t c memo united_states tax_court hailu yohannes awlachew petitioner v commissioner of internal revenue respondent docket no 23914-05l filed date hailu yohannes awlachew pro_se michael r fiore for respondent memorandum findings_of_fact and opinion marvel judge pursuant to sec_6330 petitioner seeks review of respondent’s determination sustaining the filing 1unless otherwise indicated all section references are to the internal_revenue_code in effect at all relevant times some monetary amounts are rounded to the nearest dollar of a notice_of_federal_tax_lien with respect to petitioner’s unpaid and federal_income_tax liabilities findings_of_fact some of the facts have been stipulated we incorporate the stipulated facts into our findings by this reference petitioner resided in cambridge massachusetts when his petition in this case was filed petitioner timely filed form sec_1040 u s individual_income_tax_return for and on his tax_return petitioner reported a total_tax liability of dollar_figure which included an alternative_minimum_tax amt liability of dollar_figure attributable to his exercise of incentive stock_options during that year petitioner reported tax due of dollar_figure for and sent a dollar_figure payment with his return on hi sec_2001 tax_return petitioner reported a total_tax liability of dollar_figure and a tax due of dollar_figure the ordinary_income reported on petitioner’ sec_2001 return included income from his disposition of incentive stock_options during sec_421 and sec_422 provide for deferred tax treatment of the qualifying exercise of an incentive_stock_option however the favorable tax treatment does not apply for amt calculation purposes sec_56 3deferred tax treatment under sec_421 and sec_422 is not available on the exercise of an incentive_stock_option if the taxpayer disposes of the share of stock received pursuant to the option within years of the grant of the option or within year of receipt of the share sec_422 petitioner admits that continued on date respondent assessed the tax reported on petitioner’s tax_return as well as statutory interest and a sec_6651 addition_to_tax that same day respondent issued to petitioner a statutory notice of balance due on date petitioner made another dollar_figure payment toward his unpaid tax_liability on date petitioner entered into an installment_agreement with respondent the record does not disclose the details of the agreement but beginning on date petitioner began making monthly payments to respondent between date and date petitioner made payments totaling dollar_figure toward his unpaid tax_liability petitioner did not make any voluntary payments toward his tax_liability after date on date respondent assessed the tax reported on petitioner’ sec_2001 tax_return as well as statutory interest and sec_6651 and sec_6654 additions to tax the record does not disclose whether petitioner made any payments toward hi sec_2001 tax_liability on or around date petitioner submitted an offer-in- compromise to respondent the record does not disclose the continued he disposed of shares received as a result of the exercise of his incentive stock_options before he had held them for year details of petitioner’s offer on date respondent rejected petitioner’s offer on date respondent issued to petitioner a final notice notice_of_intent_to_levy and notice of your right to a hearing levy notice in which respondent announced his intention to levy to collect petitioner’s unpaid and tax_liabilities the levy notice also advised petitioner of his right to a hearing with respondent’s appeals_office petitioner received the levy notice on or about date but he did not request a hearing with respondent on or around date petitioner submitted a second offer-in-compromise the record does not disclose the details of petitioner’s second offer on date respondent rejected petitioner’s second offer-in-compromise on date petitioner submitted a third offer-in- compromise the record does not disclose the details of petitioner’s third offer on date respondent issued to petitioner a notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 lien notice the lien notice informed petitioner that he had a right to request a hearing to appeal the collection action and to discuss optional payment methods the lien notice also advised petitioner how to request a hearing and how to obtain a release of the federal_tax_lien on or about date petitioner mailed to respondent a form request for a collection_due_process_hearing request in his request petitioner stated that he had lost all of the value of the stock from which his tax_liability originated and that the loss was beyond his control because it resulted from a downturn in the economy petitioner also claimed that his job security was uncertain that he was in debt and that he was a loyal taxpayer petitioner asked respondent not to place a lien on his property because of his precarious financial condition by letter dated date respondent’s appeals_office informed petitioner that his request had been received and that a telephone hearing had been scheduled for date on date respondent received a letter from petitioner requesting a face-to-face hearing petitioner attached to his request a form 433-a collection information statement for wage earners and self-employed individuals and documentation to substantiate the figures on his form 433-a on his form 433-a petitioner reported assets of dollar_figure dollar_figure in cash and dollar_figure in investments dollar_figure in credit card debt and a monthly net_income of dollar_figure 4on his form 433-a petitioner reported monthly income from salaries of dollar_figure and monthly expenses of dollar_figure petitioner’s monthly expenses included other expenses of dollar_figure on date petitioner participated in a face-to- face hearing with a settlement officer petitioner and the settlement officer also communicated through correspondence by letter dated date the settlement officer informed petitioner that she was sustaining the previous rejection of petitioner’s most recent offer-in-compromise the settlement officer offered petitioner the opportunity to enter into an installment_agreement requiring a monthly payment of dollar_figure petitioner rejected the settlement officer’s offer complaining that the amount was too high by letter dated date the settlement officer provided petitioner a copy of his previously submitted form 433-a and a blank form 433-a and informed petitioner that he had until date to submit any additional information to assist her in making her determination by letter dated date petitioner again requested relief from the additions to tax and interest that had been assessed for and because of his precarious job and financial situations petitioner also submitted an updated form 433-a showing dollar_figure in assets dollar_figure in cash and dollar_figure in investments dollar_figure in credit card debt and monthly net_income of approximately dollar_figure 5we assume that this was a rejection of petitioner’s third offer-in-compromise submitted in date by letter dated date the settlement officer informed petitioner that she had adjusted his monthly expenses to meet the national standard for one person as a result the settlement officer determined that petitioner was able to make monthly payments of dollar_figure the settlement officer also denied petitioner’s request for abatement of interest and for relief from the additions to tax the settlement officer gave petitioner until date to accept the proposed installment_agreement by letter dated date petitioner rejected the proposed installment_agreement petitioner disputed the settlement officer’s adjustments to his monthly expenses as reported on his updated form 433-a and he inquired whether any of the amt that he had paid could be used to offset his unpaid tax_liabilities by letter dated date the settlement officer offered petitioner a reduced installment_agreement with monthly payments of dollar_figure she gave petitioner until date to respond by letter dated date petitioner rejected the installment_agreement and once again requested relief based on 6respondent informed petitioner that he could claim expenses for only himself because he did not claim his spouse’s income petitioner never argued that his spouse was unemployed or that he was otherwise supporting his spouse however he did testify that he was supporting two aging parents and an ill niece the record does not disclose any detail of petitioner’s support of these individuals the poor economy his lack of knowledge of the tax law and his fear of losing his job petitioner requested guidance on obtaining an abatement of interest and relief from the additions to tax by letter dated date the settlement officer detailed the requirements for a request for relief from additions to tax informed petitioner that respondent was required by statute to assess interest in his case and that the interest could not be abated and referred petitioner to the internal_revenue_manual for further information by letter dated date petitioner once again requested the abatement of interest and relief from the additions to tax because of the downturn in the economy and his lack of knowledge regarding the tax implications of employee stock_options on date respondent issued to petitioner a notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination the notice_of_determination stated that respondent had verified that all statutory and administrative requirements had been met that respondent had addressed all of petitioner’s arguments raised at the face-to-face hearing and that respondent had determined that the lien appropriately balanced the government’s need for the efficient collection_of_taxes and petitioner’s concern that the 7the settlement officer used the term penalties in the letter but she was referring to additions to tax action not be more intrusive than necessary in light of petitioner’s circumstances on date petitioner’s petition contesting respondent’s determination was filed the case was scheduled for trial and a trial was held on date opinion all property and rights to property of a taxpayer become subject_to a lien in favor of the united_states on the date a tax_liability is assessed against the taxpayer if the taxpayer fails to meet the commissioner’s demand for payment of the tax_liability sec_6321 and sec_6322 until a lien notice is filed a lien is without validity and priority against certain persons such as judgment lien creditors of the taxpayer sec_6323 after the secretary files the lien notice the secretary must provide the taxpayer with written notice of the filing informing the taxpayer of the right to request an administrative hearing on the matter sec_6320 b sec_6320 requires that the administrative hearing be conducted pursuant to sec_6330 d other than paragraph b thereof and e at the hearing a taxpayer may raise any relevant issue including appropriate spousal defenses challenges to the appropriateness of the collection action and collection alternatives such as an offer-in-compromise sec_6330 additionally at a hearing a taxpayer may contest the existence and amount of the underlying tax_liability