t c memo united_states tax_court terry l worthan petitioner v commissioner of internal revenue respondent docket no filed date william t holman and david m von hartitzsch for petitioner william f castor for respondent memorandum opinion marvel judge petitioner is seeking an award of reasonable_administrative_costs pursuant to sec_7430 and rule 1unless otherwise indicated all section references are to the internal_revenue_code as amended and in effect for the relevant periods and all rule references are continued background the parties submitted this case fully stipulated pursuant to rule the stipulation of facts is incorporated herein by this reference petitioner resided in oklahoma when he filed his petition during the years at issue petitioner was a managing member of innovative machine tool solutions llc imts imts began doing business in at some point in imts closed and ceased paying wages during january and date petitioner on behalf of imts untimely filed form sec_941 employer’s quarterly federal tax_return for the quarters ending date through date with the returns petitioner voluntarily submitted and respondent accepted tax_payments for those quarters via check by hand delivery to the internal_revenue_service irs office in tulsa oklahoma in letters accompanying the checks petitioner included the following request pursuant to the authority granted by revproc_2002_26 please continued to the tax_court rules_of_practice and procedure monetary amounts have been rounded to the nearest dollar 2during january and date petitioner on behalf of imts also untimely filed forms employer’s annual federal unemployment futa_tax return for the record contains no evidence that petitioner submitted payments with the forms apply the payment to federal income taxes social_security_taxes and medicare taxes withheld from employees’ wages ie the trust_fund_taxes despite petitioner’s request that the irs apply the payments to the trust fund tax4 liabilities the irs in its best interests applied the payments to the non-trust- fund portion of imts’ liabilities respondent subsequently determined that imts had unpaid employment_taxes ie unpaid withholding and fica tax_liabilities with respect to its form sec_941 for the quarters ending date through date and unpaid futa_tax liabilities with respect to its forms for and in date respondent sent imts notice_and_demand for payment with respect to the unpaid employment_taxes in response imts’ 3rev proc sec_3 2002_1_cb_746 provides that if the irs has assessed additional taxes penalties and interest at the time the taxpayer voluntarily tenders a partial payment that is accepted by the service and the taxpayer provides specific written directions as to the application of the payment the service will apply the payment in accordance with those directions see also 808_f2d_411 5th cir cooley v commissioner tcmemo_2012_164 slip op pincite n sec_3102 and sec_3402 require an employer to withhold from an employee’s wages and pay over to the irs both income_tax and the employee’s share of social_security and medicare_tax ie federal_insurance_contributions_act fica tax secs see weber v commissioner t c __ __ slip op pincite date sec_7501 provides that the amount of tax so collected or withheld shall be held to be a special fund in trust for the united_states we use the term trust fund tax to refer to income and fica_taxes imts was required to withhold from employee wages and hold in trust for the united_states see id 132_tc_301 representative william t holman mailed respondent letters and accompanying enclosures including copies of imts’ returns and tax payment checks as well as petitioner’s letters designating the checks as payments for trust_fund_taxes on date revenue_officer hal spannagel contacted mr holman by telephone during the conversation mr holman informed revenue_officer spannagel that petitioner had filed returns for the periods at issue and made payments designated as trust fund only tax_payments pursuant to irs authorities imts had ceased to do business and imts’ assets had been used to pay its outstanding liabilities to the extent possible mr holman requested a copy of imts’ account transcripts for the periods at issue and revenue_officer spannagel agreed to provide the transcripts subsequently on date respondent mailed notices of federal_tax_lien filing and your right to a hearing under sec_6320 to imts respondent advised imts that he had filed notices of federal_tax_lien nftls with respect to imts’ unpaid employment_taxes then totaling dollar_figure 5the parties did not explain or stipulate the meaning of the word authorities the parties’ reference to authorities appears to be a reference to revproc_2002_26 supra on date pursuant to a request of revenue_officer spannagel mr holman mailed him a form 433-b collection information statement for businesses on behalf of imts on date petitioner on behalf of imts timely submitted to respondent a form request for a collection_due_process or equivalent_hearing in the request petitioner stated that the amounts of taxes and penalties assessed were greater than the amounts owed by imts and that imts had paid part of its tax_liability petitioner attached a table listing imts’ payments including the payment_date tax type tax period and amount_paid the table showed that imts made payments totaling dollar_figure and that all of imts’ payments were made to satisfy its unpaid form_941 tax_liabilities on date revenue_officer jay bryce called mr holman during the telephone call revenue_officer bryce informed mr holman that he would be handling the imts matter mr holman informed revenue_officer bryce that imts had filed returns and made designated trust fund only payments that imts had ceased doing business and used its assets to pay its outstanding liabilities to the extent possible and that mr holman had submitted a completed form 433-b on behalf of imts mr holman also informed revenue_officer bryce that he had requested copies of imts’ account transcripts from revenue_officer spannagel but that he had never received them revenue_officer bryce subsequently transmitted to mr holman copies of imts’ account transcripts for the periods at issue at that time mr holman confirmed that the irs had not applied the payments to imts’ trust fund tax_liabilities as petitioner had requested imts’ request for a sec_6320 hearing subsequently was assigned to settlement officer jeffrey l silverhorn on date settlement officer silverhorn held a telephone conference with mr holman during the telephone conference mr holman stated that imts had submitted the form to dispute the irs’ application of imts’ payments mr holman informed settlement officer silverhorn that settlement officer spannagel had indicated that imts’ only recourse would be to submit the form to dispute the irs’ application of the payments petitioner on behalf of imts had specifically designated that the payments be applied to the trust fund portion of imts’ tax_liabilities the irs misapplied the payments and pursuant to internal_revenue_manual pt date if a taxpayer notifies the irs of a misapplication of payments with respect to a_trust fund recovery penalty case an appeals technical employee should prepare an appeals referral inquiry ari and submit the ari to the technical services advisory group with supporting documentation to correct the misapplication mr holman agreed to send settlement officer silverhorn documentation of imts’ payments and copies of the relevant authorities mr holman requested a face-to-face hearing to discuss the matter in the event that settlement officer silverhorn did not direct the irs to correct the misapplication of the payments settlement officer silverhorn agreed to schedule a hearing in date on date settlement officer silverhorn mailed to imts a letter scheduling a hearing for date in the letter settlement officer silverhorn requested verification that imts had paid the trust fund portion of its employment_tax liabilities on date mr holman mailed to settlement officer silverhorn a letter and accompanying enclosures including a spreadsheet of payments made by imts and copies of related checks on or about april and mr holman placed calls to and left messages for settlement officer silverhorn in the messages mr holman inquired as to whether settlement officer silverhorn had received the documentation from imts and whether settlement officer silverhorn needed any further information on date settlement officer silverhorn returned mr holman’s calls and left a message stating that he was considering the information and he would discuss the issue with mr holman at the hearing scheduled for date on that same date mr holman mailed to settlement officer silverhorn a letter stating that he had tried repeatedly to contact settlement officer silverhorn to confirm his receipt of the documentation and inquiring as to whether the information was sufficient to resolve the matter on date mr holman hand-carried to settlement officer silverhorn a letter supporting petitioner’s designation of imts’ payments to the trust fund tax portion of the liabilities on date settlement officer silverhorn sent a request for advice to the irs office_of_chief_counsel settlement officer silverhorn subsequently informed mr holman that he had made the request for advice mr holman requested to participate in any discussion that occurred with the office_of_chief_counsel regarding the payment application matter and settlement officer silverhorn agreed to permit him to participate on date settlement officer silverhorn received an opinion from the office_of_chief_counsel in the opinion the office_of_chief_counsel stated that it concurred with imts’ position that the payments should be applied to the trust fund portion of the employment_tax liabilities on date settlement officer silverhorn mailed to imts a letter advising that the appeals_office had determined that the irs should grant imts’ request to apply certain payments to the trust fund tax_liabilities in the letter settlement officer silverhorn requested that imts sign an enclosed form summary