar_figure of mark's total compensation of dollar_figure consisted of bonuses in mark's income grew to dollar_figure although that included deferred_compensation received by him when he resigned his position goldman sachs co earned commissions of dollar_figure million to dollar_figure million during to on transactions that mark had executed during the 1980's goldman sachs co promoted many of mark's contemporaries to positions of greater responsibility while mark was not so promoted he remained one of many traders who had a nominal title of vice president his career had begun to stall during his last couple of years at goldman sachs co mark also became increasingly anxious about being fired for abusing drugs in date the first boston corporation first boston offered mark a position in its restricted_stock group which was then expanding mark accepted the offer as a solution to his perceived problems at goldman sachs co despite his fears of accepting the same sort of demanding job that he had voluntarily abandoned just years earlier mark took his drug abuse habit to first boston his behavior became even more erratic three days after reporting to work mark missed days because he was taking drugs thereafter he canceled a business trip with the false excuse that his mother had broken her arm on another occasion after he had been missing for days marla found him at the train station asleep in the back of his jeep in mark went to harrah's casino in atlantic city for a second binge of illegal drug use during visits to harrah's in and mark wrote checks totaling dollar_figure despite this erratic behavior first boston earned commissions in the range of dollar_figure million and dollar_figure million on transactions that mark executed in and mark continued as an employee at first boston until petitioners' lifestyle and financial transactions despite frequent drug-related absenteeism mark focused on keeping his job during the years at issue first at goldman sachs co and then at first boston mark's earnings from which his employers withheld federal and state income and employment_taxes were petitioners' sole source of support in the years to mark earned gross_income of dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure respectively at home marla focused on keeping an air of normality about her life and that of their children by paying the bills and performing other essential tasks even as she denied the increasing severity of mark's drug use problem and feared to confront him about it petitioners' family spending pattern remained relatively constant throughout the years in issue however the record of their year-by-year expenditures is fragmentary because checks check registers and other records are missing for tax years and the record shows that mark and marla habitually used cash for much of their consumption during the entire period of to 3mark's employers only withheld a portion of the taxes owed petitioners paid substantial additional_amounts of taxes due for each year when they eventually filed their delinquent returns on date year amount withheld dollar_figure big_number big_number big_number big_number additional tax owed dollar_figure big_number big_number big_number big_number even though they maintained several bank accounts funds deposited in these accounts during this period came largely from mark's earnings and some relatively small returns on investments in petitioners made over checks out to cash some for as much as dollar_figure dozens of the checks were for dollar_figure or more both petitioners wrote like numbers of checks to cash in each of the other tax years in question using three different accounts with chemical bank ie a checking account and an unidentified second account for the entire period and a money market account from to marla tended to write her checks to cash for dollar_figure or less while mark wrote checks to cash for much larger amounts including several for dollar_figure mark also drew cash from a first boston brokerage account and a dreyfus liquid_assets account mark used much of the money to purchase illegal drugs mark regularly transferred funds between his various bank accounts which included brokerage accounts first at goldman sachs co during the years when he worked there then at first boston these accounts along with a dreyfus liquid_assets account served as mark's vehicles for conducting both his personal spending and his investment activities petitioners paid for three major purchases on credit during the tax years their house the lease of the second mercedes-benz automobile and another automobile a cadillac bought in they missed no payments on any of these three obligations although some of the payments made on the cadillac in and and some of the lease payments on the mercedes in may have been delinquent petitioners also regularly used several credit cards including a visa card from chemical bank the income_tax returns for each year reflect deductions ranging from a high of dollar_figure in to a low of dollar_figure in for credit card interest although petitioners began to experience financial difficulties in they were not dunned by creditors for unpaid bills during through irs investigation after petitioners failed to file timely income_tax returns beginning in for tax_year irs agents contacted mark on at least three occasions date date and date mark contacted the irs in the wake of at least one of these visits thereafter in the irs began a criminal investigation of mark's failure_to_file income_tax returns on date agents from the irs criminal_investigation_division cid interviewed mark on date petitioners mailed income_tax returns to the irs for tax years through and paid all taxes shown on the returns and interest through date on date a criminal information was filed against mark in the u s district_court for the eastern district of new 4see supra note for excess of taxes owed for each year over amounts withheld mark made no additional payments until petitioners delinquently filed their tax returns york in the case of united_states v kantor charging him with a single count of violating sec_7203 in that he willfully and knowingly failed to make at the time required_by_law an income_tax return to the irs for mark pleaded guilty to the charge and on date he was sentenced to years' probation and fined dollar_figure the terms of probation required mark to complete hours of community service and continue to seek drug treatment on date john j fitzgerald an irs appeals officer solicited from petitioners an open-ended extension of the period of limitations for each of the years in issue by sending a form letter with two form sec_872a to petitioner's attorneys steven mastbaum michael feldberg and joel goldschmidt on june mr fitzgerald renewed the request by sending another form letter requesting that petitioners sign two copies of a form_872 which would extend the period of limitations for each year by a specified period starting on date the third anniversary of the date petitioners filed their tax returns mr goldschmidt returned the completed form sec_872 to mr fitzgerald on date with a cover letter stating that he understood that mr fitzgerald had no authority to limit the scope of the extension despite an earlier agreement to do so the forms signed by petitioners and dated date extended the period of limitations until date on date mr fitzgerald sent a request for a second extension of the period of limitations to mr goldschmidt on date mr fitzgerald renewed the request this time directly to petitioners on date petitioners signed and dated the form_872 which further extended the period of limitations to date petitioners signed a third extension on date which expired on date on date respondent issued a statutory_notice_of_deficiency to petitioners petitioners filed a timely petition with the tax_court opinion respondent determined additions to tax for fraud for each of the years in issue solely with respect to petitioner mark n kantor since we find no fraud for any of the years we address respondent's alternative determinations of negligence which are against petitioners jointly and severally by reason of their having filed joint income_tax returns for the years in issue reaching these alternative determinations requires that we address infra p petitioners' allegation that the period of limitations expired for each of the tax years in issue because an invalid extension form_872 was executed 5there is a minor evidentiary issue petitioners submitted at trial three letters labeled petitioners' exhibit that we exclude from evidence as hearsay fed r evid the letters do not fall within the hearsay exception of records of regularly conducted activity fed r evid first the letters are not entries made during the routine of a business they were apparently specifically written at mark's behest to his continued fraud for tax_year if any part of an underpayment is due to fraud sec_6653 imposes an addition_to_tax of percent of the underpayment for this purpose the underpayment equals the tax required to be shown on the return if a return is delinquently filed sec_6653 for tax years to if any part of an underpayment is due to fraud sec_6653 imposes the same addition_to_tax on the entire underpayment and sec_6653 imposes a further addition of percent of the interest payable under sec_6601 with respect to the portion of the underpayment attributable to fraud respondent bears the burden of proving by clear_and_convincing evidence that an underpayment exists and that part of such underpayment is attributable to fraud sec_7454 rule b 96_tc_858 affd on other issues 959_f2d_16 2d cir 91_tc_1049 n citing 15_bta_316 