if the taxpayer did not receive a notice_of_deficiency for the tax_liability in question or did not otherwise have an opportunity to dispute the tax_liability sec_6330 see also 114_tc_604 following the hearing the appeals_office is required to issue a notice_of_determination regarding the disputed lien notice in so doing the appeals_office is required to take into consideration the verification presented by the secretary the issues raised by the taxpayer and whether the proposed collection action appropriately balances the need for efficient collection_of_taxes with the taxpayer’s concerns regarding the intrusiveness of the proposed collection action sec_6330 the taxpayer may petition the tax_court for judicial review of the appeals office’s determination sec_6330 if the taxpayer files a timely petition for judicial review the applicable standard of review depends on whether the underlying tax_liability is at issue the phrase underlying tax_liability includes the tax_deficiency any penalties and additions to tax and statutory interest 115_tc_329 if the underlying tax_liability is properly at issue the court reviews any determination regarding the underlying tax_liability de novo sego v commissioner supra pincite the court reviews all other administrative determinations for abuse_of_discretion id i petitioner’s challenge to the underlying tax_liabilities sec_6330 provides that a taxpayer may dispute the existence or amount of his unpaid tax_liability if he did not receive a notice_of_deficiency or otherwise have an opportunity to dispute such tax_liability the opportunity to dispute such tax_liability includes a conference with the appeals_office that was offered either before or after the tax_liability was assessed sec_301_6320-1 q a-e2 proced admin regs most of petitioner’s arguments are directed to collection alternatives and do not raise challenges to the underlying tax_liabilities for and however during the administrative_proceeding petitioner inquired about the possibility of offsetting his unpaid liabilities with the amt that he had paid the record contains no evidence that the settlement officer specifically answered his inquiry in this proceeding petitioner has again raised the question of whether he can reduce his unpaid tax_liabilities by the amount of amt he paid although his argument is very unclear we interpret it as an assertion that he is entitled to a credit under sec_53 sec_53 authorizes a taxpayer to claim a credit for net_minimum_tax paid in prior years adjusted for specified items the minimum_tax_credit allowable under sec_53 is the excess if any of the adjusted_net_minimum_tax imposed for all prior taxable years beginning after over the amount allowable as a credit under sec_53 for such prior taxable years sec_53 the sec_53 credit however is limited to the amount by which a taxpayer’s regular_tax_liability for the year the credit is claimed less allowable credits exceeds his tentative_minimum_tax for the year sec_53 petitioner did not claim a sec_53 credit on either his or income_tax return and he did not present any information to the settlement officer that he was entitled to claim such a credit his inquiry about the possibility of a credit which he made in one of his letters to the settlement officer during his sec_6320 hearing was insufficient to demonstrate either that he was claiming a sec_53 credit for and or or that he was entitled to such a credit in addition even if we treat petitioner’s inquiry as a claim for a sec_53 credit petitioner is precluded from pursuing his claim by the fact that he had an earlier opportunity to assert his claim and he did not do so petitioner received the date levy notice but he did not request a hearing under sec_6330 regarding the levy notice petitioner’s failure to do so precludes him from asserting his claim in this proceeding see sec_301_6320-1 q a-e7 proced admin regs see also 126_tc_356 castleman v commissioner tcmemo_2007_143 because petitioner had an earlier opportunity to dispute his underlying tax_liability by asserting a claim for a credit under sec_53 his underlying tax_liability was not properly at issue before the settlement officer considering the lien and it is not properly before us now ii petitioner’s challenge to respondent’s determination to file a lien although petitioner’s arguments are not clear petitioner appears to argue that respondent erred by rejecting collection alternatives he raised and by offering petitioner an installment_agreement requiring monthly payments of dollar_figure petitioner appears to argue that his financial condition is so dire that he cannot afford to pay his and tax_liabilities although sec_6330 requires respondent to consider relevant issues properly raised by petitioner including a claim 8in a posttrial conference call with this court petitioner raised a question regarding whether the tax relief and health care act of trhca publaw_109_432 120_stat_2922 authorizes petitioner to claim a refundable_credit under sec_53 as amended by trhca that he could then apply against his unpaid tax_liabilities for and by order we gave the parties time to explore the effect of trhca on this case and to file a joint written status report summarizing their positions in a joint status report filed on date respondent stated that trhca has no impact on this case and he explained why petitioner simply asserted that he has an amt credit that he has never used and that he will use any refundable_credit he may receive under the new law to pay his and tax_liabilities that a collection alternative such as an installment_agreement or offer-in-compromise is more appropriate respondent is not required to offer petitioner a collection alternative acceptable to petitioner before determining that a lien is an appropriate collection tool in this case petitioner had the burden of demonstrating that a collection alternative was appropriate and that respondent abused his discretion by rejecting the collection alternative on the record before us we cannot conclude that the settlement officer abused her discretion in determining that the lien was appropriate to safeguard respondent’s collection of petitioner’s unpaid taxes petitioner did not argue at his hearing or at trial that respondent should have accepted one or more of his three offers-in-compromise and he did not introduce the offers into evidence at trial petitioner made payments for approximately a year and a half of about dollar_figure per month after full years of nonpayment petitioner submitted several forms 433-a showing net monthly income ranging from more than dollar_figure per month to dollar_figure per month the settlement officer finally determined that petitioner could pay dollar_figure per month 9although petitioner subsequently submitted a revised form 433-a showing monthly net_income of dollar_figure we are satisfied that the settlement officer did not abuse her discretion in concluding that petitioner could pay dollar_figure per month petitioner estimated his expenses and did not apply the applicable national and local continued petitioner did not establish that the settlement officer’s determination was an abuse_of_discretion we hold therefore that the settlement officer did not abuse her discretion by determining that the lien on petitioner’s property was appropriately filed and would remain in effect until petitioner’s and tax_liabilities were satisfied to reflect the foregoing decision will be entered for respondent continued standards promulgated by respondent for use in calculating a taxpayer’s allowable expenses


internal_revenue_service number release date index number ----------------------------------------------- --------------------------- ---------------------------------------------------- ----------- ------------------------------------------ department of the treasury washington dc person to contact --------------------------- id no -------------- telephone number ---------------------- refer reply to cc psi b03 - plr-107991-13 date date legend x ---------------------------------------------------- ---------------------------------------------------- y ---------------------------------------------------- ---------------------------------- z ---------------------------------------------------- ---------------------------------------------------------------------- country d1 -------- ------------------- dear ---------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations that x be granted an extension of time to file an election to be classified as a partnership under sec_301_7701-3 facts the information submitted states that x was formed on d1 as a limitada under the laws of country x’s default classification is an association_taxable_as_a_corporation because all members have limited_liability as of d1 x had more than one member including y z is the general_partner of y x intended to elect to be treated as a partnership for federal tax purposes effective d1 however a form_8832 entity plr-107991-13 classification election electing to be treated as a partnership effective d1 was not timely filed law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 under sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership sec_301_7701-3 provides that unless an entity elects otherwise a foreign eligible_entity is an association if all members have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided in sec_301_7701-3 or to change its classification by filing a form_8832 with the service_center designated on the form_8832 sec_301_7701-3 provides that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 cannot be more than days prior to the date on which the election is filed and cannot be more than months after the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but 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 a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government plr-107991-13 conclusion based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file form_8832 with the appropriate service_center and elect to be classified as a partnership for federal tax purposes effective d1 a copy of this letter should be attached to the form_8832 except as specifically set forth above no opinion is expressed or implied concerning the federal tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed or implied as to whether x is otherwise eligible to make the election this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to x’s authorized representative sincerely associate chief_counsel passthroughs special industries by ___________________________________ james a quinn senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index numbers -------------------------- ----------------------------------------------- ------------------------------------------------------ ------------------------------------- department of the treasury washington dc person to contact ----------------------- id no -------------- telephone number ---------------------- refer reply to cc psi b03 - plr-127536-12 date date legend x ------------------------------------------------------------ ----------------------------------------- y ------------------------------------------------------------ ---------------------------------------- state a --------------- --------------------------- dear -------------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be classified as an association for federal tax purposes facts the information submitted discloses that x was formed on a as a limited_liability_company under the laws of state x’s ultimate owner is y the common parent_corporation of an affiliated_group that files a consolidated_return x failed to file timely a form_8832 entity classification election to be classified as an association for federal tax purposes effective a law and analysis plr-127536-12 sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301 b unless the entity elects otherwise a domestic eligible_entity is i a partnership if it has two or more members or ii disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides in part that except as provided in sec_301_7701-3 and v an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 entity classification election with the service_center designated on form_8832 sec_301_7701-3 provides in part that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed under sec_301_9100-1 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 internal_revenue_code code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards 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 regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government plr-127536-12 conclusion based on the facts and representations submitted x has established that the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied consequently x is granted an extension of time of one hundred twenty days from the date of this letter to elect under sec_301_7701-3 to be treated as an association effective a x must file form_8832 within the extension period with the appropriate service_center with a copy of this letter attached except for the specific ruling above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code in addition sec_301_9100-1 provides that the granting of an extension of time for making an election is not a determination that the taxpayer is otherwise eligible to make the election this ruling is directed only to the taxpayer requesting it according to sec_6110 of the code this ruling may not be used or cited as precedent under a power_of_attorney on file with this office we are sending a copy of this letter to x’s authorized representatives sincerely associate chief_counsel passthroughs special industries by s james a quinn senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


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-120152-09 date july legend legend x ------------------------- ----------------------------- y ---------------------------------------------- ----------------------- state ------------- trust1 ----------------------------------------------------------- trust2 ---------------------------------------------------------- trust3 ---------------------------------------------------------------------- ------------------------------------- trust4 ---------------------------------------------------------------- ------------------------------------- a -------------------------- date1 ------------------ date2 ------------------ date3 ------------------------- date4 ----------------------- date5 ------------------------- plr-120152-09 dear ---------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the code the information submitted states that x was incorporated under the laws of state on date1 x elected to be an s_corporation effective date2 until date3 the stock of x was held entirely by trust1 trust2 and a an individual x represents that trust1 and trust2 are trusts treated under subpart e of part i of subchapter_j of chapter of the code as being owned by an individual who is a citizen_of_the_united_states and therefore trust1 and trust2 are eligible s_corporation shareholders under sec_1361 on date3 trust1 transferred its shares of x to y a limited_liability_company formed under the laws of state and owned by trust3 and trust y is represented as being a partnership for federal tax purposes and therefore is not an eligible s_corporation shareholder x represents that trust3 and trust4 are trusts treated under subpart e of part i of subchapter_j of chapter of the code as being owned by an individual who is a citizen_of_the_united_states and therefore trust3 and trust4 are eligible s_corporation shareholders under sec_1361 on or about date4 x learned that its s_corporation_election terminated as a result of the transfer of x stock to y an ineligible s_corporation shareholder as corrective action y transferred its x stock to trust4 on date5 x represents that x and x’s shareholders have filed tax returns consistent with x being an s_corporation x further represents that the circumstances resulting in the termination of x’s s_corporation_election were inadvertent and were not motivated by tax_avoidance or retroactive tax planning x and each person who was or is a shareholder of x at any time since date3 agree to make adjustments consistent with the treatment of x as an s_corporation that may be required by the secretary with respect to such period sec_1362 provides that if an election under sec_1362 by a corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then plr-120152-09 notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election terminated on date3 because of the transfer of x stock to y we further conclude that the termination was inadvertent within the meaning of sec_1362 pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation on date3 and thereafter provided that x’s s_corporation_election was valid and the election was not otherwise terminated under sec_1362 for reasons not addressed in this letter except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 or whether trust1 trust2 trust3 and trust4 are eligible s_corporation shareholders under sec_1361 this ruling is directed only to the taxpayer who requested 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 x’s authorized representative sincerely bradford r poston senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court rodney w lynnell r frazier petitioners v commissioner of internal revenue respondent docket no filed date rodney w and lynnell r frazier pro sese alan friday for respondent memorandum opinion thornton judge by separate notices of deficiency respondent determined the following deficiencies and penalties with respect to petitioner husband’s federal income taxes and petitioners’ joint and federal income taxes accuracy-related years deficiency penalty sec_6662 dollar_figure dollar_figure big_number big_number big_number all section references are to the internal_revenue_code in effect in the years in issue all rule references are to the tax_court rules_of_practice and procedure all dollar amounts are rounded some of the facts have been stipulated and are so found and incorporated by this reference at the time the petition was filed petitioners were married and living in hueytown alabama during the years at issue petitioner husband operated a business known as pro tv vcr repair in petitioner husband filed a federal_income_tax return with a filing_status of single in petitioners were married during the years at issue petitioner wife was employed at the alabama power co in and petitioners filed joint federal_income_tax returns petitioner husband’s tax_return for and petitioners’ joint tax returns for and reported income as follows amount of year source_of_income income reported schedule c income dollar_figure interest_income wages big_number dividend income schedule c income wages big_number tnterest dividend sec_141 schedule c loss big_number in petitioner husband purchased a house which he sold in resulting in a capital_gain of dollar_figure respondent determined that for taxable_year petitioner husband had unreported income in the amount of dollar_figure and that for taxable years and petitioners had unreported income of dollar_figure and dollar_figure respectively respondent also determined that petitioners had unreported capital_gain of dollar_figure in taxable_year in their petition petitioners alleged that they did not engage in any taxable activities during the years at issue discussion generally the commissioner’s determinations are presumed correct and the taxpayer bears the burden of proving that those determinations are erroneous rule a 290_us_111 in certain circumstances involving unreported income respondent must make some minimal evidentiary showing linking the taxpayer to an income-producing activity before the presumption in favor of respondent’s determination attaches 994_f2d_1542 11th cir affg tcmemo_1991_636 in the case at hand ample evidence supports respondent’s determinations respondent used the cash_expenditures_method to reconstruct petitioners’ income this method is based on the assumption that absent some explanation by the taxpayer the excess of a taxpayer’s expenditures over reported income in a taxable_year constitutes taxable_income 92_tc_661 petitioners have stipulated copies of bank records disclosing deposits and disbursements from their bank accounts and schedules prepared by respondent summarizing all of the transactions deposits and disbursements for each of the years in issue these documents show that petitioners made substantial expenditures in excess of amounts reported as income on their federal_income_tax returns our review of the record indicates that respondent complied with the requirements set forth in 348_us_121 by adequately accounting for opening cash balances and for nontaxable receipts such as loans see petzoldt v commissioner supra pincite and that respondent has properly reconstructed petitioners’ income for the years in issue petitioners bear the burden of showing that respondent’s application of the cash_expenditures_method was unfair or inaccurate see 335_f2d_671 5th cir 198_f2d_851 3d cir 87_tc_74 alvarez v commissioner tcmemo_1995_414 petitioners chose to present no substantive evidence and to call no witnesses at trial petitioner husband sought to read from a prepared statement contending that the federal_income_tax is an indirect_tax under article section clause of the constitution and that petitioners did not engage in any excise taxable activities petitioners’ trial memorandum advances similar arguments petitioners’ arguments are without merit and have long been rejected in 82_tc_403 for instance this court stated since the ratification of the sixteenth_amendment it is immaterial with respect to income taxes whether the tax is a direct or indirect_tax the whole purpose of the sixteenth_amendment was to relieve all income taxes when imposed from apportionment and from a consideration of the source whence the income was derived see also 751_f2d_85 2d cir sickler v commissioner tcmemo_1994_462 boyce v commissioner tcmemo_1990_555 respondent’s determinations of unreported income for each of the years in issue are sustained petitioners have stipulated that the sale in of the house that petitioner husband purchased in resulted in capital_gain of dollar_figure we conclude that this