notice_of_determination waiver of right to judicial review of a collection_due_process determination and waiver of suspension of levy action pursuant to the form the determination of the appeals_office was t o apply the various payments made to the trust fund portions of the outstanding liabilities as designated by the taxpayer at the time the payments were remitted to the irs on date mr holman faxed to settlement officer silverhorn a letter acknowledging receipt of his letter dated date in the letter mr holman requested that settlement officer silverhorn provide clarification as to what constituted certain payments as identified in settlement officer silverhorn’s letter and various payments as identified in the form on date settlement officer silverhorn concluded that rather than attempt to obtain petitioner’s signature on the form which he felt did not require any clarification it was appropriate to reapply the payments to imts’ trust fund tax_liabilities and issue a notice_of_determination settlement officer silverhorn contacted the irs compliance division to assist him with reapplying imts’ payments subsequently on date settlement officer silverhorn completed the closing documents and sent them to his manager for approval on date settlement officer silverhorn’s manager gina smith received a telephone message from mr holman in the message mr holman stated that he had been unsuccessful in contacting settlement officer silverhorn to obtain clarification regarding the misapplied payments and that he was willing to advise petitioner to sign the form provided that the appeals_office issued a revised letter stating that all of petitioner’s payments would be applied properly settlement officer silverhorn did not contact mr holman in response to his faxed letter and message subsequently on date settlement officer silverhorn reviewed the relevant account transcripts for imts and ascertained that each payment originally designated a remittance with return had been reapplied and designated a subsequent payment settlement officer silverhorn also ascertained that each payment had been applied as a payment of imts’ trust_fund_taxes he determined that all actions to reallocate the payments to the trust fund tax_liabilities had been completed and accordingly there was no need to conduct another hearing or to secure a signed form settlement officer silverhorn did not contact mr holman regarding his determination on date respondent’s appeals_office issued to imts a notice_of_determination concerning collection action s under sec_6320 and or in the notice_of_determination the appeals_office determined that respondent should apply the various payments that imts made with each form_941 to the trust fund portion of its tax_liabilities the appeals_office sustained respondent’s filing of the nftls because imts had neither satisfied the entire amount of its unpaid employment_tax liabilities nor qualified for withdrawal of the nftls under sec_6323 subsequently on date mr holman on behalf of petitioner mailed a letter to settlement officer silverhorn in the letter petitioner requested reimbursement of administrative costs consisting of dollar_figure in attorney’s fees that petitioner purportedly incurred in connection with his proceedings with the irs respondent did not respond to the request accordingly on date petitioner filed a petition in this court seeking an award of reasonable_administrative_costs sec_301_7430-2 proced admin regs provides that the irs may notify the taxpayer of its decision to grant or deny an award for reasonable continued discussion i introduction sec_7430 allows a taxpayer to recover reasonable_administrative_costs incurred in an administrative_proceeding brought by or against the united_states in connection with the determination collection_or_refund_of_any_tax interest or penalty reasonable_administrative_costs are the reasonable and necessary costs incurred by the taxpayer in connection with the administrative proceedings including administrative fees imposed by the commissioner reasonable fees paid_or_incurred to retain the services of a representative who is licensed to practice_before_the_irs reasonable expenses of expert witnesses and reasonable costs for any study analysis or report that is necessary to the taxpayer’s case sec_7430 sec_301_7430-2 and iii b proced admin regs recoverable costs are limited to costs incurred on or after the administrative_proceeding date see sec_301_7430-3 proced admin regs see also gustafson v commissioner 97_tc_85 to recover administrative costs under sec_7430 the taxpayer must satisfy each of the continued administrative costs if the irs does not respond to the taxpayer’s request within six months after the taxpayer filed the request the taxpayer may consider the irs’ failure to respond as a decision denying an award for reasonable_administrative_costs see id following requirements the taxpayer must not have unreasonably protracted the administrative proceedings see sec_7430 and the taxpayer must have been the prevailing_party in the administrative proceedings see sec_7430 the parties disagree with respect to the following issues whether petitioner incurred the requested costs in an administrative_proceeding whether petitioner incurred the requested costs on or after the administrative_proceeding date and whether petitioner is the prevailing_party for purposes of sec_7430 because we hold that petitioner incurred the requested costs in a collection proceeding and that he incurred all of the costs before the administrative_proceeding date we find that petitioner is barred by sec_301_7430-3 proced admin regs from recovering these costs under sec_7430 accordingly we need not address the remaining issue ii whether petitioner is entitled to recover administrative costs claimed sec_7430 defines the term administrative_proceeding as any procedure or other action before the irs pursuant to sec_301_7430-3 proced admin regs an administrative_proceeding does not include p roceedings in connection with collection actions as defined in paragraph b of this section a collection action includes any_action that the irs takes to collect a tax or any_action a taxpayer takes in response to the irs’ act or failure to act in connection with collection of a tax see sec_301_7430-3 proced admin regs specifically collection actions include actions taken by the irs to collect a tax through the filing of a notice of lien with respect to a taxpayer and actions the taxpayer takes in response to the irs’ filing of a notice of lien see id a collection action includes any_action taken by the internal_revenue_service under chapter of subtitle f to collect a tax see also secs dalton v commissioner tcmemo_2011_136 slip op pincite taxpayers are not permitted to recover costs incurred in connection with the collection_due_process_hearing rev’d on other grounds 682_f3d_149 1st cir acme music co v irs in re 208_br_838 bankr w d pa holding that a ctions of levy under sec_6331 constitute collection actions for purposes of sec_7430 to illustrate the difference between an administrative_proceeding and a collection action sec_301_7430-3 example proced admin regs provides as follows taxpayer e files an individual_income_tax_return showing a balance due no payment is made with the return and the internal_revenue_service assesses the amount shown on the return the internal_revenue_service issues a notice_and_demand for tax pursuant to sec_6303 e contacts the collection_division collection regarding e’s outstanding liability no agreement is reached with respect to the timing of e’s payment and collection issues a notice_of_intent_to_levy pursuant to sec_6331 prior to the levy e enters into an installment_agreement with collection the costs that e incurred in connection with the notice_and_demand were not incurred in an administrative_proceeding but rather in a collection action accordingly e may not recover those costs as reasonable_administrative_costs under sec_7430 and the regulations thereunder we interpret this example to mean that any costs a taxpayer incurs in connection with a notice_and_demand for the payment of tax are costs incurred in a collection action see id accordingly administrative costs incurred in connection with a notice_and_demand for the payment of tax or with a notice_of_federal_tax_lien are not recoverable under sec_7430 see id see also dalton v commissioner slip op pincite h_r conf rept no pincite 1988_3_cb_473 thus with respect to a collection action only reasonable_litigation_costs are recoverable under sec_7430 respondent contends that petitioner incurred the requested administrative costs in connection with a collection action and not in connection with an administrative_proceeding petitioner contends that respondent should not be permitted to characterize the proceeding as a collection action because he attempted to induce respondent to apply the designated tax_payments properly respondent failed to act to correct the misapplication and consequently respondent forced petitioner to seek correction of the misapplication by participating in a proceeding under sec_6330 the record shows petitioner contacted respondent’s collection_division only after he received notice_and_demand for payment the record also shows that petitioner was unable to resolve his dispute with the collection_division timely and that believing that he lacked any other available process to dispute the application of the tax_payments petitioner requested a sec_6320 hearing after respondent filed nftls with respect to the unpaid employment_taxes because petitioner incurred the costs after respondent had issued notice_and_demand for payment and had filed nftls the costs were costs incurred in a collection action not an administrative_proceeding see sec_301_7430-3 example proced admin regs see also dalton v commissioner slip op pincite petitioner pursued an administrative remedy only after respondent had initiated a collection action with respect to the trust_fund_taxes by sending petitioner a notice_and_demand for payment and filing nftls while petitioner