affd 926_f2d_1470 6th cir 56_tc_213 the existence of fraud is a question of fact that we resolve continued attorney or to whom it may concern while the letters were seemingly made by persons with personal knowledge petitioners have not provided the necessary foundation to ascertain that fact because the letters possess no other equivalent circumstantial guarantees of trustworthiness they cannot be admitted into evidence under rule of the federal rules of evidence separately for each year upon consideration of the entire record 294_f2d_541 7th cir affg tcmemo_1960_11 91_tc_874 an underpayment_of_tax exists in each year in dispute petitioners filed joint returns that show the amounts of tax required to be shown for and to and conceded the deficiency of dollar_figure for accordingly respondent has met her burden of proving the existence of the underpayments dileo v commissioner supra see also catalfo v commissioner tcmemo_1995_106 affd without published opinion 101_f3d_687 2d cir for each year respondent must also establish petitioner's fraudulent intent by showing a specific intent to evade a tax believed to be owing through conduct intended to conceal mislead or otherwise prevent collection 394_f2d_366 5th cir affg tcmemo_1966_81 80_tc_1111 comparato v commissioner tcmemo_1993_52 fraud does not include negligence carelessness misunderstanding or unintentional understatement of income 236_f2d_844 3d cir fraudulent intent is an actual intentional wrongdoing and the intent required is the specific purpose to evade a tax believed to be owing 67_tc_143 the existence of fraud is a factual question 75_tc_1 fraudulent intent may never be imputed or assumed but must be proven by independent evidence recklitis v commissioner supra pincite citing 55_tc_85 see also rowlee v commissioner supra pincite stone v commissioner supra pincite we do not sustain the commissioner's determination of fraud when we are left with only a suspicion of fraud 66_tc_538 see also comparato v commissioner supra and even a strong suspicion does not suffice 225_f2d_216 6th cir affg in part and revg and remanding in part a memorandum opinion of this court axelrod v commissioner tcmemo_1982_92 affd without published opinion 711_f2d_1062 9th cir because direct proof is often difficult to obtain respondent may use circumstantial evidence to prove a taxpayer's fraud 317_us_492 79_tc_995 affd 748_f2d_331 6th cir see also 252_f2d_56 9th cir 67_tc_181 affd without published opinion 578_f2d_1383 8th cir we examine the taxpayer's entire course of conduct to determine whether respondent has met her burden_of_proof of fraud by clear_and_convincing evidence 94_tc_316 recklitis v commissioner supra pincite weighing and evaluating the objective evidence and taxpayer's testimony in a fraud case can be difficult comparato v commissioner supra to find fraud we must infer intent in part from the objective evidence as to the taxpayers' actions which may be ambiguous and in part from their own testimony which is almost by definition self-serving 865_f2d_342 d c cir revg and remanding rosenbaum v commissioner tcmemo_1983_113 while we are not obliged to accept the testimony of interested parties if it is not credible and not corroborated by the evidence 88_tc_122 affd 866_f2d_852 6th cir we find both mark's and marla's testimony generally credible strongly supported by the rest of the record and uncontroverted by respondent the courts have developed a nonexhaustive list of the badges_of_fraud 796_f2d_303 9th cir affg tcmemo_1984_601 899_f2d_164 2d cir affg in part and revg in part an oral opinion of this court miller v commissioner supra pincite list of badges_of_fraud is nonexclusive some of which respondent cited in her brief large and consistent understatements of tax failure_to_file income_tax returns dealing in cash transferring or otherwise concealing funds petitioner's lack of cooperation with tax authorities we use these badges which are illustrative only as tools in considering the totality of the facts and circumstances which in this case includes mark's admitted illegal drug abuse to determine the existence of fraudulent intent 98_tc_511 evidence of emotional or substance abuse problems can rebut evidence of fraudulent intent either by showing that it prevented the taxpayer from forming the requisite intent 38_tc_251 considerable psychiatric evidence of a severe psychosis overcame other evidence showing taxpayer's astuteness and awareness of matters and participation in intricate financial operations during the tax years supplemented by tcmemo_1962_236 or as part of a larger pattern of facts and circumstances that does not present clear_and_convincing evidence to the court gutierrez v commissioner tcmemo_1995_252 combination of alcoholism lax record-keeping and cooperation with irs indicated lack of fraudulent intent affd in part and revd and remanded on other issues without published opinion 105_f3d_651 5th cir in other cases this court has used the presence of compelling evidence of a taxpayer's acts to mislead and conceal to find fraud despite evidence of mental illness yarbrough oldsmobile cadillac inc v commissioner tcmemo_1995_538 brain tumor did not prevent finding of fraud when other indicia such as falsified records disallowed deductions use of a corporation to disguise personal expenses as business_expenses proved fraud or drug use--even drug addiction see maniloff v commissioner tcmemo_1991_554 testimony of extensive drug use insufficient to rebut other evidence showing participation in fraudulent and illegal activities yocum v commissioner tcmemo_1985_447 drug addiction insufficient to rebut fraudulent intent of taxpayer who engaged in drug smuggling chaffin v commissioner tcmemo_1983_394 drinking problem did not preclude forming fraudulent intent petitioners presented no psychiatric testimony or other evidence of mental impairment caused by drug addiction that prevented mark from forming the requisite intent however the record is replete with anecdotal evidence that drug abuse played a destructive role in mark's life long before the years in issue and that it continued throughout those years marla testified about many of these episodes and about her role in helping mark keep his job which provided their sole source_of_income while marla tended--as best she could--to their family life against this background of mark's drug abuse and petitioners' efforts to cope with it respondent contends that mark's failure_to_file income_tax returns which resulted in his pleading guilty under sec_7203 for willful failure_to_file a return for frequent writing of checks to cash and maintenance of an upper-middle-class lifestyle taken together prove his specific intent to evade the payment of taxes in the years in issue we are not convinced and we hold to the contrary the only badge of fraud found in the record is mark's failure_to_file income_tax returns in each of the years to bradford v commissioner f 2d pincite mark knew he had the obligation to do so he had filed petitioners' joint tax_return in rowlee v commissioner t c pincite mark has argued that his drug abuse was the root cause of his failure_to_file an argument contradicted to some extent by his filing of the tax_return in at a time when he already was heavily abusing drugs however the record indicates that mark's erratic behavior during through created ever increasing chaos in petitioners' personal lives marla testified that the failure_to_file their tax returns from to was a direct byproduct of that chaos in mark pleaded guilty to a charge that he willfully failed to file his tax_return in sec_7203 such a conviction without more does not constitute clear_and_convincing evidence of fraud for that year beaver v commissioner t c pincite 86_tc_1253 see also mccullough v commissioner tcmemo_1993_70 although it may be highly persuasive evidence of fraudulent intent 43_tc_407 modified 44_tc_408 as in hudgens v commissioner tcmemo_1985_587 and paddock v commissioner tcmemo_1985_586 we regard mark's continued failure_to_file to be an emotional response to the chaos caused by years of illegal drug abuse that prevented him from confronting his situation in any constructive way and not a series of affirmative acts actuated by an intent to evade paying taxes hudgens v commissioner supra the other factors cited by respondent do not support a finding of clear_and_convincing proof of fraudulent intent in any of the tax years in question the welter of detail that respondent entered into the record documenting petitioners' expenditures during the years in question merely indicates a relatively affluent if somewhat undisciplined lifestyle heedless of the consequences of failing to pay taxes the record does not recount a series of affirmative acts demonstrating fraudulent intent 317_us_492 the case at hand contrasts sharply with the taxpayer in anderson v commissioner tcmemo_1973_155 who told the court that he did not file his tax returns or pay his taxes because he did not wish to lower his family's standard of living such recalcitrant behavior is absent from the record in this case petitioners were merely living their lives without any particular regard for whether they filed their returns and paid their taxes filing tax returns and paying taxes was the last thing on their minds mark's disregard for the consequences of his actions was grossly negligent and may even have been willful but it does not evidence any attempt to mislead conceal or otherwise prevent payment of taxes owed webb v commissioner f 2d pincite respondent would also have us hold that petitioners' use of multiple bank accounts and extensive use of checks written