capital_gain constitutes taxable_income respondent’s determination on this issue is sustained respondent determined that petitioners are liable for accuracy-related_penalties pursuant to sec_6662 for negligence or disregard of rules or regulations ’ in their petition petitioners assigned no error to that determination nor did they assert either in their trial memorandum or at trial that the sec_6662 penalties are in dispute petitioners failed to offer any evidence that their underpayments were not due to negligence or that they did not disregard rules or regulations respondent’s determination of penalties under sec_6662 is sustained the tax_court is authorized under sec_6673 to require the taxpayer to pay to the united_states a penalty not in excess of dollar_figure when it appears to the court that the taxpayer’s position in the proceeding is frivolous or groundless petitioners’ position based on stale and meritless contentions is manifestly frivolous and groundless and their action has resulted in the waste of limited judicial and administrative resources previously on its own motion this court has awarded damages to the united_states under sec_6673 where the taxpayer advanced frivolous and groundless contentions similar to ' in the notices of deficiency for each of the years at issue respondent determined that petitioners were liable for civil_fraud penalties pursuant to sec_6663 or in the alternative accuracy-related_penalties pursuant to sec_6662 at trial respondent abandoned the imposition of civil_fraud penalties those advanced by petitioners see abrams v commissioner supra pincite although we do not now impose a penalty under sec_6673 we caution petitioners that if they continue to advance such arguments to this court they will invite such penalties in the future to reflect the foregoing and a concession by the respondent decision will be entered under rule


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si - plr-119452-99 date date x a d1 year year dear this letter responds to a letter dated date and subsequent correspondence submitted by x’s authorized representative on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on d1 of year a the president of x represents that x was intended to be an s_corporation beginning with its year taxable_year a believed that x automatically received s_corporation status by filing form ss-4 application_for employer_identification_number and receiving an acceptance of form ss-4 from the service therefore no form_2553 election by a small_business_corporation was filed timely for x for year sec_1362 of the code provides that if -- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation for x’s year taxable_year accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x’s year taxable_year a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being forwarded to x’s authorized representative sincerely yours h grace kim assistant to the chief branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court rodney w taras and linda k taras petitioners v commissioner of internal revenue respondent docket no filed date marc s fisher for petitioners michael d baker for respondent memorandum findings_of_fact and opinion ruwe judge respondent determined deficiencies in petitioners' federal income taxes and additions to tax as follows year deficiency dollar_figure dollar_figure dollar_figure dollar_figure addition_to_tax sec_6651 dollar_figure dollar_figure dollar_figure dollar_figure after concessions the issues remaining for decision are whether petitioners' horse racing and breeding activity during and was an activity_not_engaged_in_for_profit within the meaning of sec_183 and whether petitioners are liable for additions to tax pursuant to sec_6651 findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and second stipulation of facts are incorporated herein by this reference at the time the petition was filed petitioners resided in walnutport pennsylvania during the years at issue ms taras was employed as a full- time secretary in the accounting department at bethlehem steel corp bethlehem ms taras worked hours per week at bethlehem on their and federal joint income_tax returns petitioners reported gross_income from bethlehem in the amounts of dollar_figure dollar_figure dollar_figure and dollar_figure respectively 1petitioners concede that the notice_of_deficiency for improperly allowed a gambling loss deduction in the amount of dollar_figure thereby erroneously reducing taxable_income by dollar_figure 2unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure during the years through mr taras owned and operated a framing and truss fabrication business in walnutport pennsylvania as a framing contractor mr taras employed and supervised as many a sec_5 to employees whose primary function was to frame houses and fabricate trusses on schedule c profit or loss from business or profession petitioners reported net_income of dollar_figure dollar_figure dollar_figure and dollar_figure from the framing and truss fabrication business for and respectively mr taras grew up on his family’s farm during those years the family farm had horses as did other farms on which mr taras worked when he was a teenager in petitioners lived on a 1-acre parcel of land that is adjacent to a 2-acre parcel owned by mr taras’ parents petitioners kept their horses on the acre parcel during the years at issue prior to petitioners made plans to begin racing and breeding horses petitioners did not have any experience in racing or breeding horses petitioners' plan generally consisted of a desire to purchase racehorses race those horses and thereafter to breed their horses in an effort to eventually race the horses they bred in the summer of petitioners contacted ms audrey kraynik who represented that she was the only female licensed horse trainer in pennsylvania and that she had trained horses for a number of years petitioners did not consult with anyone other than ms kraynik and her two personal references before they started their horse racing activity upon the recommendation of ms kraynik petitioners purchased a horse named stand away in and seven horses in named dublin bay captain’s k liberty knoll bad memories naughty castle distinctive jet and talitha all these horses with the possible exception of distinctive jet were purchased by petitioners for a total original investment of approximately dollar_figure in petitioners and ms kraynik became involved in a dispute over the ownership of distinctive jet which was eventually resolved in as a result of the dispute petitioners lost any ownership rights in distinctive jet and therefore were unable to register any of the foals of distinctive jet or use them for racing or breeding purposes in and while petitioners were operating their horse racing activity a number of their horses were injured liberty knoll broke a bone in her leg and subsequently died talitha suffered cuts from jumping out of a trailer while being transported bad memories suffered bone chips in her knee captain's k developed tendon problems and naughty castle suffered injuries to her leg and foot petitioners had purchased liberty knoll for dollar_figure talitha for dollar_figure bad memories for dollar_figure captain's k for dollar_figure and naughty castle for dollar_figure several of petitioners' other horses suffered injuries as well in ruth ann k suffered internal lacerations while giving birth in or traders k suffered internal injuries related to complications with an unborn foal and tekla tekla two and captain konik developed leg and knee problems sometime in in an effort to obtain information on breeding race horses mr taras contacted mr tom regal and mr paul mills who each had experience in breeding horses mr regal and mr mills both owned ranches in pennsylvania where each had his own breeding operation petitioners also joined the pennsylvania breeders association and began subscribing to magazines and publications regarding the breeding of horses petitioners hired a number of professionals to assist them in training boarding and caring for their horses petitioners hired licensed trainers including ms audrey kraynik who trained petitioners’ horses between and mr keith lebaron who trained their horses in and mr william summers who trained their horses for a brief period of time mr leslie vegh who trained their horses in and and mr rusty albright who trained petitioners' horses from to the time of trial these trainers also fed and cared for petitioners' horses during the period they trained them petitioners also hired veterinarians to care for their horses petitioners each spent time working on their horse racing and breeding activity mr taras made improvements to the adjacent property including a small barn and seven stalls and enclosed the area with fencing later a 20-stall barn was built in an effort to reduce expenses during the years at issue petitioners increased the number of hours each spent working on their horse activity they performed simple veterinary tasks such as worming the horses and giving them shots petitioners began buying veterinary supplies from different catalogs rather than tack shops and boarding their horses on the adjacent 2-acre parcel when they were not racing also during the years at issue petitioners eliminated their farm help and performed by themselves such activities as cleaning the stalls and feeding and grooming the horses ms taras maintained the books_and_records of petitioners’ horse racing and breeding activity petitioners offered a detailed summary of expenses associated with their activity which included monthly expenses for feed veterinarians trailering jockey club fees tack boarding farriery breaking training stud services legal fees associated with the activity and other miscellaneous items ms taras also kept a summary of the dates they acquired their horses the purchase prices and the proceeds received if a horse were sold these records also 3the following is a list of the horses purchased and the calculation of gain_or_loss on each horse continued describe whether the horses were used for breeding or racing and the amount of their winnings if any petitioners records indicate that the income and expenses related to their horse activity over the years from to resulted in gross_income of dollar_figure expenses of dollar_figure and a net_loss of dollar_figure from time to time petitioners used the books and continued horse's year purchase sale name purchased price proceeds gain loss dublin bay dollar_figure dollar_figure dollar_figure captain's k big_number -0- big_number liberty knoll big_number -0- big_number bad memories big_number -0- big_number naughty castle big_number big_number distinctive jet big_number -0- big_number talitha big_number big_number royale finale -0- hermit's glory big_number -0- big_number fab's last big_number big_number ruth ann k big_number -0- big_number kings linn big_number big_number big_number anda big_number big_number kashmir -0- -0- -0- thaddius -0- snickers -0- tamara -0- scoundrel -0- filly unknown -0- colt unknown -0- fillies unknown -0- dublin bay's -0- colt anda's colt -0- colts -0- big_number big_number apple