argues that respondent forced him to pursue a remedy through a collection action we note that respondent was not required to postpone the filing of the lien notices while petitioner’s administrative appeal conducted by revenue_officer spannagel was pending see eg 453_fedappx_526 5th cir accordingly we find that petitioner may not recover the requested administrative costs because the costs were incurred in connection with a collection action and not in connection with an administrative_proceeding alternatively we note that petitioner is entitled to recover administrative costs incurred only on or after the administrative_proceeding date see sec_301_7430-2 sec_301_7430-3 proced admin regs see also gustafson v commissioner t c pincite a taxpayer may only recover those costs incurred on or after the earlier of i the date of the receipt by the taxpayer of the notice of the decision of the internal_revenue_service office of appeals ii the date of the notice_of_deficiency or iii the date on which the first letter of proposed deficiency which allows the taxpayer an opportunity for administrative review in the internal_revenue_service office of appeals is sent sec_7430 see also sec_301_7430-3 proced admin regs accordingly the 7as part of the internal_revenue_service restructuring and reform act of rra pub_l_no sec_3101 sec_112 stat pincite congress amended sec_7430 to provide that taxpayers also could recover costs incurred on or after the date of the first letter of proposed deficiency see also sec_7430 this amendment was made effective for costs incurred more than days after date the date of enactment of this act rra sec continued administrative_proceeding date with respect to petitioner’s claim was date the date the appeals_office issued the notice_of_determination to petitioner petitioner is seeking to recover administrative costs incurred before the appeals office’s issuance of the notice_of_determination on date petitioner is not entitled to recover the requested administrative costs because he incurred those costs before the administrative_proceeding date on the basis of the record we conclude that petitioner may not recover the requested administrative costs because he incurred those costs in connection with a collection action and not in connection with an administrative_proceeding and because he incurred those costs before the administrative_proceeding date because of our holding we need not decide whether petitioner was the prevailing_party iii conclusion while we are sympathetic to the difficulties petitioner faced in inducing respondent to apply petitioner’s tax_payments properly petitioner has not satisfied continued g stat pincite sec_301_7430-3 proced admin regs has not been updated to reflect this change the requirements of sec_7430 and accordingly we find that petitioner is not entitled to an award of the requested costs we have considered the remaining arguments of both parties for results contrary to those expressed herein and to the extent not discussed above we conclude such arguments are irrelevant moot or without merit to reflect the foregoing decision will be entered for respondent


t c memo united_states tax_court gregory stewart malone and pamela joyce malone petitioners v commissioner of internal revenue respondent docket no filed date gregory stewart malone and pamela joyce malone pro sese james f prothro for respondent memorandum opinion cohen chief_judge this case was assigned to special_trial_judge john f dean pursuant to sec_7443a and rule sec_180 sec_181 and sec_183 the court agrees with and adopts the opinion of the special_trial_judge which is set forth below 1all 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 opinion of the special_trial_judge dean special_trial_judge this case is before the court on respondent's motion to dismiss for failure to state a claim upon which relief can be granted filed pursuant to rule the motion also seeks an award of a penalty against petitioners under sec_6673 petitioners resided in fort worth texas at the time the petition in this case was filed respondent's notices of deficiency on date respondent mailed petitioners respective notices of deficiency determining the following deficiencies and additions to petitioners' federal income taxes petitioner gregory stewart malone taxable_year additions to tax_deficiency sec_6651 sec_6654 dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number petitioner pamela joyce malone taxable_year additions to tax_deficiency sec_6651 sec_6654 dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number the deficiencies in income_tax determined by respondent are based on the determination that petitioners received compensation prizes_or_awards and capital_gains during the years through no part of which was reported on federal_income_tax returns for those years the additions to tax under sec_6651 are based on respondent's determination that petitioners' failure_to_file timely federal_income_tax returns was not due to reasonable_cause the additions to tax under sec_6654 are based on respondent's determination that petitioners failed to pay the required estimated income_tax for the years in issue background on date this court received and filed petitioners' petition on date respondent's motion to dismiss for failure to state a claim upon which relief can be granted was filed under rule and it was requested therein that the united_states be awarded a penalty under sec_6673 petitioners filed a notice of objection to the motion on date by order dated date this court directed petitioners to file an amended petition stating specific allegations of error in the notice_of_deficiency and a separate statement of facts on or before date in addition this court set a hearing on respondent's motion on date petitioners filed an amended petition on date and a hearing was held in accordance with the order respondent asserts that this case should be dismissed for failure to state a claim because petitioners have failed to allege in the petition or amended petition any justiciable error and merely assert frivolous arguments as a protest against paying income taxes petitioners assert numerous arguments including assertions that a the amounts in the notices of deficiency are arbitrary and without foundation b petitioners do not voluntarily accept liability and the commissioner is therefore without authority to act c the internal_revenue_service irs does not exist as an agency of the federal united_states government d no determinations have been made in this case e there is no tax_court jurisdiction over this case f because there has been no prior judicial determination petitioners have been denied due process and g the substitutes for returns prepared by the irs in this case were not signed by petitioners or by the district_director and are invalid discussion rule provides that a party may file a motion to dismiss for failure to state a claim upon which relief can be granted the court may dismiss a petition when it appears beyond doubt that the taxpayer can prove no set of facts in support of his claim that would entitle him to relief under rule b and a petition must contain clear and concise assignments of each and every error which the petitioner alleges to have been committed by the commissioner in the determination of the deficiency and clear and concise lettered statements of the facts on which petitioner bases the assignments of error moreover any issue not raised in the pleadings is deemed conceded rule b 78_tc_646 73_tc_736 in general determinations made by the commissioner in a notice_of_deficiency are presumed to be correct and the taxpayer bears the burden of proving that those determinations are erroneous rule a 290_us_111 the petition filed in this case does not satisfy the requirements of rule b and there is neither assignment of any error nor any allegation of fact in support of a justiciable claim instead petitioners' filings contain a hodgepodge of rhetoric unsupported assertions and legalistic 2the internal_revenue_service restructuring reform act of rra publaw_105_206 sec a 112_stat_685 added sec_7491 which shifts the burden_of_proof to the secretary in certain circumstances sec_7491 is applicable however to court proceedings arising in connection with examinations commencing after the date of the enactment of this act rra sec c 112_stat_727 the rra was enacted on date and accordingly sec_7491 is inapplicable to this case gibberish without any actual legal basis further petitioners did not file a proper amended petition as directed by the court in its order dated date petitioners are subject_to the federal_income_tax system the same as other citizens of the united_states having made up their minds petitioners do not seek to understand the law they merely seek to justify a position that they have already decided to take nevertheless we shall address some of their points by law enforcement of the internal_revenue_code is to be performed by or under the supervision of the secretary_of_the_treasury sec_7801 under sec_7802 a commissioner of internal revenue --there shall be in the department of the treasury a commissioner of internal revenue who shall be appointed by the president by and with the advice and consent of the senate the commissioner of internal revenue shall have such duties and powers as may be prescribed by the secretary_of_the_treasury contrary to petitioners' argument there is in fact and in law an irs see 899_fsupp_471 d nev recognizing a host of constitutional and statutory provisions that establish the irs is indeed a federal_agency argument to the contrary was found to be wholly frivolous petitioners argue that paying federal_income_tax is voluntary a misleading concept at best our federal_income_tax system provides for voluntary or self-assessment see sec_6201 sec_6203 assessment is recording the liability of the taxpayer sec_301_6201-1 proced admin regs the district_director shall assess taxes determined by the taxpayer as to which returns are made see also 362_us_145 imposition of the income_tax however is not voluntary see