to cash was a continued effort to conceal income petitioners openly conducted their affairs and concealed nothing as attested by the wealth of minutiae in the record that respondent gathered the sources of their funds were known and easy to trace mark's salary and bonuses earned during the tax years in question from which substantial amounts of tax had been withheld and w-2 forms issued by his employers as required_by_law sec_3101 sec_3402 sec_6051 cf 398_f2d_1002 3d cir self-employed taxpayer who failed to file his tax returns for years knew that he owed taxes in those years also did not make any payments of estimated_tax during this period and further delayed filing returns out of fear of prosecution was denied refund for additions to tax due to fraud mark's behavior did not contain the critical element of deceit or concealment that the actions of the taxpayer in stoltzfus v united_states supra displayed mark did nothing to prevent taxes from being withheld cf weber v commissioner tcmemo_1995_125 that the withholdings were less than his required estimated_tax payments under sec_6654 does not establish fraud that mark was well educated financially sophisticated and conversant with his responsibilities under the code is incontrovertible sophistication and knowledge are relevant only in concert with other substantive indicia of fraud beaver v commissioner supra pincite see also o'connor v commissi412_f2d_304 2d cir background of experience knowledge and ability acquired as a certified_public_accountant relevant in light of wealth of other evidence that demonstrated taxpayer's bad faith with intent to defraud affg on this point tcmemo_1967_174 in the circumstances of this case mark's background does not persuade us that his failure_to_file was actuated by fraudulent intent respondent also alleged that mark failed to cooperate with the service in its investigation uncooperativeness can indicate fraud 781_f2d_1566 11th cir affg tcmemo_1985_63 however respondent produced no evidence on this score other than an unsubstantiated allegation that mark failed to respond to a single attempted contact in which the irs itself failed to follow up mark responded to the next irs contact made years later in petitioners' eventual filing of tax returns in and subsequent willingness to execute extensions to the period of limitations do not indicate a willful failure to cooperate like the taxpayer in gutierrez v commissioner tcmemo_1995_252 affd in part and revd and remanded on other issues without published opinion 105_f3d_651 5th cir mark was irresponsible and heedless in his actions but the record is bereft of meaningful badges_of_fraud other than a failure_to_file itself and fails to support even a strong suspicion of fraudulent intent drieborg v commissioner f 2d pincite axelrod v commissioner tcmemo_1982_92 affd without published opinion 711_f2d_1062 9th cir other issues bearing on liabilities for additions to tax i period of limitations preliminary to determining whether petitioners are liable for additions to tax in the alternative we briefly address whether respondent timely issued the notice_of_deficiency to petitioners within the statutory period of limitations unless an exception applies as in the case of a fraudulent return sec_6501 or where no tax_return is filed sec_6501 the irs must assess an income_tax within years after the taxpayer files a return sec_6501 the taxpayer and the irs may agree to extend this period by executing a written_agreement prior to the expiration of the period of limitations sec_6501 in deciding that the statutory period for assessing or collecting a tax_deficiency has expired this court decides on the merits that no such deficiency exists sec_7459 19_bta_809 affd 62_f2d_754 2d cir petitioners must raise in their pleading the affirmative defense that the statutory period of limitations has expired rule 101_tc_374 affd 40_f3d_385 5th cir 95_tc_227 they failed to do so attempting to raise the issue only in their request for admissions however the issue was tried by implied consent of the parties and we will rule on the merits rule b petitioners have made a prima facie case by proving the filing_date of the income_tax returns date and that the statutory_notice_of_deficiency was mailed more than years thereafter on date thereby shifting the burden of going forward to respondent 57_tc_735 see also ribb v commissioner tcmemo_1988_ respondent discharged that burden by showing that the parties executed three facially valid extensions to extend the period of limitations to date concrete engg co v sec_7459 effect of decision that tax is barred by limitation --if the assessment or collection of any_tax is barred by any statute_of_limitations the decision of the tax_court to that effect shall be considered as its decision that there is no deficiency in respect of such tax commissioner 19_bta_212 affd 58_f2d_566 8th cir shifting the burden back to petitioners to affirmatively show the invalidity of those written consents 81_f2d_365 9th cir concrete engg co v commissioner supra pincite petitioners always retain the ultimate burden of persuasion because they raised the issue that the assessment is barred by the statute_of_limitations 90_tc_684 petitioners raised two arguments first they questioned whether the date next to their signatures on the first form_872 consent signed on date is in the same handwriting as that in the later two consents their argument in that respect appears to be that the consent was not properly executed and was therefore invalid however petitioners have produced no evidence other than their vague allegations about the differences in handwriting to support their contention we find that the consent appears regular on its face and in accordance with the law in the absence of contrary evidence we find it to be valid concrete engg co v commissioner supra pincite next petitioners allege that respondent's appeals officer purportedly agreed with petitioners to drop the fraud_penalty in return for extending the period of limitations the record shows that the parties never reached a formal closing_agreement sec_7121 sec_601_202 statement of procedural rules and petitioners have not shown that the appeals officer had the authority to enter into any other promises or bargains that may have been reached 899_f2d_1149 11th cir statutory requirements of closing agreements are exclusive and strictly construed we find that petitioners have not discharged their burden_of_proof and have failed to show that any of the written consents were invalid kronish v commissioner supra pincite respondent issued the notice_of_deficiency to petitioners within the period of limitations as extended by petitioners' consents ii negligence as an alternative to fraud for each of the tax years in question respondent determined a 5-percent addition_to_tax on underpayments sec_6653 and for the years through an additional penalty of percent of interest due on the underpayment under sec_6653 based on her determination of petitioner's negligence sec_6653 defines an underpayment for purposes of this section as the excess of the amount of tax required to be shown on the return over the amount of tax_shown_on_the_return except that the amount of tax shown is disregarded if the return was not filed within the prescribed time period negligence is defined as the lack of due care or failure to do what an ordinarily prudent person would do under the circumstances 67_f3d_29 2d cir affg 100_tc_650 marcello v commissioner 380_f2d_499 5th cir affg in part and remanding in part 43_tc_168 the failure of taxpayers without reasonable_cause to comply with the statutory duty to timely file returns sec_6072 violates that duty and is probative of negligence 985_f2d_704 2d cir affg in part and revg in part on another issue tcmemo_1991_492 92_tc_899 92_tc_342 affd 898_f2d_50 5th cir petitioners bear the burden of showing that they were not negligent rule a 39_f3d_402 2d cir affg tcmemo_1993_480 petitioners did not contend at trial or on brief that their actions in failing to timely file their returns were not negligent for they are collaterally estopped from contending otherwise because of mark's conviction under sec_7203 for a willful failure to make a return 86_tc_1253 petitioners have failed to show that their failure_to_file a tax_return for any of the years in issue was not negligent petitioners are liable for additions to tax under sec_6653 for each of the tax years in question to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number ----------------------- --------------------------------------- ------------- -------------------------- ------------------------- ----------------------------------- --------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-116677-09 date date legend x ----------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- ------------------------ country --------------------- d1 ------------------ dear ---------------- this responds to a letter dated date submitted on behalf of x by its authorized representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election to be classified as a disregarded_entity for federal tax purposes facts the information submitted states that x was formed under the laws of country on d1 as a foreign_entity eligible to elect to be treated as a disregarded_entity for federal tax plr-116677-09 purposes however x inadvertently failed to timely file a form_8832 entity classification election electing to treat x as a disregarded_entity effective d1 law and analysis sec_301_7701-2 generally provides that a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-3 provides that so long as a business_entity is not classified as a corporation under sec_301_7701-2 or an eligible_entity it may elect its classification for federal tax purposes sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing a form_8832 with the appropriate service_center under sec_301_7701-3 this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the date specified on form_8832 cannot be more than days prior to the date on which the election is filed and cannot be more than months after the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election with a deadline prescribed by a regulation published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that request for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government plr-116677-09 conclusion based solely on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly x is granted an extension of sixty days from the date of this letter to elect to be classified as a disregarded_entity for federal tax purposes effective d1 the election should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the election except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter will be sent to x’s authorized representatives sincerely curt g wilson associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