writer big_number big_number total dollar_figure dollar_figure dollar_figure 4see appendix records to determine what if any income and expenses they had in connection with their horse activity petitioners also maintained records on the breeding of each of their horses beginning in petitioners bred the horses they purchased later during and petitioners bred their mares traders k angular pleasure bad memories and its legit to the stallion tagish for a stud fee of dollar_figure each during petitioners bred their mares its legit and angular pleasure to the stallion deerhound for a stud fee of dollar_figure each angular pleasure was again bred to deerhound in for a stud fee of dollar_figure finally petitioners bred their mares traders k and tekla tekla two to the stallion norquestor for a stud fee of dollar_figure each as a result of petitioners’ having bred their mares to the above-mentioned stallions a number of foals have been produced by breeding their mares to norquestor petitioners had produced at the time of trial one horse of racing age and two yearlings petitioners estimate an average value of dollar_figure for each of their foals bred from norquestor the property upon which petitioners maintained their horse operations and their horses was not open to the public petitioners did not ride the horses themselves nor allow others except for professional trainers to ride their horses petitioners attended horseraces watched their horses race and gambled on horses at various times during the years at issue petitioners filed their tax returns after the due_date for each year petitioners filed their tax returns for the tax years and on date and their tax_return for the tax_year on date on date respondent mailed petitioners a notice_of_deficiency for each of the taxable years and opinion the first issue we must decide is whether petitioners' horse racing and breeding operation was an activity_not_engaged_in_for_profit as defined in sec_183 sec_183 provides generally that no deduction attributable to an activity which is not engaged in for profit is allowed except as provided in sec_183 sec_183 allows those deductions which are otherwise allowable regardless of profit objective sec_183 allows those deductions which would be allowable if the activity were engaged in for profit but only to the extent that gross_income attributable to the activity exceeds the deductions permitted by sec_183 sec_183 defines 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 deductions are allowed under sec_162 for the ordinary and necessary expenses of carrying on an activity which constitutes the taxpayer's trade_or_business deductions are allowed under sec_212 for expenses paid_or_incurred 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 with respect to either section the taxpayer must demonstrate a profit objective for the activities in order to deduct associated expenses see 934_f2d_573 5th cir affg tcmemo_1989_687 893_f2d_656 4th cir affg 91_tc_686 72_tc_28 66_tc_312 34_tc_1146 sec_1_183-2 income_tax regs while a reasonable expectation of profit is not required a taxpayer's profit_motive must be bona_fide 830_f2d_499 3d cir affg tcmemo_1986_156 respondent argues that for purposes of sec_183 a taxpayer must prove that profit was the primary purpose for engaging in the activity in simon v commissioner supra pincite the court_of_appeals for the third circuit the court to which this case is appealable stated it is well established that in order to take a deduction for expenses_incurred in carrying out a trade_or_business the taxpayer must have entered into the venture with the primary and predominant purpose and objective of making a profit see 792_f2d_1256 4th cir 778_f2d_275 5th cir primary in this context means of first importance or principally while profit means economic profit independent of tax savings 383_us_569 accord 81_tc_210 84_tc_564 the existence of the requisite profit objective is to be determined by examining all the facts and circumstances giving greater weight to objective facts than to the taxpayer's statement of intent 78_tc_659 sec_1_183-2 and b income_tax regs sec_1 b income_tax regs lists nine nonexclusive factors relevant to the issue of profit objective 5the supreme court also addressed the standard to be applied when it stated we accept the fact that to be engaged in a trade_or_business the taxpayer must be involved in the activity with continuity and regularity and that the taxpayer's primary purpose for engaging in the activity must be for income or profit 480_us_23 6in order to determine whether and to what extent sec_183 and the regulations thereunder apply the activity or activities of the taxpayer must be ascertained sec_1_183-1 income_tax regs generally the commissioner will accept the characterization by the taxpayer of several undertakings as either a single activity or separate activities id petitioners have treated their horse racing and breeding operations as one activity and respondent has accepted this treatment continued sec_1_183-2 income_tax regs contains a nonexclusive list of objective factors to be considered in deciding whether an activity is engaged in for profit the factors are the manner in which the taxpayer carries on the activity the expertise of the taxpayer or the taxpayer's advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer's history of income or losses with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayer and elements of personal pleasure or recreation allen v commissioner supra pincite no single factor is determinative petitioners have the burden of proving that they had the requisite profit objective and that respondent's determination is incorrect 290_us_111 businesslike manner the fact that a taxpayer carries on the activity in a businesslike manner and maintains complete and accurate books and continued records may indicate that the activity was engaged in for profit sec_1_183-2 income_tax regs petitioners kept books_and_records for their horse racing and breeding activity petitioners kept detailed ledgers by date and check number in which they tracked monthly expenses petitioners' detailed bookkeeping does not by itself demonstrate an intent to generate a profit 72_tc_411 affd without published opinion 647_f2d_170 9th cir a lack of profit objective may exist where a taxpayer fails to abandon unprofitable methods change operations or adopt new techniques in an attempt to improve profitability sec_1_183-2 income_tax regs accordingly the maintenance of detailed books_and_records may reveal the mere trappings of a profit objective particularly when a taxpayer fails to produce income statements profit plans or business plans created to alter operations in an attempt to reverse mounting losses osteen v commissioner tcmemo_1993_519 affd in part and revd in part 62_f3d_356 11th cir petitioners contend that before conducting any racing or breeding activities they consulted with individuals who had experience in racing horses who helped them establish a business plan petitioners also argue that since commencing their activity they have attempted to increase profitability by reducing expenses although petitioners sought advice from several successful horse trainers and breeders their testimony in this regard was vague and the meetings yielded no concrete plan of operation petitioners decided to commence their activity with little concept of the expenses involved or of the steps required to achieve cost efficiency and an eventual profit see daley v commissioner tcmemo_1996_259 with respect to petitioners’ assertion that they constantly analyzed and modified their business plan and operation in order to minimize expenses petitioners have failed to introduce specific credible_evidence to indicate that increased profit potential would result the record shows that expenses over years of operating their horse racing and breeding activity have generally remained constant or increased petitioners assert that they reduced veterinary expenses between and and reduced expenses by boarding their horses at their property as part of a plan to increase profitability the record shows a reduction of veterinary expenses in those years but veterinary expenses for the years prior and years after that period have remained constant or increased as time passed moreover veterinary expenses account for less than percent of overall 7see appendix expenses in all years even assuming that petitioners were able to reduce their board and veterinary expenses to zero for all years total losses would have only been reduced by approximately percent in the face of successive or increasing losses petitioners have failed to materially alter their operations or their prospects of generating profits golanty v commissioner supra pincite expertise preparation for an activity by extensive study of its accepted business economic and scientific practices or consultation with those who possess expertise in the activity may indicate that the taxpayer has a profit objective sec_1_183-2 income_tax regs mr taras grew up on a farm and worked with horses during those years mr taras also became a member of the pennsylvania breeders association and educated himself through industry publications petitioners sought out consulted with and hired professional racehorse trainers and breeders throughout the years of operation of their activity petitioners followed the advice of ms audrey kraynik who represented that she was a licensed trainer experienced in training racehorses with respect to the breeding of their horses petitioners consulted with two horse breeders mr tom regal and mr paul mills petitioners sought and received professional training and breeding advice time devoted to the activity the fact that a taxpayer devotes much of his personal time and effort to carrying on an activity may indicate an intention to derive a profit sec_1_183-2 income_tax regs petitioners contend that they personally devoted a substantial amount of time to the activity ms taras testified that she spent approximately hours per week on projects related to the activity including bookkeeping feeding the horses cleaning the stalls and exercising the horses mr taras testified that during the years at issue he spent approximately to hours per week taking care of the horses feeding and exercising the horses and performing routine veterinary services during the period in which petitioners each claim they spent a large number of hours on their horse activity they also participated in other time-demanding activities mr taras has owned and managed a framing and truss fabrication business in which he employed and managed between and persons to help him do on-site framing of homes and fabrication of trusses while he claimed to have worked approximately or more hours per week on petitioners' racehorse activity similarly ms taras worked at a full-time job requiring hours per week at bethlehem while claiming that she contributed hours per week year after year in petitioners' horse activity expectation that assets may appreciate the appreciation of assets including land used in the activity is to be considered in determining whether a taxpayer intended to derive