sec_1 there is hereby imposed on the taxable_income of-- every married individual who makes a single return jointly with his spouse under sec_6013 a tax determined in accordance with the table provided emphasis added furthermore if the secretary or his delegate3 determine sec_3 secretary is defined to mean the secretary_of_the_treasury or_his_delegate sec_7701 a delegate means any officer employee or agency of the treasury_department duly authorized by the secretary_of_the_treasury directly or indirectly by one or more redelegations of authority to perform the function mentioned or described sec_7701 where a function is vested by the internal_revenue_code or any other statute in the secretary or_his_delegate and treasury regulations provide that such function may be performed by such officers as the commissioner or district_director the regulation shall constitute a delegation by the secretary of the authority to perform such function to the designated officer_or_employee sec_301_7701-9 proced admin regs an officer_or_employee authorized to perform a function by regulation is authorized to redelegate the performance of such function to an officer performing services under his supervision unless prohibited by order or directive sec_301_7701-9 proced admin regs petitioners claim to have been unable to find any delegation of power to revenue agents to perform income_tax examinations we refer them to deleg order no revised 1957_2_cb_1089 and deleg order no rev 1990_1_cb_294 even if such continued a deficiency in income_tax he is authorized to send to the taxpayer a notice_of_deficiency by certified or registered mail before assessing such deficiency sec_6212 sec_6201 when a taxpayer fails to file a return as petitioners here it is as if he filed a return showing a zero amount for purposes of assessing a deficiency 919_f2d_830 2d cir in such a case the deficiency is the amount of tax due 423_us_161 petitioners having failed to file federal_income_tax returns were sent notices of deficiency by certified or registered mail signed by the acting district_director once a statutory_notice_of_deficiency has been sent a taxpayer ha sec_90 days in which to file a petition with the united_states tax_court during this period no assessment for the deficiency may be made and no levy or proceeding in court for its collection can be made or begun or if a petition is filed until a decision of the tax_court is final sec_6213 petitioners have availed themselves of the statutory protections provided by congress by filing their petition and continued delegations did not exist it would have no legal impact on petitioners' rights and obligations as citizens since delegations are internal management rules and not substantive rules of law 95_tc_624 affd without published opinion 956_f2d_1168 9th cir accord 951_f2d_1065 9th cir cannot be heard to argue that they have been somehow deprived of their due process rights by this procedure the issue was decided by the supreme court at least years ago see 283_us_589 petitioners rely on 814_f2d_1363 9th cir revg 81_tc_855 and assert that there has been no determination_of_a_deficiency in their case and therefore the notices of deficiency are invalid in scar the court noted that the commissioner acknowledges in the notice that the deficiency is not based on a determination of deficiency of tax reported on the taxpayer's return and that it refers to a tax_shelter the commissioner concedes has no connection to the taxpayers or their return scar v commissioner supra pincite the facts of this case differ from those in scar petitioners evidently think that they fall within the rule_of scar because they admittedly filed no federal_income_tax returns but sec_6211 makes it clear that only if a return was made by the taxpayer does the tax shown on a return figure in the commissioner's determination_of_a_deficiency if no return is made the amount shown as the 'tax by the taxpayer upon his return' shall be considered as zero sec_301 a see laing v united_states supra nowhere in petitioners' petition or amended petition do they state any facts indicating that they did not receive the income that was the subject of the notices of deficiency the notices of deficiency include as unreported income employee compensation at the hearing on this motion petitioners admit working during the years in issue and to being compensated for that work the notices of deficiency compute petitioners' tax_liability using the appropriate tax_rate the notices unquestionably meet the minimum requirements the commissioner properly determined the deficiency within the meaning of sec_6212 at the hearing on this motion apparently reading from sec_6020 petitioners made much of the fact that substitutes for returns sfr's prepared by the commissioner in this case were not signed by them but where a taxpayer fails to file a return sec_6020 allows the secretary or the district_director or other authorized internal revenue_officer or employee sec_301_6020-1 proced admin regs to prepare one from his own knowledge and from such information as he can obtain through testimony or otherwise this section is however permissive not mandatory 983_f2d_25 5th cir 847_f2d_1379 9th cir further any inadequacies in sfr's or the absence of sfr' sec_4 do not defeat a taxpayer's liability or the commissioner's computation of a deficiency 961_f2d_1 1st cir roat v commissioner supra 65_tc_542 petitioners have failed to state a claim upon which relief can be granted accordingly we will grant so much of respondent's motion that moves to dismiss see 747_f2d_478 8th cir 4petitioners misinterpret 787_f2d_939 4th cir affg 84_tc_1308 to stand for the proposition that a sfr must be filed where a taxpayer does not himself file a tax_return what the court actually held in abrams was that warning letters sent by irs to tax_shelter investors were not notices of deficiency sec_6673 penalty we turn now to that part of respondent's motion that moves for an award of a penalty against petitioners under sec_6673 sec_6673 authorizes the tax_court to require a taxpayer to pay to the united_states a penalty not in excess of dollar_figure whenever it appears that proceedings have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer's position in such proceedings is frivolous or groundless a petition to the tax_court is frivolous if it is contrary to established law and unsupported by a reasoned colorable argument for change in the law 791_f2d_68 7th cir affg an unreported order of this court based on well-established law petitioners' positions are frivolous and groundless the record in this case convinces us that petitioners were not interested in disputing the merits of either the deficiencies in income_tax or the additions to tax determined by respondent in the respective notices of deficiency rather the record demonstrates that petitioners regard this case as a vehicle to espouse their own misguided views of the tax laws of this country we are also convinced that petitioners instituted and maintained this proceeding primarily if not exclusively for purposes of delay dealing with this matter wasted the court's time and respondent's time and taxpayers with genuine controversies were delayed in view of the foregoing we will exercise our discretion under sec_6673 and require petitioner gregory stewart malone to pay a penalty to the united_states in the amount of dollar_figure we will also require petitioner pamela joyce malone to pay a penalty to the united_states in the amount of dollar_figure see 969_f2d_951 10th cir affg tcmemo_1991_240 and tcmemo_1991_241 737_f2d_1417 5th cir coulter v commissioner 82_tc_580 an order of dismissal and decision will be entered granting respondent's motion to dismiss for failure to state a claim upon which relief can be granted


internal_revenue_service number release date index number ------------------- ----------------------- -------------------- -------------------------- in re ------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no --------------- ---------------- telephone number -------------------- refer reply to cc intl b06 plr-143942-14 date date ------------ legen-d ----------------------------------------- ----------- taxpayer accounting firm --------------------------------------- individual ------------------------------ individual company date date date date date ---------------- -------------------------------- ---------------- ---------------- --------------------- ----------------- ---------------- dear ----------- this responds to a letter dated date supplemented by letters dated date and date submitted by accounting firm requesting that the internal_revenue_service service grant taxpayer an extension of time under sec_301_9100-1 and sec_301_9100-3 to file form 4876-a election to be treated as an interest_charge_disc for taxpayer’s first taxable_year the rulings contained in this letter are based upon information and representations submitted by taxpayer and accounting firm and accompanied by affidavits and penalties of perjury statements executed by appropriate parties this office has not verified any of the materials submitted in support of the request for rulings it is subject_to verification on examination plr-143942-14 facts taxpayer is a domestic_corporation wholly owned by individual taxpayer was formed for the sole purpose of qualifying and operating as an interest charge domestic_international_sales_corporation ic-disc taxpayer operates under a commission arrangement with company taxpayer was formed on date and intended to be treated as an ic-disc starting from its formation demonstrating this intention taxpayer entered into an ic-disc commission agreement with company on date on date individual chief financial officer of taxpayer signed and filed a form 4876-a on behalf of taxpayer individual inadvertently measured the deadline for filing the form 4876-a from date the date on which taxpayer was organized internally to begin active business operations although individual has knowledge of and experience with federal_income_tax law individual has