t c summary opinion united_states tax_court tracy m colter and robert n colter jr petitioners v commissioner of internal revenue respondent docket no 20771-98s filed date tracy m colter and robert n colter jr pro sese andrew m winkler for respondent carluzzo special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subseguent section references are to the internal_revenue_code in effect for rule references are to the tax_court rules_of_practice and procedure - - respondent determined a dollar_figure deficiency in petitioners’ federal_income_tax and a dollar_figure penalty under sec_6662 the issue for decision is whether petitioners are entitled to a casualty_loss deduction in excess of the amount allowed by respondent some of the facts have been stipulated and are so found petitioners are and were during all relevant periods married to each other at the time the petition was filed they resided in fredonia kentucky sometime in early petitioners and their children moved from a rented house in nashville tennessee into a 3-bedroom 2-bath ranch-style brick house that they purchased in hendersonville tennessee the hendersonville residence on date one of petitioners’ daughters plugged a vacuum cleaner into an electrical outlet located in petitioners’ bedroom through some fault in either the vacuum cleaner or the outlet a fire started in that bedroom that caused substantial damage to the hendersonville residence and destroyed or badly damaged most of the personal_property located in the house at the time petitioners were insured against fire losses by the westfield companies westfield under the terms of their insurance coverage subject_to various conditions and limitations petitioners were entitled to recover the replacement - - cost of personal_property damaged or destroyed by fire asa result of the fire petitioners received dollar_figure less the dollar_figure deductible attributable to personal_property losses from westfield this amount includes dollar_figure for damages to the hendersonville residence dollar_figure for additional living_expenses and the policy limits of dollar_figure less the deductible for damages to or loss of personal_property of the amount petitioners received for loss of personal_property dollar_figure was attributable to dry cleaning expenses and the balance dollar_figure was attributable to the replacement costs of various items of personal_property typically found ina family residence after an investigation westfield paid petitioners the policy limits for their personal_property losses because according to the insurance_company the acv actual cash_value of the upp unscheduled personal_property exceeded the limits and they were not made whole westfield’s decision to pay policy limits for personal_property loss was based at least in part upon a document entitled personal_property inventory prepared by petitioners within days after the fire occurred the inventory the inventory consists of pages that itemizes and describes hundreds of items of personal_property destroyed by the fire some descriptions are specific eg magnavox inch color television with vcr others are more general eg belts for each item or - category of items listed on the inventory petitioners made entries in designated columns for number of items destroyed date and place of purchase original cost and replacement cost at or about the time of the fire for a few items there is a variance between the entries made for original cost and the replacement cost for most if not all of those few items the replacement cost is higher than petitioners’ estimated original cost for that item for most items either the amounts entered for original cost and the replacement cost are identical or if more than one item was destroyed the replacement cost listed is the product of the number of items multiplied by the amount listed as the original cost of the items it appears that for these items amounts entered in the original cost column do not as the name suggests represent petitioners’ costs of the items but instead duplicate petitioners’ estimate of the replacement costs of those items from the information supplied by petitioners westfield computed the actual cash_value of each item listed on the inventory by applying a depreciation factor ranging from percent to percent to the replacement cost of each item the total of the amounts listed as original cost cannot be determined from the copy of the inventory placed into the record because relevant portions of the document are obscured by overlays - - replacement costs for all of the items total dollar_figure actual cash values replacement cost minus depreciation of all of the items total dollar_figure some of the personal_property located in the house at the time of the fire appeared to be salvageable petitioners hired mastercraft and masterclean to clean and or refurbish these items after removing these items from the hendersonville residence the cleaning company determined that some of them could not be cleaned or otherwise salvaged the items that could not be cleaned were not returned to petitioners and were not included on the inventory petitioners estimated the value of these items to total dollar_figure petitioners filed a timely joint federal_income_tax return it was prepared by a professional income_tax_return_preparer they reported adjusted_gross_income of dollar_figure taking into account itemized_deductions totaling dollar_figure and personal_exemption deductions claimed for themselves and their four children they reported no taxable_income or federal_income_tax liability on that return relevant here on the schedule a itemized_deductions included with their return petitioners claimed a dollar_figure casualty_loss deduction computed as follows cost or other basis of each property dollar_figure insurance or other reimbursement big_number fair_market_value before casualty big_number fair_market_value after casualty - - amount of loss big_number amount of loss not reimbursed big_number less dollar_figure floor less percent of adjusted_gross_income big_number casualty_loss claimed big_number in the notice_of_deficiency respondent disallowed at least mathematically dollar_figure of the casualty_loss deduction here in dispute a fair reading of the explanation for this adjustment suggests that respondent intended to disallow the entire amount nevertheless we proceed as though petitioners are entitled to a casualty_loss deduction of at least dollar_figure for in the notice_of_deficiency respondent also determined that petitioners are liable for a sec_6662 penalty but respondent now agrees that they are not discussion subject_to certain limitations an individual is entitled to a deduction for any loss es sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise that arise from fire or other_casualty sec_165 c h and to properly compute a casualty_loss deduction the following values of the damaged or destroyed property must be established fair_market_value before the casualty fair_market_value after the casualty and the taxpayer’s basis in the property - jj - see 46_tc_751 affd 387_f2d_420 8th cir the reduction in the fair_market_value of the property caused by the casualty must be compared to the adjusted_basis of the property the lesser_of the two amounts equals the amount of the casualty_loss for purposes of computing the deduction allowed under sec_165 see 305_us_468 67_tc_784 56_tc_976 millsap v commissioner supra sec_1_165-7 income_tax regs subject_to numerous exceptions the general_rule is that a taxpayer’s basis in property equals the taxpayer’s cost of the property see sec_1011 and sec_1012 fair_market_value is defined in countless cases as the price at which the property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts 411_us_546 79_tc_322 affd 752_f2d_518 10th cir sec_1_170a-1 income_tax regs although less than clear from the manner in which the casualty_loss deduction was computed on petitioners’ return the relevant property over which the controversy centers in this case is the personal_property damaged or destroyed in the fire reciting the well-established general principles that control --- - situations such as the one presently before us is relatively simple and straightforward applying those principles to hundreds of personal household_items that would typically be damaged or destroyed in a residential fire is more problematic not only because of the number