a profit from his activity sec_1 b income_tax regs an expectation that assets used in the activity may appreciate may be an indication of profit objective 72_tc_659 petitioners resided on a 1-acre parcel of land during the years in issue petitioners maintained their horses on a separate but adjacent 2-acre parcel of land which was owned by mr taras' parents because petitioners do not own the land upon which they kept their horses during the years at issue we do not consider the land an asset that may be used in determining whether petitioners had a profit objective petitioners’ horses were the only assets used in the activity that might have appreciated petitioners argue that the quality of their horses improved over time and that on the basis of this improvement petitioners expected to recoup their prior losses mr taras testified that each of three horses bred from the stallion norquestor and owned by petitioners has a value of close to dollar_figure petitioners' net losses from their horse operation total dollar_figure for all the years of operation in petitioners reported a loss from their horse activity of dollar_figure at the time of trial petitioners had sold or disposed of horses and realized an overall loss of dollar_figure on the sale of those horses over the course of years of the horses disposed of petitioners realized a gain on of the horses the total gain realized on the combined sale of all horses was dollar_figure of the horses on which gain was reported on sale no more than dollar_figure of gain was reported on any single sale even if petitioners' three most valuable horses were sold for the maximum amount that petitioners believe they are worth it would still not offset the losses reported from their horse activity in it is therefore unlikely that petitioners will generate profits on the sale of their horses in the near future that would recoup more than a fraction of the past or current losses past successes in activity the fact that a 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 8see appendix 9in petitioners sold two colts which they bred for dollar_figure we assume that the proceeds were allocated pro_rata between the two horses sold activity for a profit even though the activity is presently unprofitable sec_1_183-2 income_tax regs petitioners have offered no evidence that before commencing their horse racing and breeding activity they had engaged in similar activities that were profitable history of income and losses a taxpayer's history of income losses and occasional profits with respect to an activity may indicate the presence or absence of a profit objective golanty v commissioner t c pincite sec_1_183-2 income_tax regs respondent contends that petitioners consistently incurred losses on their horse racing and breeding activity over many years indicating that they did not have the requisite profit objective a horse racing and breeding activity may be deemed to be engaged in for profit despite consistent losses during the initial startup phase golanty v commissioner supra pincite we have previously found that the startup phase for an activity involving horses may be between and years engdahl v commissioner supra pincite phillips v commissioner tcmemo_1997_128 losses sustained beyond the period normally required to generate profits may be an indication of a lack of profit objective unless such losses occurred because of unforeseen or unfortuitous circumstances petitioners sustained losses on their horse racing and breeding activity for consecutive years petitioners argue that their losses occurred because of unforeseen circumstances a portion of petitioners' losses can be explained by a series of unfortunate events beyond their control in petitioners were involved in a dispute with their first trainer ms audrey kraynik over the ownership of a stud horse named distinctive jet which resulted in the loss of distinctive jet also as a result of the dispute petitioners could not register their foals from distinctive jet with the jockey club which prevented petitioners from racing any of the foals petitioners’ horses sustained numerous injuries which contributed to their losses some of the injuries were as follows liberty knoll broke a bone in her leg an accident which ended in her death talitha jumped out of a trailer while being transported bad memories suffered bone chips in her knee captain’s k developed tendon problems naughty castle suffered injuries to her leg and foot and several of petitioners' other horses suffered injuries as well these injuries prevented petitioners from racing the injured horses a number of the aforementioned injuries occurred to horses which were originally purchased by petitioners in the injuries to liberty knoll captain's k bad memories and naughty castle occurred in and the injury to ruth ann k occurred in the injuries to traders k tekla tekla two and captain konik occurred after the years in issue we recognize that these injuries to some of petitioners' horses caused some of the losses however petitioners did not offer any objective evidence to explain how injuries between and and subsequent to prevented them from operating a profitable activity during the years and indeed despite the fact that petitioners sustained consistent losses over consecutive years they continued to engage in horse racing and breeding amount of profits the amount of profits earned in relation to the amount of losses_incurred the amount of the investment and the value of the assets in use may indicate a profit objective sec_1 b income_tax regs the opportunity to earn substantial profits in a highly speculative venture may be sufficient to indicate that the activity is engaged in for profit even though only losses are produced id see dawson v commissioner tcmemo_1996_417 in determining whether the taxpayer entered into the activity for profit a small chance of making a large profit may indicate the requisite profit objective sec_1_183-2 income_tax regs petitioners may have believed that there was a possibility of producing a champion horse that could generate a substantial amount of revenue and correspondingly large profits however the fact that petitioners suffered substantial losses year after year without significantly changing their method of operation in a meaningful way supports the inference that profit was not their primary reason for engaging in this activity 52_f3d_23 2d cir vacating and remanding tcmemo_1993_536 taxpayers' financial status the fact that the taxpayer does not have substantial income or capital from sources other than the activity may indicate that the activity is engaged in for profit sec_1_183-2 income_tax regs the legislative_history of sec_183 and b indicates a particular concern about wealthy individuals attempting to generate paper losses for the purpose of sheltering unrelated income ranciato v commissioner supra pincite s rept pincite 1969_3_cb_423 in this respect the senate report focused primarily on farming operations including specifically the racing of horses and noted an overall concern about taxpayers with substantial income s rept supra pincite c b pincite see also ranciato v commissioner supra pincite n on their federal joint income_tax returns petitioners reported wage income of dollar_figure dollar_figure dollar_figure and dollar_figure in the years and respectively petitioners also reported on schedules c income of dollar_figure dollar_figure dollar_figure and dollar_figure from their framing and truss fabrication business in and respectively in each of the years at issue the excess losses generated by petitioners' horse racing and breeding activity were used to offset their otherwise taxable_income on the other hand petitioners were actually sustaining economic losses that were offsetting relatively modest amounts of wage and business income on balance this factor generally supports petitioners' position personal pleasure or recreation the absence of personal pleasure or recreation relating to the activity indicates the presence of a profit objective shane v commissioner tcmemo_1995_504 sec_1_183-2 income_tax regs petitioners argue that they did not ride their horses or make them available for others to ride and therefore there were no elements of pleasure or recreation involved while it is true that petitioners did not ride their horses nor permit others except qualified jockeys to ride them it is obvious that petitioners' racehorses were not the kind of horses that are ridden around the farm for pleasure the record shows that petitioners attended races at the track watched their horses race and also gambled on horses while they were in attendance at the races in the final analysis we are convinced that petitioners' enjoyment of being engaged in horse racing and breeding was the most significant reason why they continued to engage in this activity despite their record of consistent losses conclusion having considered the factors listed in sec_1_183-2 income_tax regs all contentions presented by the parties and the facts and circumstances of this case we believe that petitioners honestly hoped that their horse racing and breeding activity would generate a profit and that profit was one of their objectives however in order to prevail petitioners must show that their horse racing and breeding activity was engaged in primarily for the purpose of making a profit simon v commissioner f 2d pincite warden v commissioner tcmemo_1995_176 affd without published opinion 111_f3d_139 9th cir petitioners engaged in horse racing and breeding activities for at least years losing more than dollar_figure without coming near a profit in any of those years petitioners initiated their activity without developing a business plan commensurate with that which would be expected from someone who was motivated primarily by a profit objective throughout all the years of continuous losses petitioners did not materially alter their mode of operation petitioners maintained two full-time jobs and had access to sufficient property with which they could maintain a number of racehorses that they personally enjoyed breeding and racing based on the entire record we are not convinced that petitioners' primary objective was to make a profit rather the evidence is more consistent with the conclusion that petitioners enjoyed breeding and racing their horses and therefore were willing to sustain continuing losses despite the improbability of profits consequently we hold that petitioners' horse racing and breeding activity was not primarily engaged in for profit within the meaning of sec_183 respondent also determined additions to tax under sec_6651 for petitioners' failure_to_file their through returns sec_6651 imposes an addition_to_tax of percent of the amount of the tax due for each month a return is delinquent up to a maximum of percent the addition_to_tax is not applicable if it is shown that the failure is due to reasonable_cause and not willful neglect sec_6651 469_us_241 petitioners have the burden of proving that their failure_to_file was due to reasonable_cause and not willful neglect 99_tc_202 petitioners filed their tax returns for the tax years and on date and their tax_return for the tax_year on date petitioners have failed to show that their failure_to_file returns for the taxable years through was due to reasonable_cause and not willful neglect petitioners are liable for the additions to tax under sec_6651 for the taxable years through decision will be entered under rule the appendix is a 1-page spreadsheet in lotus format that is incompatible with the wordperfect format of this opinion a copy of the appendix may be obtained from chambers