limited knowledge of and experience with the particular procedures for making an ic-disc election pursuant to sec_992 the failure by individual to timely file form 4876-a was not purposeful and individual in fact believed that a timely ic-disc election had been made in date while engaged in the preparation of tax documents for taxpayer and company accounting firm discovered that taxpayer had not made a timely ic-disc election and informed individual of that fact as a result taxpayer has requested a ruling that grants an extension of time of days from the date of the ruling letter to file form 4876-a and that such filing will be treated as a timely election to be treated as an ic-disc for taxpayer’s first taxable_year law and analysis sec_992 provides that an election by a corporation to be treated as a disc1 shall be made by such corporation for a taxable_year at any time during the 90-day period immediately preceding the beginning of the taxable_year except that the secretary may give his consent to the making of an election at such other times as he may designate temp sec_1_921-1t provides in part that a corporation electing ic- disc status must file form 4876-a and that a corporation electing to be treated as an ic-disc for its first taxable_year shall make its election within days after the beginning of that year sec_301_9100-1 provides in part that the commissioner in exercising the commissioner’s discretion may grant a reasonable extension of time under the rule sec_1 as used in this letter the terms ic-disc and disc have the same meaning plr-143942-14 set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that a regulatory election is an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin for this purpose an election includes an application_for relief in respect of tax sec_301_9100-3 provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that the grant of relief will not prejudice the interests of the government in the present situation the election described in temp sec_1_921-1t is a regulatory election as defined in sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer satisfies the standards for relief set forth in sec_301_9100-3 based on the facts and representations submitted with taxpayer’s ruling_request we conclude that taxpayer satisfies sec_301_9100-3 accordingly taxpayer is granted an extension of time of days from the date of this ruling letter to file form 4876-a such filing will be treated as a timely election to be treated as an ic- disc for taxpayer’s first taxable_year the granting of an extension in this ruling letter is not a determination that taxpayer is otherwise eligible to make the election or to claim ic-disc status or benefits see sec_301_9100-1 taxpayer should attach a copy of this ruling letter to its federal_income_tax return for the taxable years to which this letter applies this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter plr-143942-14 pursuant to a power_of_attorney on file in this office copies of this ruling letter are being furnished to your authorized representatives sincerely _____________________________________ christopher j bello chief branch office of associate chief_counsel international enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court marc chrem and esther chrem et al petitioners v commissioner of internal revenue respondent docket nos filed date brian b snarr and michael craig weinstein for petitioners patrick f gallagher rose e gole and gennady zilberman for respondent 1cases of the following petitioners are consolidated herewith jacqueline ashkenazi docket no albert ashkenazi docket no david i ashkenazi and linda yedid docket no ely i ashkenazi and paulina ashkenazi docket no isaac e ashkenazi docket no jack e ashkenazi docket no joseph e betesh and sally ashkenazi docket no saul e ashkenazi and pauline j salame docket no mark chraime and barbara chraime docket no and ralph gindi and grace gindi docket no memorandum opinion lauber judge these consolidated cases are before the court on the par- ties’ cross-motions for partial summary_judgment petitioners along with eight other individuals or couples owned of the stock of comtrad trading ltd comtrad a closely held hong kong corporation a related company proposed to purchase of comtrad’s stock for dollar_figure per share after comtrad’s share- holders agreed to tender about of their shares petitioners donated the balance of their stock to a charitable_organization the acquiring company then completed the acquisition purchasing the donated stock for dollar_figure per share on their federal_income_tax returns petitioners claimed charitable_contribution deductions for their gifts valuing the donated stock at dollar_figure per share in timely notices of deficiency the internal_revenue_service irs or respondent determined that petitioners were liable for tax under the assignment_of_income_doctrine on their transfers of stock to the charity the irs also determined that petitioners had failed to obtain and where applicable attach to their returns qualified appraisals of the donated property see sec_170 and d 2all statutory references are to the internal_revenue_code code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure we round all monetary amounts to the nearest dollar petitioners seek summary_judgment with respect to the first determination and the parties have filed cross-motions for summary_judgment with respect to the second pair of determinations concluding that material disputes of fact exist we will deny all the motions background the following facts are drawn from the parties’ pleadings motion papers and the declarations and exhibits attached thereto these facts are stated solely for purposes of ruling on the pending motions for summary_judgment not as findings_of_fact in these cases see rule b fed r civ p a 115_tc_15 aff’d 269_f3d_854 7th cir all petitioners resided in new york when they filed their petitions formed in date comtrad was a hong kong corporation that did business in hong kong and shenzhen china as of date it had big_number shares of outstanding common_stock big_number of which were owned by petitioners eight other individuals or couples some of whom appear to have family ties to petitioners owned the remaining big_number shares comtrad performed testing and quality control services for three related companies that produced and marketed consumer electronic products comtrad selected suppliers took title to component parts manufactured by those suppliers performed testing on those components to verify specifications and ensure quality and managed the logistics of delivering the components to its customers comtrad received for its services commissions ranging between and computed as markups on its total costs comtrad’s principal customer was sdi technologies inc sdi which manufactured and marketed a broad range of consumer electronic products including clock radios home audio systems headphones and computer accessories sdi accounted for of comtrad’s revenue and of its gross_profit in sdi is a u s_corporation that elected to be treated as an s_corporation for federal_income_tax purposes virtually all of sdi’s stock was owned during by an employee_stock_ownership_plan esop petitioners and other comtrad shareholders appear to have been beneficiaries of the esop sdi and comtrad were also related through common management a majority of each company’s board_of directors served as directors for both companies in late sdi made a proposal to acquire of comtrad’s stock the stated purposes of this acquisition were to recapture for sdi the commission sec_3an esop is a tax-exempt plan that invests primarily in the securities of its sponsoring employer see employee_retirement_income_security_act_of_1974 erisa pub_l_no sec e stat pincite codified as amended at sec_4975 it had been paying comtrad to achieve greater vertical integration and control_over product sourcing in asia to give sdi control of certain trademarks held by comtrad and to take advantage of the favorable tax treatment that would be afforded comtrad’s net_earnings due to sdi’s status as an s_corporation whose shares were owned by an esop it was proposed that the stock acquisition would proceed in two steps sdi would first purchase big_number comtrad shares from petitioners and the other comtrad shareholders the proposed purchase_price was dollar_figure per share for a total of dollar_figure the consideration paid_by sdi for this tranche was to consist of dollar_figure in cash and dollar_figure million in subordinated 15-year promissory notes bear- ing annual interest the second step involved the remaining shares of comtrad’s outstand- ing stock in connection with sdi’s acquisition of the big_number shares petitioners agreed to donate shares to the jewish communal fund jcf an organization exempt from federal_income_tax under sec_501 and c sdi agreed to purchase each share tendered by jcf for dollar_figure in cash petitioners agreed after donating their shares to jcf to use all reasonable efforts to cause jcf to tender the shares to sdi if the donors failed to per- suade jcf to do this it was expected that sdi would use a squeeze-out merger a reverse_stock_split or such other action that will result in sdi owning of comtrad if sdi failed to secure ownership of jcf’s shares within days of acquiring the big_number shares the entire acquisition would be reversed out and sdi would return the big_number shares to the tendering comtrad shareholders as noted above virtually all of sdi’s shares were owned by an esop because sdi and comtrad were related parties the trustee for the esop believed that erisa4 required it to secure a fairness opinion to ensure that sdi paid no more than adequate_consideration for the comtrad stock see u s c secs a generally prohibiting transactions between erisa plans and parties_in_interest b a permitting such transactions if the plan pays no more than adequate_consideration b defining adequate_consideration by reference to the fair_market_value as determined in good_faith by the trustee in accordance with regulations