of items involved but also because of the nature of those items establishing the fair market values of used household_items is not only difficult but also not enough for purposes of sec_165 the taxpayer’s cost or basis in each item of property must also be established often long after the item was acquired furthermore the utility economic and sentimental values of a particular piece of personal_property to a particular owner are not necessarily reflected in either the fair_market_value of or the taxpayer’s basis in that item consequently it 1s not unusual for a taxpayer who suffers the loss of property due to some casualty to sense a loss greater than that allowable as a deduction pursuant to sec_165 petitioners could not explain the manner in which the casualty_loss deduction is computed on their return and we cannot find any support for the computation in the record the amount of insurance reimbursement listed is obviously incorrect at least in the aggregate and does not correspond to the recovery_of any of the component amounts furthermore the amounts listed for cost or basis and fair_market_value before --- - casualty do not appear to be based upon information contained on the inventory at trial petitioners more or less ignored the computation of the casualty_loss deduction set forth in their return instead they relied almost exclusively on the inventory a document prepared not with reference to the amount of any potential casualty_loss deduction to which they might be entitled but rather in connection with an insurance claim under a policy that allowed recovery based upon replacement cost for insurance purposes the original cost of personal_property damaged or destroyed in the fire was not particularly important consequently the inventory does not provide sufficient information to allow for the proper computation of the amount of petitioners’ casualty_loss deduction nevertheless respondent in apparent recognition of the practical difficulties confronting petitioners in establishing the information technically required to support a casualty_loss deduction relies at least in part upon the information reported on the inventory even though that document might not contain all of the information necessary to properly compute the allowable deduction in an apparent attempt to simplify the matter respondent now accepts petitioners’ estimate of replacement costs and westfield’s estimate of actual cash_value replacement cost less depreciation of the destroyed property as the measure of that property’s fair_market_value -- - before the fire ’ respondent argues that petitioners’ casualty_loss deduction should be computed as follows fair_market_value of personal_property before fire dollar_figure less amount reimbursed dollar_figure less dollar_figure sec_165 dollar_figure less percent of adjusted_gross_income sec_165 dollar_figure allowable casualty_loss deduction dollar_figure in effect in the above computation respondent considers the property damaged or destroyed in the fire to have had no fair_market_value after the fire furthermore to petitioners’ benefit respondent treats the property’s fair_market_value prior to the fire and petitioner’s basis in the property as equal which is highly unlikely we consider respondent’s computation to be reasonable under the circumstances and note that if only by coincidence it provides support for the adjustment made in the notice_of_deficiency the computation however does not take into account the value of those items removed from the hendersonville residence by the cleaning company determined to be unsalvageable and never returned to petitioners we accept petitioners’ dollar_figure estimate of value of those items adopt respondent’s approach as to the significance of that estimate ' subtracting depreciation from replacement cost can be an acceptable method of determining the fair_market_value of an item of personal_property see 56_tc_976 and find that petitioners are entitled to a casualty_loss deduction for computed as follows fair_market_value of personal_property listed on inventory plus fair_market_value of personal_property not listed on inventory values before fire dollar_figure fair_market_value of personal_property after fire - - less insurance reimbursement dollar_figure less dollar_figure sec_165 dollar_figure less of agi sec_165 dollar_figure allowable casualty_loss deduction dollar_figure reviewed and adopted as the report of the small_tax_case division based on the foregoing decision will be entered under rule


internal_revenue_service number release date index number ----------------- ------------------------------------- --------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-153257-04 date date ---------- ------------------------------------------------------- legend x -------------------------------------------------- state d1 dear -------------- this responds to a letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code ------------------ facts according to the information submitted x was incorporated on d1 under the laws of state x intended to be treated as an s_corporation for federal tax purposes effective d1 but the election was not timely filed law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made if the election is made after the first two and one-half months of a corporation’s taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made plr-153257-04 sec_1362 provides that if no election is made pursuant to sec_1362 or if made the election is made after the date prescribed for making such an election and the secretary determines there was reasonable_cause for the failure to timely make the election then the secretary may treat such election as timely made for such taxable_year and effective as of the first day of that year x did not file a timely election to be treated as an s_corporation under sec_1362 effective d1 x has however established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusion based solely upon the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d1 within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer plr-153257-04 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely s dianna k miosi dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


of f i c e of c h i ef c ou n sel department of the treasury i n t e r n al r e v e n u e s e r v i c e w ashington d c date number info release date conex-153550-08 uil no the honorable steve king member u s house of representative sec_1035 east shore drive lake view ia attention -------------------- dear congressman king this letter responds to your inquiry dated date you asked if insurance payouts from the federal crop insurance program are deferrable payments for federal_income_tax purposes in general a cash_method taxpayer who receives crop insurance payments must include them in income in the year received however a taxpayer may elect to report income from certain crop insurance payments in the following tax_year the type of payments that taxpayers may postpone until the following tax_year are payments that result from the damage or destruction of crops where the taxpayer can establish that income from the damaged or destroyed crops would have been reported in a following tax_year the general_rule for cash_method taxpayers receiving payments from crop insurance still applies to amounts received for any reason other than the damage or destruction of the taxpayer’s crops you can find more information on how to postpone reporting income from crop insurance payments made by reason of damage or destruction of crops on page of chapter_3 of publication farmer’s tax guide for your convenience i am enclosing a copy of that page conex-153550-08 i hope this information is helpful if you have any questions please call me or ------------- ------------------ office_of_chief_counsel income_tax and accounting division at ------------ ------------- sincerely karin g gross senior technician reviewer income_tax and accounting enclosure


internal_revenue_service number release date index number ---------------------------------- ----------------------------------- ------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------------- id no -------------- ----------------------------------------------------- telephone number --------------------- refer reply to cc psi b04 plr-122198-07 date april re -------------------------------------------------------- --------------------------------------------------------------- ---------------------------------------------------------- --------------------------------------------------------------- legend ---------------------------------------------- ------------------- --------------------------- --------------------------- ---------------------- ----------------------------------------- ----------------------------------------- -------------------------------------------------------- -------------------------------------------------------- ---------------------------------------------------- ---------------------------------------------------- grantor spouse child a child b child c trust trust trust ----------------------------------------------------- trust ----------------------------------------------------- trust ----------------------------------------------------- trust ----------------------------------------------------- corporation trustees accountant attorney date date year year ---------------------------------------------- ------------------------------------------------ ------------------------ ------------------------------- ----------------------- ---------------------- ------- ------- plr-122198-07 dear -------------- this is in