t c summary opinion united_states tax_court jane e zdunek petitioner v commissioner of internal revenue respondent docket no 27966-10s filed date jane e zdunek pro_se robert j braxton for respondent summary opinion armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined a deficiency in petitioner’s federal_income_tax of dollar_figure and an accuracy-related_penalty under sec_6662 of dollar_figure the deficiency derives from respondent’s disallowance of a dollar_figure mortgage interest_deduction claimed by petitioner as an itemized_deduction after concessions by the parties discussed below the issues remaining for decision are whether petitioner may make a postpetition election to file a joint_return with her husband whether respondent bears the burden_of_proof with respect to his deficiency determination and whether petitioner is liable for the accuracy-related_penalty under sec_6662 background some of the facts have been stipulated and they are so found we incorporate by reference the parties’ stipulation of facts and accompanying unless otherwise indicated all subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure all dollar amounts are rounded to the nearest whole dollar exhibits petitioner resided in the commonwealth of virginia when the petition was filed petitioner who holds a bachelor of science degree in accounting was employed by the internal_revenue_service irs for years at the irs petitioner worked as a revenue_agent for seven to eight years until she was transferred to the national_office training division where she assisted in developing training programs for revenue agents and tax auditors petitioner left employment with the irs in petitioner is a certified_public_accountant c p a and has prepared tax returns for compensation since petitioner attends continuing professional education cpe classes on tax law each year and took such classes in petitioner has attended at least one cpe class that covered the mortgage interest_deduction in petitioner was employed full time as a financial controller for a construction company in frederick maryland but also prepared to individual income_tax returns for compensation petitioner prepared and filed a federal_income_tax return listing her filing_status as married_filing_separately attached to that return was a schedule a itemized_deductions on which petitioner claimed a dollar_figure mortgage interest_deduction related to a residence in virginia and a second residence in west virginia in a notice_of_deficiency respondent disallowed the dollar_figure mortgage interest_deduction a form 886-a explanation of items attached to the notice_of_deficiency states since petitioner did not establish that the amount shown was a interest_expense and b paid the amount is not deductible in date petitioner filed a petition for redetermination with this court stating inter alia i disagree with the disallowance in full of mortgage interest claimed on schedule a as this interest was paid on mortgages secured_by a principal and a second residence and did not exceed the limits for acquisition and home_equity_indebtedness an attachment to the petition states t he acquisition_indebtedness on both the west virginia and the virginia homes is below the overall_limitation no later than date petitioner spoke with respondent’s appeals_office regarding the possibility of settlement and was informed that the mortgage interest_deduction she claimed exceeded the limitations for a married-filing-separate return on date petitioner’s case was tried to the court discussion i mortgage interest_deduction pursuant to sec_163 and as relevant herein married individuals filing separate returns may not deduct interest_paid on acquisition_indebtedness and home_equity_indebtedness as defined in sec_163 to the extent that the indebtedness is in excess of the limitations provided by sec_163 and c ii specifically sec_163 provides that t he aggregate amount treated as acquisition_indebtedness for any period shall not exceed dollar_figure dollar_figure in the case of a married individual filing a separate_return sec_163 provides that t he aggregate amount treated as home_equity_indebtedness for any period shall not exceed dollar_figure dollar_figure in the case of a separate_return by a married individual in addition married individuals filing separate returns are generally limited to claiming one residence for purposes of the mortgage interest_deduction unless they obtain written consent from their spouse to claim another residence see sec_163 for convenience we shall refer to these limitations collectively as the mfs limitations petitioner candidly testified that she did not apply the mfs limitations when she claimed the dollar_figure mortgage interest_deduction on her married-filing- separate tax_return respondent concedes that petitioner is entitled to a mortgage interest_deduction albeit in a lesser amount than she originally claimed specifically the parties now agree that petitioner is entitled to a mortgage interest_deduction of dollar_figure with respect to her married-filing-separate return a postpetition change_of filing_status despite the parties’ aforementioned agreement petitioner wishes to change her filing_status from married_filing_separately to married_filing_jointly so that she and her husband may claim a greater overall mortgage interest_deduction in this regard however sec_6013 precludes the filing of a joint_return after a taxpayer files a separate_return if the taxpayer files a timely petition with this court in respect of a notice_of_deficiency for the year for which the notice is issued respondent issued a notice_of_deficiency for and petitioner filed a petition with this court in respect of that taxable_year accordingly petitioner is now precluded from filing a joint_return for see sec_6013 notwithstanding the bar of sec_6013 petitioner contends that she should be permitted to change her filing_status to married_filing_jointly for because she was not informed of the mfs limitations by respondent until after she filed her petition with the court according to petitioner if she had known of the mfs limitations before filing her petition with the court then she would have filed an amended_return electing joint filing_status avoiding litigation petitioner cites no authority for her argument instead petitioner frames her argument in the context of cases in which we have found that there has been surprise and substantial disadvantage to a taxpayer in the presentation of the taxpayer’s case at trial because of how the notice_of_deficiency and pleadings were drafted compared to the issues raised at trial see eg 59_tc_551 o nce surprise and substantial detriment are found the theory whether a new reason or new issue need not be heard by this court in addition although petitioner does not expressly argue that respondent’s position is a new_matter requiring respondent to bear the burden_of_proof see rule a we shall consider such a contention in view of her pro_se status and the fact that she implicitly so contends cf 551_us_89 documents filed pro_se are to be liberally construed wilson v commissioner tcmemo_2002_61 wl at aff’d 71_fedappx_623 9th cir b surprise and substantial disadvantage we acknowledged at the outset of trial as we do again here that respondent’s wording on form 886-a may not be a model of clarity however on the basis of the pleadings and the record before us we conclude that there was no surprise or substantial disadvantage to petitioner in the presentation of her case at trial and we are satisfied that the mfs limitations issue is properly before this court we discuss below the most relevant reasons that inform our decision first petitioner alleged in her petition that the mortgage interest claimed on schedule a was paid on mortgages secured_by a principal and a second residence and did not exceed the limits for acquisition and home_equity_indebtedness moreover an attachment to the petition states t he acquisition_indebtedness on both the west virginia and the virginia homes is below the overall_limitation respondent denied this allegation in his answer to the although petitioner does not invoke the doctrine_of estoppel we note that the essential elements of such doctrine are not present in this case thus for example there is no indication that respondent made a false or misleading representation see 67_tc_612 outlining the elements of estoppel and acknowledging that estoppel should be applied against the commissioner with the utmost caution and restraint see also 1_f3d_932 9th cir holding that estoppel does not apply unless the aggrieved party demonstrates affirmative misconduct petition thus the mfs limitations issue was raised by the parties in their pleadings second petitioner candidly admitted at trial that she was informed of respondent’s position at the latest when she spoke with respondent’s appeals_office at least months before trial moreover we are confident that at the time petitioner filed her petition she was generally aware of the acquisition and home_equity_indebtedness limitations provided by sec_163 because she references those limitations in her petition finally petitioner’s argument focuses exclusively on surprise and substantial disadvantage as it relates to the examination of her tax_return and the subsequent issuance of the notice_of_deficiency not the presentation of her case at trial indeed petitioner provides nothing to suggest that she suffered any prejudice in terms of presenting her case to the court at trial consequently petitioner’s situation is readily distinguishable from cases dealing with surprise and substantial disadvantage see eg 59_tc_551 where a taxpayer first learned of the commissioner’s new position at trial therefore we shall consider respondent’s position regarding petitioner’s married filing separate_return c burden_of_proof we have held that the commissioner’s determination may be affirmed for reasons other than those assigned in his notice_of_deficiency estate of horvath v commissioner t c pincite however the commissioner bears the burden_of_proof with respect to new matters rule a a new position taken by respondent is not necessarily a ‘new matter ’ especially when it merely clarifies or develops the original determination without being inconsistent or increasing the amount of deficiency 61_tc_744 citing 50_tc_478 respondent asserts that his mfs limitations argument is covered by the notice_of_deficiency that it is not a new_matter because it merely clarifies or develops the original determination that it is not inconsistent with such determination and that it does not increase the amount of the deficiency respondent also contends that his position does not require petitioner to present different facts at trial because the facts needed to determine petitioner’s mortgage interest_deduction have been fully stipulated because the pleadings and stipulated facts are sufficient to decide the substantive issue in this case regardless of which party bears the burden_of_proof and because we conclude that there was no surprise or substantial disadvantage to petitioner in the presentation of her case at trial we decide this case without regard to the burden_of_proof see eg wilson v commissioner wl at d conclusion in view of the foregoing we conclude that petitioner is entitled to a mortgage interest_deduction of dollar_figure for as agreed by the parties on a married-filing- separate_return ii accuracy-related_penalty sec_6662 and b imposes a penalty equal to of the amount of any underpayment attributable to negligence or disregard of rules or regulations the term negligence includes any failure to make a reasonable attempt to comply with tax laws and disregard includes any careless reckless or intentional disregard of rules or regulations sec_6662 the commissioner bears the burden of production sec_7491 but if satisfied the taxpayer bears the ultimate burden of persuasion 116_tc_438 although petitioner elected married-filing-separate status when she prepared her return she failed to apply the mfs limitations provided in sec_163 petitioner did not consult a tax adviser and testified that she did not research the applicable law at the time that she prepared her return because she felt that she had a clear understanding of what it was furthermore petitioner testified that she did not review the worksheet published by the commissioner as an aid in computing the proper mortgage interest_deduction on a taxpayer’s married- filing-separate return rather petitioner testified that she simply figured it out on the basis of the record before us and particularly in view of petitioner’s education and experience as a tax professional we hold that respondent has met his burden of production sec_6664 provides an exception to the imposition of the accuracy- related penalty if the taxpayer establishes that there was reasonable_cause for and the taxpayer acted in good_faith with respect to the underpayment sec_1 a income_tax regs the determination of whether the taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account the pertinent facts and circumstances sec_1_6664-4 income_tax regs circumstances indicating that a taxpayer acted with reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances including the experience knowledge and education of the taxpayer sec_1_6664-4 income_tax regs generally the most important factor is the extent of the taxpayer’s effort to assess the proper tax_liability id although the record might support a finding of good_faith on petitioner’s part the standard we are obliged to apply also requires the existence of reasonable_cause see sec_6664 sec_1_6664-4 income_tax regs petitioner a former irs revenue_agent has prepared tax returns for compensation since at all times relevant petitioner maintained a c p a license and regularly attended cpe classes on tax law including at least one course on the mortgage interest_deduction in petitioner prepared tax returns for to individuals despite her substantial experience knowledge and education petitioner did not research the applicable law with respect to the mfs limitations when she prepared her return in light of all the facts and circumstances we hold that petitioner has not met her burden of persuasion with respect to reasonable_cause accordingly petitioner is liable for the accuracy-related_penalty under sec_6662 on the amount of the underpayment_of_tax to be computed as part of the rule process we note that our holding herein makes it unnecessary to consider respondent’s alternative theory that petitioner is liable for the accuracy-related_penalty under sec_6662 because of a substantial_understatement_of_income_tax see sec_6662 conclusion we have considered all of the arguments advanced by petitioner and to the extent not expressly addressed we conclude that those arguments do not support a result contrary to our decision herein to give effect to our disposition of the disputed issues as well as the parties’ stipulation regarding the allowable_amount ie dollar_figure of petitioner’s mortgage interest_deduction on her married-filing-separate return decision will be entered under rule


t c summary opinion united_states tax_court sweetbush trust david keith jacobs trustee et al petitioners v commissioner of internal revenue respondent docket nos 7616-02s 7621-02s filed date 9460-02s 9462-02s david keith jacobs for petitioners huong t duong for respondent pajak special_trial_judge these cases were heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petitions were filed the decisions to be entered are not reviewable by any other court and this opinion cases of the following petitioners are consolidated herewith bve trust david keith jacobs trustee docket no 7621-02s sweetbush trust david keith jacobs trustee docket no 9460-02s and bve trust david keith jacobs trustee docket no 9462-02s should not be cited as authority unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year s in issue and all rule references are to the tax_court rules_of_practice and procedure these consolidated cases were heard on respondent’s motions to dismiss for lack of jurisdiction under rule in four cases involving the sweetbush trust and the bve trust the creators of the trusts are alan c schwemmer and esther r schwemmer mr and mrs schwemmer the petitions in these cases were filed for sweetbush trust and bve trust by david-keith jacobs sic mr jacobs a purported trustee for each trust the petitions are replete with tax_protester arguments respondent’s position is that each case should be dismissed on the ground that the petition was not filed by a trustee authorized to bring suit on behalf of the trust petitioners’ responses to respondent’s motions to dismiss were filed in docket numbers 9460-02s and 9462-02s objections to respondent’s motions to dismiss were filed in all four dockets the objections which were signed by mr jacobs have as the core thesis that these cases should be dismissed for lack of subject matter jurisdiction on the grounds that the notice_of_deficiency determination issued use of the terms trust and trustee and their derivatives are intended for narrative convenience only thus no inference should be drawn from our use of such terms regarding any legal status or relationship by respondent was issued on hearsay facts and evidence petitioner demands that respondent provide certified facts or evidence of a statutory correct assessment or tax_liability to support any claimed deficiency lacking a statutory correct assessment or tax_liability the notice_of_deficiency is null and void and this court does not have subject matter jurisdiction insofar as we can ascertain the facts relating to the two trusts created the same day are virtually identical with the exception that richard m schwemmer apparently is one of the trustees in the sweetbush trust and keith a schwemmer apparently is one of the trustees in the bve trust hereinafter we refer only to the sweetbush trust but all comments and holdings apply equally to the bve trust petitioner provided respondent with a memorandum of trust memorandum dated date the memorandum appointed luther j wilson and richard m schwemmer as trustees of the sweetbush trust the memorandum provided notwithstanding any other provision in this trust instrument no power shall be exercised nor any_action taken by the trustees except upon the unanimous consent of all trustees having authority to exercise that power there is no document jointly signed by luther j wilson and richard m schwemmer that authorizes mr jacobs to represent sweetbush trust rule a provides in pertinent part a case shall be brought by and in the name of the person against whom the commissioner determined the deficiency in the case of a notice_of_deficiency or liability in the case of a notice of liability or by and with the full descriptive name of the fiduciary entitled to institute a case on behalf of such person see rule a a case timely brought shall not be dismissed on the ground that it is not properly brought on behalf of a party until a reasonable_time has been allowed after objection for ratification by such party of the bringing of the case and such ratification shall have the same effect as if the case had been properly brought by such party at the hearing the court granted mr jacobs an additional days to provide documentation to refute respondent’s position mr jacobs provided documentation but it did not refute respondent’s position the memorandum refers to the trust_indenture whereby mr and mrs schwemmer as creators created a_trust called sweetbush what is critical in this case is that mr jacobs did not submit a copy of the trust_indenture without this trust_indenture and related documents we do not know who the relevant trustees are nor the powers of the trustees or others named in that instrument if a trustee resigns we do not know if or how a successor trustee is appointed we cannot ascertain whether any of the purported documents presented by mr jacobs were properly executed by the requisite number of persons so as to appoint mr jacobs as trustee the undesignated unsigned undated and incomplete documents provided by mr jacobs are given no weight the other documents without more are incoherent although we gave mr jacobs the opportunity he did not establish a paper trail authorizing him to act as sweetbush’s trustee on the record before us we find that mr jacobs has failed to establish that he is authorized to act on behalf of sweetbush trust bella vista chiropractic trust v commissioner tcmemo_2003_8 jeff burger prods llc v commissioner tcmemo_2000_72 respondent filed motions for summary_judgment in docket numbers 9460-02s and 9462-02s these motions will be denied as moot all of the arguments and contentions that have not been analyzed herein have been considered but do not require any further discussion to reflect the foregoing orders of dismissal for lack of jurisdiction granting respondent’s motions will be entered in all four dockets respondent’s motions for summary_judgment will be denied in docket nos 9460-02s and 9462-02s


id office uilc cca_2011120512473537 ---------- number release date from ------------------- sent monday december pm to ------------------- cc ----------- subject re opinion needed on statutes for a tefra linked investor which is a joint_committee case yes as explained by a recent opinion of the federal_circuit in bush v u s - f 3d - fed cir a no change to partnership items at the partnership level still results in a computational adjustment of partnership items at the partner level that can be assessed or refunded under section a or c for instance if a partner files inconsistently with a partnership return under sec_6222 we may issue a no change fpaa in order to make a computational adjustment to that partner cf harbor cove v commissioner partner disagreed with no change fpaa