promulgated by the secretary of labor the esop trustee hired empire consultants llc empire to provide a fairness opinion supported by a valuation report in describing the proposed trans- action empire expressed its understanding that sdi would acquire of com- trad’s stock in two stages the first stage according to empire involves the 4erisa is an acronym for the employee_retirement_income_security_act_of_1974 pub_l_no 88_stat_829 codified as amended at various sections of u s c acquisition of big_number shares or approximately of comtrad’s outstanding ordinary shares for dollar_figure in cash and promissory notes simultaneously with sdi’s acquisition of the big_number shares empire stated certain of comtrad’s shareholders will transfer shares to jcf the second stage of the proposed transaction involves the acquisition of the jcf shares for dollar_figure per share or dollar_figure million in aggregate using regulatory guidelines and professional standards that it deemed rele- vant empire provided its estimate of the fair_market_value fmv of of the ordinary shares of comtrad it employed a market approach and a discounted cashflow approach and it applied a downward adjustment to reflect a discount for lack of marketability it concluded that the fmv of comtrad valued on a going concern basis was between dollar_figure million and dollar_figure million or dollar_figure to dollar_figure per share empire submitted its findings to the esop trustee in a restricted use ap- praisal report dated date and a fairness opinion dated date collectively empire report given the range of fmvs it determined for 5empire stated that it performed its appraisal according to guidelines set by the department of labor the irs and the american society of appraisers 6in explaining this relatively small discount empire note d that the appro- priate level of discount is materially less on a control block than it would be on a minority interest block comtrad empire opined that the proposed transaction was fair to the beneficiaries of sdi’s esop empire emphasized that its report was for the the sole use of the esop trustee in its fiduciary capacity and could not be used for any other purpose or by any other user s without the express consent of empire empire expressly stated that its appraisal does not take into consideration any_tax consequences related to comtrad’s selling shareholders on date two days after the date of empire’s fairness opinion sdi purchased big_number shares of comtrad stock from petitioners and the other comtrad shareholders the parties dispute when petitioners donated their shares to jcf petitioners assert that these donations occurred on december whereas respondent contends that they occurred no earlier than december al- legedly after jcf unconditionally agreed to sell the shares to sdi but the parties agree that jcf formally tendered its shares to sdi on december the same day on which the other comtrad shareholders tendered their shares and the parties agree that jcf received the same per-share price dollar_figure that the other comtrad shareholders received but that jcf was paid entirely in cash all petitioners timely filed sometimes jointly form sec_1040 u s individual_income_tax_return for on their respective schedules a itemized_deductions petitioners claimed noncash charitable_contributions for the stock they donated to jcf as follows petitioner s marc chrem esther chrem jacqueline ashkenazi albert ashkenazi david i ashkenazi linda yedid ely i ashkenazi paulina ashkenazi isaac e ashkenazi jack e ashkenazi joseph e betesh sally ashkenazi saul e ashkenazi pauline j salame mark chraime barbara chraime ralph gindi grace gindi total docket no shares contributed claimed deduction dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number when a taxpayer makes a charitable_contribution of property other than publicly_traded_securities valued in excess of dollar_figure he is required to secure a qualified_appraisal sec_170 if he claims a value in excess of dollar_figure for such property he is required to attach a copy of the appraisal to his return sec_170 none of petitioners secured for their contributions or attached to their returns an appraisal that was addressed to them however each of petitioners’ returns included an appraisal_summary on form_8283 noncash charitable_contributions in part i of these forms captioned information on donated property petitioners noted the number of comtrad shares that each had donated they stated that they had acquired those shares by purchase and supplied their respective cost bases for the donated shares gregory sullivan the managing director of empire who had signed the fairness opinion issued to the esop trustee signed the declaration of appraiser on each form_8283 saul wadowski an officer of jcf signed the donee acknowledgment on each form which listed date as the date on which jcf had received the donated stock the irs selected all of petitioners’ returns for examination and requested that they supply qualified appraisals to substantiate their claimed deductions in response each petitioner supplied a copy of the report that empire had prepared for the esop trustee the irs issued notices of deficiency to all petitioners determining that they were liable for tax under the anticipatory_assignment_of_income doctrine on their transfers of shares to jcf the irs also disallowed in full the claimed charitable_contribution deductions for failure to satisfy the requirements of sec_170 finally the irs determined that petitioners were liable for accuracy-related_penalties under sec_6662 and in the alternative gross_valuation_misstatement penalties under sec_6662 petitioners timely petitioned this court for redetermination on date the court consolidated the cases for purposes of trial briefing and opin- ion on date respondent filed his motion for partial summary judg- ment petitioners filed their cross-motion one week later i summary_judgment standard discussion the purpose of summary_judgment is to expedite litigation and avoid costly time-consuming and unnecessary trials fla peach corp v commissioner 90_tc_678 under rule b we may grant summary_judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law 98_tc_518 aff’d 17_f3d_965 7th cir in deciding whether to grant summary judg- ment we construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party id see 477_us_242 however the nonmoving party may not rest upon the mere allegations or denials in his pleadings but instead must set forth specific facts showing that there is a genuine dispute for trial rule d see sundstrand corp t c pincite ii assignment_of_income petitioners seek summary_judgment on respondent’s application of the as- signment of income doctrine to their donations of stock a longstanding principle of tax law is that income is taxed to the person who earns it 410_us_441 h e who earns income may not avoid taxation through anticipatory arrangements no matter how clever or subtle thus a person anticipating receipt of income cannot avoid taxation by entering into a contractual arrangement whereby that income is diverted to some other person id pincite citing 281_us_111 this court has previously considered the assignment_of_income_doctrine as applied to charitable_contributions in the typical scenario the taxpayer donates to a charity stock that is about to be acquired by the issuing_corporation via redemp- tion or by another corporation via merger or acquisition in determining whether the taxpayer has assigned income in these circumstances one relevant question is whether the prospective acquisition is a mere expectation or a virtual certainty more than expectation or anticipation of income is required before the assignment_of_income_doctrine applies 13_f3d_577 2d cir another relevant question is whether the charity is obligated or can be com- pelled by one of the parties to the transaction to surrender the donated shares to the acquirer revrul_78_197 1978_1_cb_83 see 119_tc_157 finding the donee’s control to be an important factor the existence of an understanding among the parties or the fact that transactions occur simultaneously or according to prearranged steps may be relevant in answering that question see eg 697_f2d_473 2d cir stating that an understanding among the parties need not be legally enforceable under state law aff’g tcmemo_1981_579 108_tc_244 finding assignment_of_income with respect to proceeds of merger that occurred contemporaneously with charitable_contribution aff’d 174_f3d_997 9th cir 7compare eg 62_tc_684 finding no assignment_of_income where stock was transferred before corporation had voted to redeem it aff’d 523_f2d_1308 8th cir with 174_f3d_997 9th cir finding an assignment_of_income where stock was donated after tender offer had effectively been completed and it was most unlikely that the offer would be rejected aff’g 108_tc_244 and 471_f2d_275 8th cir finding an assignment_of_income where stock was donated after shareholders had voted and taken steps to liquidate the corporation we conclude that there exist genuine disputes of material fact that prevent us from resolving the assignment_of_income issue summarily comtrad and sdi were related by common management the interests of both companies appear to have been aligned and both companies seemingly desired that the stock acquisi- tion be completed if so these facts may support the conclusion that the acquisi- tion was virtually certain to occur respondent also points to emails and an al- leged exchange of documents between jcf and petitioners on date this evidence may support respondent’s contention that jcf agreed in advance to tender its shares to sdi and that all steps of the transaction were prearranged the parties also dispute the dates on which relevant events occurred peti- tioners assert that they transferred their shares to jcf on december and there ap- pears to be documentary_evidence arguably supporting that assertion respondent contends that jcf did not acquire ownership of its shares until at the earliest december allegedly after jcf unconditionally agreed to sell the