response to a letter from your authorized representative dated date requesting an extension of time under sec_301 of the procedure and administration regulations to make an allocation of generation-skipping_transfer gst_exemption facts the facts and representations submitted are summarized as follow grantor executed two irrevocable trusts instruments trust and trust on date in year each trust instrument created one trust for the benefit of her three children child a child b and child c and their descendants for a total of six trusts trust 1a trust 1b trust 1c trust 2a trust 2b and trust 2c trust and trust were funded with shares of stock in corporation no additional transfers have been made to trust sec_1 and both trusts contain basically identical provisions article v provides that trustees may divide trust and trust in equal or unequal shares to create trusts with a zero inclusion_ratio attorney drafted the trust agreement accountant prepared the form 709s united_states gift and generation-skipping_transfer_tax returns for year accountant had a professional relationship with grantor in previous years and understood that he was to elect gift-splitting and allocate grantor’s and spouse’s gst_exemption grantor’s and spouse’s year form sec_709 reflect the gift-splitting treatment and a portion of their gst exemptions was allocated to trust 1a and trust 2a for the benefit of child a however accountant did not allocate grantor’s and spouse’s gst_exemption to the trusts for the benefit of child b and child c the error was discovered in year grantor and spouse have divorced as a result on date trustees severed the trusts for the benefit of child b and child c so that one set of trusts contains assets attributable to grantor’s contributions to trusts for the benefit of child b_trust and trust and one set of trusts contains assets attributable to spouse’s contributions to trusts for the benefit of child c trust and trust it is represented that no taxable_distributions or taxable terminations have occurred with respect to these trusts grantor signed an affidavit stating that she was advised by attorney to gift-split and allocate gst_exemption to trust sec_1 and grantor also stated in the affidavit that she advised accountant to split the gifts and allocate gst_exemption to trust sec_1 and on grantor’s form_709 accountant signed an affidavit stating that he signed the form sec_709 and believed the intention of grantor had been accurately addressed on the forms a later review by accountant discovered the omission of that allocation to the trusts for the benefit of child b and child c plr-122198-07 you have requested an extension of time to allow grantor to make an election under sec_2632 to allocate gst_exemption to the transfers she made to trust sec_3 and law and analysis sec_2601 of the internal_revenue_code imposes a tax on every generation- skipping transfer a generation-skipping_transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2631 as in effect for the tax years at issue provided that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides that an allocation of gst_exemption to property transferred during the transferor’s lifetime other than in a direct_skip is made on form_709 sec_2642 provides that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph sec_2642 provides that in determining whether to grant relief under this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers is to be treated as if not expressly plr-122198-07 prescribed by statute and taxpayers may seek an extension of time to make an allocation described in sec_2642 or b under the provisions of sec_301_9100-3 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose date is prescribed by a regulation and not expressly provided by statute in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore grantor is granted an extension of time of days from the date of this letter to make an allocation of her available gst_exemption with respect to her transfers to trust sec_3 and for the benefit of child b and child c the allocation will be effective as of the respective date of the transfers to the trusts and the value of the transfers to the trusts as determined for federal gift_tax purposes will be used in determining the amount of grantor’s gst_exemption to be allocated to the trusts this allocation should be made on a supplemental form_709 and filed with the cincinnati service_center at the following address internal_revenue_service cincinnati service_center - stop cincinnati oh a copy of this letter should be attached to the supplemental form_709 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code plr-122198-07 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely william p o’shea associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter cc


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date date number release date conex-137574-12 uil the honorable frank r wolf member u s house of representatives park center road suite herndon va attention ------------------- dear congressman wolf this letter is in response to your inquiry dated date on behalf of your constituent --------------------- of --------------------------------------------- -------------asked whether a person can be an employee and an independent_contractor simultaneously for the same company when working as a professional consultant on two separate consulting projects i hope the following general information on the factors the irs uses to determine whether an individual is performing services as an employee or an independent_contractor is helpful in addressing ---------------question the irs looks to the provisions of the internal_revenue_code the code to determine who is an employee subject_to federal employment_taxes code sec_3121 defines an employee as any individual who under the common_law rules applicable in determining the employer-employee relationship has the status of an employee whether an individual is an employee under the common_law rules is a question of fact to be determined after considering the facts and circumstances in a particular case individuals can find guidance for determining that status in two similar sections of the applicable employment_tax regulations sec_31_3121_d_-1 relating to the federal_insurance_contributions_act fica and sec_31_3401_c_-1 relating to federal_income_tax withholding sec_31_3121_d_-1 of the regulations provides that the relationship of employer- employee exists when the person for whom the services are performed has the right to direct and control the individual who performs the services not only as to the result to be accomplished by the work but also as to the details and means by which that result is conex-137574-12 accomplished the employer does not necessarily have to actually direct or control the manner in which the services are performed it is sufficient if he or she has the right to do so sec_31_3401_c_-1 of the regulations has a similar provision sec_31_3121_d_-1 of the regulations provides that if the relationship of an employer and employee exists the designation or description of the relationship by the parties as anything other than that of employer and employee is immaterial thus if an employer-employee relationship exists it is of no consequence that the employee is designated as partner co-adventurer agent independent_contractor or the like in determining whether an individual is an employee or an independent_contractor under the common_law rules we must consider all evidence of control or autonomy in doing so we examine the relationship of the worker and the business relevant facts generally fall into three categories of evidence behavioral controls financial controls and the relationship of the parties behavioral controls are evidenced by facts that illustrate whether the service_recipient has a right to direct or control how the worker performs the specific tasks for which he or she is hired these facts include the provision of training the issuance of instruction or the completion of an evaluation financial controls are evidenced by facts that illustrate whether the service_recipient has a right to direct or control the financial aspects of the worker’s activities these factors include the method of payment the worker’s opportunity for profit or loss and whether a worker has made a significant investment incurred unreimbursed expenses or otherwise makes services available to the relevant market the relationship of the parties is generally evidenced by the parties’ agreements and actions with each other including facts that show not only how they perceive their own relationship but also how they represent their relationship to others these facts include the intent of the parties as expressed in written contracts the provision of or lack of employee_benefits the right of the parties to terminate the relationship the permanency of the relationship and whether the services performed are part of the service recipient’s regular business activities if an employer-employee relationship exists the employee is generally subject_to fica_taxes more commonly known as social_security and medicare_tax and income_tax_withholding an employer has an obligation to withhold and report these taxes deposit the withheld taxes with the government and provide a form_w-2 wage and tax statement to the employee and to the social_security administration reporting the wages paid and the taxes withheld conex-137574-12 in instances where an individual provides services in two separate roles to the same business the irs examines separately the relationship between the worker and the business for each performance of services just as with any examination of worker status we examine each relationship based on facts that fall into the three categories of evidence explained above-behavioral controls financial controls and relationship of the parties if an employer-employee relationship is found with regard to performance of services for only one role of the worker remuneration with regard to only those specific services is subject_to all fica and income_tax_withholding requirements under the code if an employer-employee relationship is found for both roles then remuneration for all services performed by the worker for the business are subject_to_withholding requirements under the code a business may file form ss-8 determination of worker status for purposes of federal employment_taxes and income_tax_withholding to request an irs determination of the status of a worker including a class of workers as an employee or an independent_contractor if the firm is requesting a determination for a particular class of worker it should complete the form for one individual who represents the class whose status is in question this letter provides only general principles of the law it is intended for informational purposes only and does not constitute a ruling see revproc_2012_1 sec_2 2012_1_irb_1 pincite date i hope this information is helpful if you have any questions please contact ---------------- ------------ of my staff at ------------------- sincerely victoria a judson division counsel associate chief_counsel tax exempt government entities


t c memo united_states tax_court woodrow reynolds petitioner v commissioner of internal revenue respondent docket no 17810-04l filed date p filed a petition for judicial review pursuant to sec_6330 i r c in response to a determination by r that levy action is appropriate held because p has advanced only frivolous arguments r’s determination to proceed with collection action is sustained held further a penalty pursuant to sec_6673 i r c is due from p and is awarded to the united_states in the amount of dollar_figure woodrow reynolds pro_se timothy s murphy for respondent memorandum findings_of_fact and opinion wherry judge this case is before the court on a petition for judicial review of a notice_of_determination concerning collection action s under sec_6320 and or the issues for decision are whether respondent may proceed with collection action as so determined and whether the court should sua sponte impose a penalty pursuant to sec_6673 findings_of_fact some of the facts have been stipulated and are so found the stipulations of the parties with accompanying exhibits are incorporated herein by this reference at the time this petition was filed petitioner resided in muskegon michigan for the and taxable years petitioner submitted to the internal_revenue_service irs form sec_1040 u s individual_income_tax_return that contained entirely zeros on date respondent issued to petitioner a notice_of_deficiency for the taxable_year showing a deficiency of dollar_figure and a penalty pursuant to sec_6662 and b of dollar_figure on date respondent issued to petitioner a notice_of_deficiency for the taxable_year that showed a deficiency of dollar_figure and additions to tax pursuant to sec_6651 and sec_6654 of dollar_figure and dollar_figure respectively petitioner 1unless otherwise indicated all section references are to the internal_revenue_code code of as amended following his receipt of the date notice_of_deficiency sent a letter in date to mr richard creamer the director of the compliance center that issued such notices requesting documentation of the secretary’s delegation to mr creamer of authority to issue statutory notices of deficiency petitioner did not receive a response and did not file a petition contesting either of the determined tax deficiencies with this court on date respondent mailed to petitioner a final notice_of_intent_to_levy and notice of your right to a hearing for the and taxable years reflecting a total unpaid balance of dollar_figure petitioner timely submitted a form request for a collection_due_process_hearing and attached a lengthy letter threatening legal action against any revenue_officer or revenue_agent who tries to collect tax from him and containing tax-protester rhetoric including such arguments as there is no code section that makes petitioner liable for income taxes the irs does not have the authority to change the amount of taxes that a taxpayer claims to owe on a submitted tax_return an appeals officer must present to a taxpayer documentation from the secretary verifying that any applicable law and administrative procedure have been met and petitioner did not receive a statutory notice_and_demand for payment petitioner also demanded documentation proving that the secretary delegated authority to various irs directors and employees involved in petitioner’s case mr lawrence phillips the settlement officer assigned to petitioner’s case mailed petitioner a letter dated date that advised petitioner on the procedures of a collection hearing the letter warned that items that you mention in your cdp request are items that courts have determined are frivolous or groundless or appeals does not consider these are moral religious political constitutional conscientious or similar grounds mr phillips further enclosed with the letter copies of forms certificate of assessments payments and other specified matters for and the collection hearing was held via telephone on date during the hearing petitioner again demanded documentation and reiterated tax-protester rhetoric petitioner also questioned mr phillips as to why his hearing was being conducted by a settlement officer and not an appeals officer on date respondent mailed to petitioner the above-mentioned notice_of_determination concerning collection action s under sec_6320 and or for the and taxable years petitioner timely filed a petition with this court for redetermination of the collection action therein in addition to contentions akin to those set forth in his form petitioner argued notices of deficiency that are signed by the director of the service_center and not the secretary are invalid he did not receive a proper collection hearing because mr phillips was a settlement officer not an appeals officer and he was improperly precluded from raising relevant issues that challenged the validity of the underlying tax_liabilities i collection action a general rules opinion pursuant to sec_6331 if a taxpayer liable to pay taxes fails to do so within days after notice_and_demand for payment the secretary is authorized to collect such tax by levy upon the taxpayer’s property the secretary is obliged to provide the taxpayer with days’ advance notice_of_levy collection and of the administrative appeals available to the taxpayer sec_6331 upon a timely request a taxpayer is entitled to a collection hearing before the irs office of appeals sec_6330 at the collection hearing the taxpayer may raise any relevant issue relating to the unpaid tax or the proposed levy including appropriate spousal defenses challenges to the appropriateness of collection actions and offers of collection alternatives sec_6330 the taxpayer may not contest the validity of the underlying tax_liability unless the taxpayer did not receive a notice_of_deficiency for such tax_liability or did not otherwise have an earlier opportunity to dispute such tax_liability sec_6330 in rendering a determination the appeals officer must take into consideration verification that any applicable law and administrative procedure have been met relevant issues relating to the unpaid tax or proposed levy and whether any proposed collection action balances the need for the efficient collection_of_taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary sec_6330 the taxpayer is entitled to appeal the determination of the appeals_office made on or before date to the tax_court or a u s district_court depending on the type of tax at issue sec_6330 where the validity of the underlying tax_liability is properly at issue the court will review the matter de novo 114_tc_604 114_tc_176 the court reviews any other administrative determination regarding the proposed levy action for an abuse_of_discretion sego v commissioner supra pincite goza v commissioner supra pincite 2determinations made after date are appealable only to the tax_court see pension_protection_act of publaw_109_280 120_stat_1019 b analysi sec_1 appeals hearing petitioner argues that he did not receive a proper collection hearing because his hearing was conducted by a settlement officer not an appeals officer while sec_6330 references appeals officer the remainder of sec_6330 and corresponding regulations more broadly use the terms officer and employee sec_6330 provides that the collection hearing shall be conducted by an officer_or_employee who has had no prior involvement with respect to the unpaid tax the regulations further explain that a cdp hearing will be conducted by an employee or officer of appeals who has had no involvement with respect to the tax for the tax periods to be covered by the hearing sec_301_6330-1 proced admin regs accordingly there is no requirement that the collection hearing be conducted by an appeals officer the hearing need only be conducted by an officer_or_employee of the appeals_office which includes a settlement officer rohner v united_states aftr 2d n d ohio review of underlying liability petitioner claims that he received invalid notices of deficiency and was improperly precluded from challenging the underlying tax_liabilities at the collection hearing in particular petitioner contends that the notices of deficiency are invalid