shares to sdi that contention derives arguable support from other documentary_evidence as well as from empire’s description of the proposed transaction which recited that petitioners would transfer shares to jcf s imultaneously with sdi’s acquisition of the big_number shares there are also genuine disputes of material fact concerning the extent to which jcf having received the shares was obligated to tender them to sdi empire stated in its report that petitioners would use all reasonable efforts to cause jcf to agree to sell the shares to sdi at this juncture the record includes little if any evidence concerning petitioners’ ability to sway jcf’s actions or jcf’s separate negotiations if any with sdi respondent contends that jcf had no meaningful discussions with sdi at all but was simply informed by petitioners that the shares should be tendered at once a trial will be necessary to determine whose version of the facts is correct one fact potentially relevant to this question concerns jcf’s fiduciary duties as a custodian of charitable assets if jcf tendered its comtrad shares it would immediately receive dollar_figure in cash if it refused to tender its shares and the entire transaction were scuttled jcf would apparently be left holding a minority interest in a closely held hong kong corporation the market_value of which might be questionable in sum viewing the facts and the inferences that might be drawn from the facts in the light most favorable to respondent as the nonmoving party we find that there exist genuine disputes of material fact that prevent summary adjudication of the assignment_of_income issue to the extent petitioners seek summary_judgment on this question we will deny their motion iii charitable_contribution deductions a governing legal framework sec_170 allows as a deduction any charitable_contribution made within the taxable_year if the taxpayer makes a charitable_contribution of property other than money the amount of the contribution is generally equal to the fmv of the property when contributed see sec_1_170a-1 income_tax regs a charitable_contribution shall be allowable as a deduction only if verified under regulations prescribed by the secretary sec_170 the secretary has prescribed extensive regulations governing verification of charitable_contributions see sec_1_170a-13 income_tax regs a taxpayer who claims a deduction for a contribution of property other than publicly traded secu- rities valued in excess of dollar_figure must obtain a qualified_appraisal of the prop- erty sec_170 he must also attach to his return such information regarding such property and such appraisal as the secretary may require which includes a fully completed appraisal_summary on form_8283 id see jorgenson v commissioner tcmemo_2000_38 79_tcm_1444 sec_1 170a- c income_tax regs when a contribution of property is valued in excess of dollar_figure the taxpayer must attach a copy of that appraisal to his return sec_170 this last requirement applies to the four petitioners who claimed charitable_contribution deductions of dollar_figure see supra p sec_170 defines qualified_appraisal to mean an appraisal performed by a qualified_appraiser that is treated for purposes of this paragraph as a qualified_appraisal under regulations or other guidance prescribed by the sec- retary the regulations prescribed by the secretary require that a qualified ap- praisal include among other things the following a description of the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property that was appraised is the property that was or will be contributed a statement that the appraisal was prepared for income_tax purposes t he date or expected date of contribution to the donee t he date or dates on which the property was appraised and t he appraised fair_market_value of the property sec_1_170a-13 income_tax regs in 100_tc_32 we held that the regula- tory reporting requirements listed above while helpful to respondent in the proc- essing and auditing of returns on which charitable deductions are claimed are directory and not mandatory thus in appropriate circumstances these require- ments can be satisfied by substantial rather than literal compliance id pincite see 109_tc_258 ndollar_figure describing substantial compliance as satisfied where the taxpayer has provided most of the information required or made omissions solely through inadvertence aff’d without published opinion 166_f3d_332 4th cir while substantial compliance may excuse minor technical or merely procedural defects it offers no relief to taxpayers who have failed to disclose information that goes to the essential requirements of the governing statute estate of evenchik v commissioner tcmemo_2013_34 105_tcm_1231 quoting 122_tc_115 sec_170 excuses failure to satisfy the reporting require- ments discussed above if it is shown that such failure is due to reasonable_cause and not to willful neglect the formulation of this defense--requiring the existence of reasonable_cause and the absence of willful neglect --resembles that appearing in numerous code provisions that impose penalties or additions to tax see eg sec_6039g sec_6704 sec_6652 f - j c see also sec_6664 requiring that the taxpayer have reasonable_cause and have acted in good_faith although sec_170 relieves the taxpayer from disallowance of a deduction rather than from imposition of a penalty we have construed the contours of these defenses similarly see alli v commissioner tcmemo_2014_15 107_tcm_1082 crimi v commissioner tcmemo_2013_51 105_tcm_1330 reasonable_cause requires that the taxpayer have exercised ordinary busi- ness care and prudence as to the challenged item crimi t c m cch pincite citing 469_us_241 the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances sec_1_6664-4 income_tax regs reasonable_cause may be shown by establishing reliance on the advice of a tax professional but such advice must generally be from a competent and independent advisor unburdened with a conflict of interest and not from promoters of the investment 440_f3d_375 6th cir aff’g tcmemo_2004_279 b analysis while not challenging empire’s status as a qualified_appraiser respondent urges that petitioners have failed in two respects to satisfy the regulatory reporting requirements respondent first contends that the empire report does not constitute a qualified_appraisal even if it is a qualified_appraisal respondent contends that those petitioners who donated stock valued in excess of dollar_figure are entitled to no deductions because they did not attach copies of that appraisal to their tax returns as sec_170 requires petitioners contend that they substantially complied with all of the regulatory reporting requirements or in the alternative that they had reasonable_cause for failing to do so as respondent observes the empire report in several respects fits awkwardly with the appraisal reporting requirements for starters it is not addressed to petitioners it does not examine any charitable_contributions of property it does not set forth the date or expected date of the contribution and it does not include a statement that it was prepared for income_tax purposes see sec_1_170a-13 income_tax regs quite the contrary the report explicitly states that it was prepared for erisa compliance purposes that it was intended solely for_the_use_of the esop trustee and that it d id not take into consideration any_tax consequences related to comtrad’s selling shareholders respondent further emphasizes that empire did not value the specific prop- erty that each petitioner actually contributed petitioners individually donated to jcf between and shares of comtrad stock the largest block represented only of comtrad’s big_number outstanding shares and petitioners collectively do- nated fewer than of its outstanding shares but whereas petitioners contributed small minority interests empire valued comtrad on a going concern basis and determined the value of of the or- dinary shares of comtrad in so doing empire discharged the mission the esop trustee had entrusted to it that is to determine whether sdi’s offering price of dollar_figure was fair to the comtrad shareholders since empire was valuing the entire company it correctly applied no minority discount and while it applied a discount of for lack of marketability that adjustment was small because the appropriate level of discount is materially less on a control block than it would be on a minority interest block had empire been asked to value the minority interest block that each petitioner donated to jcf empire would obviously have written a very different sort of report when an appraisal values property different from that which was actually contributed to charity that failure can be fatal because it goes to the essence of the information required costello v commissioner tcmemo_2015_87 109_tcm_1441 holding that an appraisal was not qualified where it valued the wrong asset estate of evenchik t c m cch pincite holding that an appraisal was not qualified because it valued corporate assets whereas the taxpayer had donated corporate stock citing cases such as these respondent contends that petitioners neither strictly nor substantially complied with the regu- latory reporting requirements because the empire report valued the wrong asset and for that reason neglected to apply the discounts that should appropriately be applied when valuing minority stock interests petitioners reply that this is a case of no harm no foul sdi was offering to buy of comtrad’s shares and to pay the same price dollar_figure for each share that being so petitioners say all of comtrad’s shares had equal value and there was no logical reason to apply a minority interest discount to the shares tendered by jcf indeed because jcf received cash for its shares whereas the other comtrad shareholders received mostly promissory notes jcf’s shares as compared with those other shares may arguably have justified a valuation premium rather than a discount for these reasons petitioners urge that they substantially complied with the appraisal reporting requirements although empire did not recite the analysis set forth in the preceding paragraph it described the proposed transaction in detail and made clear that sdi was offering to buy each share tendered by jcf for dollar_figure in cash under these circumstances petitioners say it would be obvious to any sophisticated reader that no minority discount was required thus neutralizing respondent’s argument that empire valued the wrong property petitioners admit that the empire report did not explicitly state that the ap- praisal was prepared for income_tax purposes see sec_1_170a-13 income_tax regs but empire allegedly followed irs guidelines when doing its valuation and the empire professional who signed the appraisal also signed the forms attached to petitioners’ returns petitioners admit that the empire report did not explicitly state the date or expected date of contribution to the donee id subdiv ii c and while the parties dispute the exact date on which the contributions occurred the empire report makes clear that all relevant events occurred sometime between december and petitioners contend that any technical shortcomings of the empire report can thus be excused on grounds of substantial compliance the four petitioners who made contributions valued in excess of dollar_figure have a second hurdle to overcome sec_170 required them not only to get a qualified_appraisal but also to attach a copy of that appraisal to their 8see eg zarlengo v commissioner t c memo 108_tcm_155 finding appraisal qualified where contribution dates were list- ed in the appraisal_summary gorra v commissioner tcmemo_2013_254 106_tcm_523 finding appraisal qualified where commissioner could discern that the contribution was made during a specific month consol inv’rs grp v commissioner tcmemo_2009_290 98_tcm_601 finding appraisal qualified despite omission of any statement regarding income_tax purpose simmons v commissioner tcmemo_2009_208 98_tcm_211 finding appraisal qualified despite omission of an explicit statement regarding income_tax purpose aff’d 646_f3d_6 d c cir tax returns which they did not do they say that they nevertheless substantially complied with this requirement by attaching to their return a fully completed form_8283 but the code requires that a taxpayer in this position attach to his return both an appraisal_summary and a copy of the appraisal itself compare sec_170 with id subpara d when a statute separately requires that a taxpayer satisfy two requirements it is not obvious that literal compliance with the first constitutes substantial compliance with the second even if petitioners did not strictly or substantially comply with the regula- tory reporting requirements they all seek haven in sec_170 that provision excuses failure to satisfy the reporting requirements discussed above if it is shown that such failure is due to reasonable_cause and not to willful neglect petitioners allege that their returns were prepared by an experi- enced certified_public_accountant cpa that they supplied her with the empire report and all relevant information about the comtrad stock acquisition and that she did not direct any of petitioners to include a copy of the empire report with 9petitioners cite sec_1_170a-13 income_tax regs in sup- port of their position that section provides possible relief where a donor owing to a good_faith omission fails to attach an appraisal_summary to his return in that event the charitable_contribution_deduction will not be automatically denied if the taxpayer supplies a form_8283 within days of an irs request therefor ibid but there is no comparable relief provision covering situations where the donor having reported a value in excess of dollar_figure for donated property fails to attach to his return a copy of the appraisal itself their returns the record as it stands now is silent concerning the advice if any that the cpa provided petitioners regarding the empire report and whether they relied in good_faith on whatever advice she may have supplied for these reasons we conclude that petitioners’ ability to rely on the reasonable_cause defense of sec_170 presents genuine disputes of material fact that are not susceptible to resolution by summary_judgment barring settlement these cases will need to go to trial on the assignment_of_income issue and on petitioners’ entitlement to the reasonable_cause defense under these circumstances we deem it prudent for two reasons to deny in their entirety both pending motions for partial summary_judgment first if petitioners prevail on the reasonable_cause defense it will be unnecessary for us to decide whether they substantially complied with the appraisal reporting requirements second there could be some factual overlap between the two sets of issues during trial of the assignment_of_income issue we will need to determine among other things whether the prospective acquisition of comtrad’s stock was a mere expectation or a virtual certainty see supra p the resolution of that factual question could affect whether petitioners substantially complied or had reasonable_cause for failing to comply with the appraisal reporting requirements that might be so for example if petitioners contend that they did not need to get an appraisal at all or were advised that they did not need to get an appraisal because the value of the comtrad stock was fixed at dollar_figure per share by an offer from sdi that was certain to close to reflect the foregoing an appropriate order will be issued


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 b01 plr-130036-07 date date ------------- ----------------- ----------------- ------------------------------------ legend x --------------------------------------------------- date date state dear --------------- this responds to your letter dated date requesting an extension of time under sec_301_9100-1 of the procedure and administration regulations to treat x as an association for federal tax purposes and relief under sec_1362 of the internal_revenue_code facts according to the information submitted x was formed on date under state law x intended to elect to be treated as an association_taxable_as_a_corporation and to then elect to be treated as an s_corporation with both elections effective date however form_8832 entity classification election and the election to be treated as an s_corporation inadvertently were not timely filed law and analysis corporation under sec_301_7701-2 or an eligible sec_301_7701-3 provides that a business_entity that is not classified as a plr-130036-07 to elect to be classified other than as provided in sec_301_7701-3 an sec_301_7701-3 provides that unless a domestic eligible_entity elects entity can elect its classification for federal tax purposes a business_entity is an entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the code sec_301_7701-2 an eligible_entity with at least two members can elect either to be classified as an association and thus a corporation under sec_301_7701-2 or as a partnership otherwise the entity is a partnership if it has two or more members eligible_entity must file form_8832 with the designated service_center sec_301_7701-3 an election will be effective on the date specified on the form_8832 or on the date filed if no such date is specified the effective date specified on form_8832 cannot be more than days prior to the date the election is filed nor later than twelve months after the filing_date sec_301_7701-3 sec_301_9100-1 allows the commissioner to grant a reasonable extension of time for making a regulatory election under the rules set forth in sec_301_9100-2 and sec_301_9100-3 sec_301_9100-1 defines a regulatory election as an election having a due_date prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin elections sec_301_9100-3 provides extensions for time for making elections that do not meet the requirements of sec_301_9100-2 provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301 a treated as an s_corporation is made within the first two and one-half months of a corporation's taxable_year then that corporation will be treated as an s_corporation for the year in which the election was made if an election is made after the first two and one-half months of a corporation's taxable_year then the corporation will generally not be treated as an s_corporation until the following taxable_year sec_1362 provides that a small_business_corporation can elect to be sec_1362 provides when an s election becomes effective if an s election requests for relief under sec_301_9100-3 will be granted when the taxpayer sec_301_9100-2 provides automatic extensions of time for making certain plr-130036-07 sec_1362 provides that if no election is made pursuant to section based solely on the information submitted and the representations made we a or if the election is made after the date prescribed for making such an election and the secretary determines reasonable_cause existed for the failure to timely make the election then the secretary can treat such an election as timely made for that taxable_year and effective as of the first day of that taxable_year conclusion conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 as a result x is granted an extension of time of days following the date of this letter for making the election to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date x should make the election by filing form_8832 with the relevant service_center a copy of this letter should be attached to that form in addition based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective date an original form_2553 along with a copy of this letter must be forwarded to the relevant service_center within days from the date of this letter concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter provides that it may not be used or cited as precedent enclosures william p o’shea associate chief_counsel passthroughs and special industries this ruling is directed only to the taxpayer requesting it sec_6110 except as expressly provided herein no opinion is expressed or implied copy of this letter copy for sec_6110 purposes sincerely