because they were signed by the compliance center director of the ogden service_center instead of the secretary and there was no documentation delegating authority to such director it is well established that the secretary or his delegates may issue notices of deficiency sec_6212 sec_7701 and a i a notice_of_deficiency prepared and issued by a director is valid and the director is not obligated to produce a copy of the order delegating such authority from the secretary 118_tc_162 sec_301_6212-1 sec_301_7701-9 proced admin regs in addition petitioner contends that the secretary cannot recalculate the amount of taxes he determined on his zero returns petitioner’s submitting zero returns does not preclude the commissioner from determining petitioner’s tax_liability the court is satisfied that petitioner received valid notices of deficiency for the and taxable years and had the opportunity to challenge the validity of the underlying tax_liabilities but failed to do so accordingly petitioner was properly precluded from contesting the validity of the underlying tax_liabilities at the collection hearing c review for abuse_of_discretion given the foregoing the notice_of_determination at issue is subject_to review for abuse_of_discretion because the existence or amounts of petitioner’s underlying tax_liabilities is not properly at issue an abuse_of_discretion has occurred if the commissioner exercised his discretion arbitrarily capriciously or without sound basis in fact or law 112_tc_19 petitioner alleges he did not receive a statutory notice_and_demand for payment sec_6303 provides that the secretary shall as soon as practicable and within days after the making of an assessment of a tax pursuant to sec_6203 give notice to each person liable for the unpaid tax stating the amount and demanding payment thereof if the notice is mailed it shall be sent to the taxpayer’s last_known_address sec_6303 a notice of balance due constitutes a notice_and_demand for payment for purposes of sec_6303 119_tc_252 forms show that respondent promptly sent petitioner notices of balance due for both and petitioner also contends that the appeals officer must present to the taxpayer documentation from the secretary verifying that any applicable law and administrative procedure have been met sec_6330 provides that the appeals officer shall at the hearing obtain verification from the secretary that the requirements of any applicable law or administrative procedure have been met however sec_6330 only requires that the officer obtain such verification before making a determination it does not require the officer to present a copy of the verification to the taxpayer nestor v commissioner supra pincite nor does sec_6330 require the officer to rely on a particular document to satisfy the verification requirement imposed by that section craig v commissioner supra pincite the officer may rely on a form_4340 to make such a verification because it provides at least presumptive evidence that a tax has been validly assessed 115_tc_35 petitioner actually received copies of the relevant forms and has made no showing that would tend to call into question the accuracy of the information reported thereon no abuse_of_discretion was committed with respect to the verification requirement petitioner did not show that there was any irregularity in the assessment procedure that would raise a question about the validity of the assessments respondent noted verification in the notice_of_determination that all requirements of applicable law and administrative procedure had been met and that respondent had properly balanced the need for efficient collection against any legitimate concerns of intrusiveness raised by petitioner petitioner has not presented any evidence or persuasive arguments that respondent abused his discretion but instead has repeatedly raised frivolous tax_protester arguments hence the court concludes that respondent’s determination to proceed with collection of petitioner’s tax_liabilities was not an abuse_of_discretion and respondent may proceed with the proposed collection ii sec_6673 penalty sec_6673 authorizes the tax_court to impose a penalty not in excess of dollar_figure on a taxpayer for proceedings instituted primarily for delay or in which the taxpayer’s position is frivolous or groundless a petition to the tax_court or a tax_return is frivolous if it is contrary to established law and unsupported by a reasoned colorable argument for change in the law 791_f2d_68 7th cir respondent warned petitioner about the sec_6673 penalty in the notice_of_determination and the court warned petitioner at trial that he may be subject_to such a penalty if he continued to raise frivolous arguments although respondent has not asked the court to impose a penalty pursuant to sec_6673 the court may sua sponte impose such a penalty against a taxpayer 115_tc_576 the court is convinced that petitioner’s position is frivolous and made for delay because it is based on tax-protester rhetoric which has been rejected by this court and many others see 118_tc_365 affd 329_f3d_1224 11th cir 117_tc_183 114_tc_176 keenan v commissioner tcmemo_2006_45 frey v commissioner tcmemo_2004_87 therefore the court concludes that a penalty of dollar_figure should be imposed on petitioner the court has considered all of petitioner’s contentions arguments requests and statements to the extent not discussed herein we conclude that they are meritless moot or irrelevant to reflect the foregoing an appropriate decision will be entered


internal_revenue_service number release date index number ---------------------- ------------- ------------------------------ --------------------- ------------------------------- re re department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-121211-05 date date ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ -------- taxpayer date1 date2 sb_se official --------------------------------------------------- dear ------------- ------------------------------------------------------- -------------------------- ---------------- this letter responds to a letter dated date and supplemental correspondence submitted by taxpayer requesting an extension of time under ' of the procedure and administration regulations to file a copy of a form_3115 application_for change in accounting_method with the internal_revenue_service irs national_office facts taxpayer a partnership is the owner of depreciable_property which is used in a commercial rental real_estate activity taxpayer timely filed its form_1065 u s return of partnership income for the taxable_year ending date1 along with the original of the form_3115 under revproc_2002_9 2002_1_cb_327 for automatic consent of a change in method_of_accounting for depreciation however no copy of this form_3115 with signature was filed with the irs national_office until date2 because taxpayer’s accountant inadvertently failed to file the copy timely ruling requested the procedure and administration regulations to file a duplicate copy of the signed form_3115 for the taxable_year ending date1 with the irs national_office accordingly taxpayer requests an extension of time pursuant to sec_301_9100-3 of revproc_2002_9 provides the procedures by which a taxpayer may obtain plr-121211-05 law and analysis automatic consent to change certain methods_of_accounting a taxpayer complying with all the applicable provisions of this revenue_procedure has obtained the consent of the commissioner of internal revenue to change the taxpayer’s method_of_accounting under sec_446 and the income_tax regulations thereunder section a of revproc_2002_9 provides that a taxpayer changing a method_of_accounting pursuant to revproc_2002_9 must complete and file a form_3115 in duplicate the original must be attached to the taxpayer's timely filed including extensions original federal_income_tax return for the year_of_change and a copy with signature of the form_3115 must be filed with the irs national_office no earlier than the first day of the year_of_change and no later than when the original is filed with the federal_income_tax return for the year_of_change under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time under the rules set forth in and to make a regulatory election sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief under ' will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusions based solely on the facts and the representations submitted we conclude that the requirements of and have been met accordingly an extension of time is hereby granted for taxpayer to file the necessary copy of the form_3115 with the irs national_office in this regard we will consider the signed copy of the form_3115 submitted by taxpayer to the irs national_office on date2 as timely filed by taxpayer for purposes of section a of revproc_2002_9 except as specifically ruled upon above no opinion is expressed or implied concerning the federal_income_tax consequences of the facts described above specifically no opinion is expressed or implied concerning i whether taxpayer is qualified to file the form_3115 for the change in method_of_accounting described above plr-121211-05 under revproc_2002_9 ii whether taxpayer meets the requirements of that revenue_procedure for the form_3115 described above or iii whether each item of property that is the subject of the form_3115 described above meets the requirements of revproc_2002_9 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer’s authorized representative a copy of this letter is also being sent to the sb_se official sincerely heather c maloy heather c maloy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes