release number release date date uil code internal_revenue_service national_office technical_advice_memorandum e o exams programs and review internal_revenue_service attn eo mandatory review mc dal commerce street dailas tx taxpayer's name taxpayer's address taxpayer's identification_number tax years involved date of conference egend e f d n i s f o j d d w w u o b o i ssue should the first-tier excise_taxes under ilr c sec_4942 on trust's failure to distribute income for the years at issue be abated in accordance with facts the settior created trust on date1 according to the second amendment and restatement of trust agreement restatement after settlor's death the residue of the trust estate is to be held in trust and the income distributed for a term of years to named charities at the end of the term the balance of the trust estate is to be distributed to the then beneficiaries free of trust in the proportions in which such beneficiaries are receiving income the restatement further provides for pro_rata distribution to remaining eligible charitable beneficiaries if any one or more charitable beneficiaries cannot take the settior maintained the revocable_trust for years until his death the settlor died testate on date2 at that time under its terms trust became a nonexempt_charitable_trust pursuant to sec_4947 the trustee was a first cousin of settlor with whom he lived in retirement trustee was elderly and not familiar with tax matters sought the advice of a local_tax preparer who advertised that he was an enrolled_agent authorized to practice before the internal_revenue_service rather than recognizing that trust was a nonexempt_charitable_trust subject_to the private_foundation provisions under sec_4942 the tax preparer advised the trustee that trust was a complex taxable trust and should file form sec_1041 u s income_tax retum for estates and trusts the trustee filed form_706 estate_tax_return and form sec_1041 for certain specified years during many of these years trust made donations to the charitable beneficiaries of the trust but treated them as charitable deductions of a taxable trust rather than as qualifying distributions of a private_foundation the amounts donated did not equal what would have been required distributable amounts of the private_foundation during all of these years on date3 the irs conducted a correspondence examination of the trust's form_1041 income_tax return the irs requested documentation to verify the charitable deductions claimed on the return as well as the trust instrument and any amendments on date4 the irs issued a no_change_letter stating we have determined that no change to your tax_return is necessary subsequently the charitable beneficiaries brought civil actions against trust and the trustee for an accounting a surcharge and removal of trustee at that time trust engaged a new accountant to provide an accounting as requested in the civil suit this new accountant informed the trustee that under the terms of its trust document trust was a nonexempt_charitable_trust described in sec_4947 under this provision trust is treated as a private_foundation after the death of the settlor this requires the trust to file form_990-pf return of private_foundation pay excise_tax on its net_investment_income pursuant to sec_4940 and make required annual distributions to charity pursuant to sec_4942 trust also engaged new tax counsel to handie the court action tax counsel agreed with the new accountant that trust was a nonexempt_charitable_trust however because trust's federal tax status still needed to be resolved the new accountant prepared and the trustee filed form_1041 to correct its failure_to_file the proper information_return and failure_to_pay_tax on net_investment_income under sec_4940 trust filed forms 990-pf for the specified years at issue on each of the forms 990-pf trust computed the tax on net_investment_income penalty for underpayment of estimated_tax tax due distributable_amount and qualifying_distribution trust paid the excise_tax on net_investment_income and penalty for underpayment of estimated_tax plus interest for each of these tax years where applicable trust made qualifying distributions of all remaining undistributed_income from those years this distribution was reported on the form_990-pf trust also filed forms for the years at issue caiculating the total undistributed_income at the end of each of these tax years that is subject_to tax under sec_4942 pursuant to sec_4962 trust requests that the first-tier sec_4942 excise_tax reflected on the forms be abated because the under distribution was due to reasonable_cause and not willful neglect no notice_of_deficiency with respect to the first-tier tax has been issued law r c sec_4942 imposes a tax on the undistributed_income_of_a_private_foundation which has not been distributed before the first day of the second or any succeeding taxable_year following such taxable_year if such day falls within the taxable_period il r c sec_4942 defines undistributed income’ as the amount by which the distributable_amount for such taxable_year exceeds qualifying distributions made before such time out of such distributable_amount sec_4942 defines the distributable_amount as an amount equal to the sum of the minimum_investment_return as adjusted reduced by the sum of the taxes imposed on such private_foundation under subtitle a and sec_4940 lr c sec_4942 defines minimum_investment_return for any private_foundation for any taxable_year as five percent of the excess of the aggregate fair_market_value of all assets of the foundation other than those which are used directly in carrying on the foundation's exempt_purpose over any acquisition_indebtedness with respect to such assets sec_4942 provides that a qualifying_distribution is any amount_paid for tax exempt purposes as defined in sec_170 il r c sec_4942 provides that the term taxable_period means with respect to the undistributed_income for any taxable_year the period beginning with the first day of the taxable_year and ending on the date of mailing of a notice_of_deficiency sec_4942 provides that the term allowable_distribution_period means with respect to any private_foundation the period beginning with the first day of the first taxable_year following the taxable_year in which the incorrect valuation described in a of this section occurred and ending days after the date of mailing of a notice_of_deficiency extended by a any period in which a deficiency cannot be assessed under sec_6213 and b any other period which the secretary determines is reasonable and necessary to permit a distribution of undistributed_income under this section sec_4962 provides that if it is established to the satisfaction of the secretary that a taxable_event was due to reasonable_cause and not to willful neglect and such event was corrected within the correction_period for such event then any qualified_first_tier_tax imposed with respect to such event including interest shall not be assessed and if assessed the assessment shall be abated and if collected shall be credited or refunded as an overpayment il r c sec_4947 provides that a nonexempt_charitable_trust which is a_trust that is not exempt from taxation under sec_501 all of the unexpired interests in which are devoted to one or more of the purposes described in sec_170 and for which a deduction was allowed under sec_170 sec_545 sec_642 sec_2055 sec_2106 or sec_2522 shail be treated as an organization described in sec_501 il r c sec_4962 provides that the term qualified_first_tier_tax means any first_tier_tax imposed by subchapter_a c d or g of chapter with the exception of the initial tax on self-dealing imposed by sec_4941 sec_4963 provides definitions for excise_tax taxable_event correction and correction_period with regard to chapter taxes in the case of sec_4942 taxable_event means any act or failure to act giving rise to liability under sec_4942 the taxable_event occurs on the first day of the taxable_year for which there was a failure to distribute income correct means reducing the amount of the undistributed_income to zero and correction_period means with respect to any taxable_event the period beginning on the date on which such event occurs and ending days after the date of mailing under sec_6212 of a notice_of_deficiency with respect to the second_tier_tax imposed on such taxable_event subject_to certain extensions sec_1_507-1 provides that no motive to avoid the restrictions of the law or the incurrence of any_tax is necessary to make an act or failure to act willful however a foundation's act or failure to act is not willful if the foundation or a foundation_manager if applicable does not know that it is an act of self-dealing a taxable_expenditure or other act or failure to act to which chapter applies rules similar to the regulations under chapter see for example sec_53_4945-1 of this chapter shall apply in determining whether a foundation or a foundation_manager knows that an act or failure to act is an act of self-dealing a taxable_expenditure or other such act or failure to act sec_1_508-1 a d provides that a nonexempt_charitable_trust described in sec_4947 is excepted from the sec_508 notice requirement for purposes of sec_507 sec_508 sec_508 sec_508 sec_508 sec_509 and chapter sec_53_4942_a_-3 provides that an organization's qualifying distributions will be determined solely on the cash_receipts_and_disbursements_method of accounting and the amount of a qualifying_distribution of property is the fair_market_value of the property on the date the qualifying_distribution is made sec_53_4942_a_-3 defines the term qualifying_distribution as a b d any amount_paid by a private_foundation to accomplish one or more purposes described in sec_170 or sec_170 that is to say amounts paid to accomplish charitable religious educational etc purposes or amounts contributed to a governmental_unit for exclusively public purposes any amount_paid to acquire an asset used or held for use directly in carrying out one or more purposes described in sec_170 or sec_170 any amount set_aside which meets the criteria for set asides included in amounts paid for one or more purposes described in sec_170 or sec_170 are amounts paid for program-related investments as defined in sec_4944 also distributions or expenditures that are creditable against a private foundation's obligation to distribute its distributable_amount are referred to as qualifying distributions’ sec_53_4947-1 explains that the basic purpose of sec_4947 is to prevent charitable trusts from being used to avoid the requirements and restrictions applicable to private_foundations sec_53_4947-1 provides in part a a charitable trust’ is treated as a private_foundation and is subject_to the excise_tax on its investment_income under b rather than the tax imposed by sec_4940 sec_53_4963-1 provides that the correction_period with respect to any taxable_event shall begin with the date on which the taxable_event occurs and shall end days after the date of mailing of a notice_of_deficiency under sec_6212 with respect to the second_tier_tax imposed with respect to the taxable_event subparagraph provides that the correction_period may be extended by any period which the commissioner determines is reasonable and necessary to bring about correction of the taxable_event in 469_us_241 the supreme court described ‘willful neglect’ as meaning a conscious intentional failure or reckless indifference to show reasonable_cause the taxpayer must demonstrate that he exercised ‘ordinary business care and prudence boyle us pincite quoting sec_301_6651-1 side tennis 178_f2d_769 2d cir provides that when a corporate taxpayer selects a competent tax expert supplies him with all necessary information and requests him to prepare proper tax returns the taxpayer has done all that ordinary business care and prudence can reasonably demand the taxpayer had not awaited passively for such tax_advice but affirmatively requested the preparation by his consultant of proper returns to require the taxpayer to inquire specifically about the personal_holding_company act nullifies the very purpose of consulting an expert the court continues we doubt if anyone would suggest that a client who stated the facts of his case to his lawyer must in order to show ordinary business care and prudence inquire specifically about the applicability of various legal principles which may be relevant to the facts stated the courts have recognized that reliance on the advice of counsel or of expert accountants sought and received in good_faith is ‘reasonable cause’ for failing to file a tax_return the court held in favor of the taxpayer in west burden of establishing reasonable_cause is on the taxpayer and that the taxpayer had not shown a timely effort to get advice or to secure a ruling and has rested its case on the finding of the taxpayer's board that the officers and directors believed that it was exempt but this without more was not sufficient the board had stated we do not know the steps taken by petitioner to ascertain its status as a taxpayer and without knowledge of the basis for the belief of its officers and directors that it was exempt from tax we are in no position to test the reasonableness of the conclusion the court therefore held in favor of the commissioner in 137_f2d_731 4th cir the taxpayer claimed as an excuse for failing to file a return that its attorneys’ belief that it was a personal_holding_company and therefore not subject_to the statute in question the court held that a mere statement that taxpayer's counsel entertained a subjective belief whether well-founded or not that taxpayer was not subject_to the tax statute in question was not sufficient to show reasonable_cause relieving the taxpayer of a penalty for failing to file a timely return therefore the court held in favor of the commissioner v commissioner 111_f2d_6 2d cir the court states that the club in rembusch v commissioner 38_tcm_310 the court held that the taxpayer has the burden of showing that a failure_to_file timely returns was due to reasonable_cause and not willful neglect a mere showing that the delinquency in filing the returns was not due to willful neglect is not sufficient and that there must also be reasonable_cause in hale v commissioner 44_tcm_1116 the tax_court states that the taxpayer bears the burden of showing reasonable_cause to avoid penaities for failing to file a timely return under sec_6651 a commissioner 18_tcm_288 the tax in western supply and furna court opines that reliance upon the advice of counsel or of expert accountants sought and received in good_faith is reasonable_cause for failure_to_file a tax_return however the court was not persuaded that a bookkeeper had any special knowledge or training in tax law or that he was otherwise competent in tax matters in fact he testified that he did not know that corporate returns had to be signed by two officers nor is it established in the record that the taxpayer relied upon the advice of the bookkeeper the court held that the taxpayer's failure_to_file proper corporate returns was due to willful neglect and not to reasonable_cause h_r rep no pt 98th cong 2d sess and s rep no vol 98th cong 2d sess provide that where the foundation or foundation_manager can establish that there was reasonable_cause for such a violation and that there was no willful neglect of the rules the internal_revenue_service is to have discretionary authority to relieve the foundation or manager from the first-tier penalty tax provided that the violation is corrected in the manner required in order to avoid liability for second-tier taxes a violation which was merely due to ignorance of the law cannot qualify for such abatement delegation_order formerly do-237 rev delegates authority to abate substantial first- tier excise_taxes to the director exempt_organizations substantial qualified first-tier tax amount is described as a sum exceeding dollar_figure for all such tax_payments or deficiencies excluding interest other taxes and penalties involving all related parties and transactions arising from chapter taxable events within the statute_of_limitations as determined by the area office involved see irm dollar_figure analysis sec_4962 provides discretionary authority to the irs not to assess or to abate or refund any qualified first-tier tax if the foundation establishes to the satisfaction of the irs that the violation was due to reasonable_cause was not due to willful neglect and has been corrected within the appropriate correction_period analysis for abatement requires determining whether trust meets the threshold prerequisites of sec_4962 for the years at issue to consider abatement of first tier taxes under sec_4942 for failure to distribute income in each of those years the questions and analysis for each question is set forth below did trust correct the taxable events for each of the years at issue within the correction_period under sec_4962 the taxable_event must be corrected within the correction_period for sec_4942 the taxable_event occurs on the first day of the taxable_year for which there was a failure to distribute income llr c sec_4963 to correct the taxable_event the private_foundation must reduce the amount of undistributed_income to zero sec_4963 correction_period means with respect to any taxable_event the period beginning on the date on which such event occurs and ending days after the date of mailing under sec_6212 of a notice_of_deficiency with respect to the second-tier tax imposed on such taxable_event subject_to certain extensions sec_4963 trust became aware that it was an sec_4947 nonexempt_charitable_trust treated as a private_foundation subsequently and immediately after the discovery trust filed forms 990-pf for the years at issue and remitted the sec_4940 excise_tax on net_investment_income and penaity for underpayment of estimated_tax for each of these years trust also computed the distributable_amount for each year undistributed_income for each year and from prior years and qualifying distributions for each year trust filed forms reporting the applicable taxes for the years at issue as indicated above no statutory_notice_of_deficiency has been issued based on the information provided trust corrected the taxable events within the correction_period for the specified years at issue by making qualifying distributions to reduce to zero the amount of undistributed_income for those years was the taxable_event due to reasonable_cause and not to willful neglect wiliful neglect sec_4962 does not define willful neglect sec_6653 or for returns due after date sec_6662 defines negligence for purposes of the negligence_penalty as including any failure to make a reasonable attempt to comply with the provisions in the generally accepted legal sense negligence is the failure to do something that a reasonable person guided by those considerations that ordinarily regulate the conduct of human affairs would do or doing something that a prudent and reasonable person would not do willful is defined in several places for example in sec_53_4945-1 as voluntary conscious and intentional and in sec_1_507-1 which provides that no motive to avoid the foundation restrictions is necessary to make an act or failure to act willful but that an act or failure to act is not willful if the foundation does not know that it is an act to which the foundation rules apply in 469_us_241 the supreme court described willful neglect as meaning a conscious intentional failure or reckless indifference thus the term willful neglect implies a voluntary conscious and intentional failure to exercise the care that a reasonable person would observe under the circumstances to see that the standards were observed despite knowledge of the standards or rules in question a finding that a violation was caused by willful neglect will preclude abatement of the first-tier tax but a mere finding of no willful neglect does not in itself justify abatement ignorance of the law is a clear example of the operation of this principle the fact that a foundation's managers or directors did not know that an act or failure to act was a violation demonstrates that it was not due to willful neglect but it does not meet the reasonable_cause requirement in rembusch v commissioner 38_tcm_310 the tax_court opined that a mere showing that the delinquency in filing tax returns was not due to willful neglect is not sufficient and there must also be reasonable_cause we have no evidence that the taxable events occurred due to a voluntary conscious and intentional failure on the part of trust and trustee to exercise the care that a reasonable person would observe trustee engaged an accountant who held himself out as qualified in tax matters as an enrolled_agent because she was unfamiliar with the tax law issues related to her responsibilities as trustee we find no willful neglect that would preclude abatement of the first- tier tax reasonable_cause neither sec_4942 or sec_4962 define reasonable_cause however regulations under other chapter internal_revenue_code sections indicate that the standard should be ordinary business care and prudence see eg sec_53 -1 b b iii a v b and d under sec_301_6651-1 and other provisions that impose a reasonable_cause standard determining whether reasonable_cause was shown requires consideration of all the facts and circumstances the supreme court also used this ordinary business care and prudence’ definition of reasonable_cause in determining whether a taxpayer was entitled to relief from failure_to_file penalties 469_us_241 however the burden of establishing reasonable_cause is on the taxpayer see west side tennis 2d cir hale v commissioner 44_tcm_1116 generally reliance in good_faith on the advice of counsel may establish reasonable_cause and show an absence of willful neglect pursuant to 469_us_241 a v commissioner 111_f2d_6 club taxpayer must demonstrate that it relied on advice it sought from its own counsel where the taxpayer has obtained advice from a competent tax professional on the specific tax matter and the taxpayer has provided the advisor with all the necessary and relevant information to make a determination the taxpayer has done all that ordinary business care and prudence can reasonably demand 178_f2d_769 2d cir in addition the advice must be obtained in a timely manner see 111_f2d_6 2d cir western supply commissioner that taxpayer's counsel entertained a subjective belief that taxpayer was not subject_to the tax statute in question is not sufficient to show reasonable_cause 137_f2d_731 4th cir v commissioner 19_tcm_743 however a mere statement and furna ely trustee was not a sophisticated investor she retained accounting and legal professionals to handie the estate and trust matters after the settlor passed away the original accountant was an enrolled_agent able to practice before the internal_revenue_service who held himself out as a tax expert the accountant prepared the form_706 estate_tax_return and the form sec_1041 income_tax returns for the trust as a complex_trust after the death of the settlor the trustee relied on the accountant to prepare the proper tax forms for her to sign and file she also followed the instructions of the trust document itself and its restatement to distribute income to the stated beneficiaries in the percentages stated the accountant characterized these distributions as donations and listed them as charitable deductions on the form sec_1041 the language of the trust and restatement did not expressly indicate it was an sec_4947 non- exempt charitable_trust to be treated as a private_foundation in fact when the irs conducted a correspondence_audit and reviewed trust's governing document it did not recognize trust as a sec_4947 non-exempt charitable_trust that should be following the requirements of chapter and filing form_990-pf based on the facts provided the trustee relied in good_faith on the advice of the accountant further the trustee relied in good_faith on the findings of the audit when it was issued a no_change_letter the trustee had no reason to question the advice of the accountant until she consulted a new accountant and tax counsel therefore we find the taxable_event s were due to reasonable_cause based on the foregoing facts we find that trust has met the requirements of sec_4962 that its violation of sec_4942 for years at issue was due to reasonable_cause was not due to willful neglect and has been corrected within the correction_period the request to abate the tax is granted by the acting director exempt_organizations a copy of this memorandum is to be given to taxpayer sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent end-


t c summary opinion united_states tax_court connie j meadows petitioner v commissioner of internal revenue respondent docket no 874-06s filed date connie j meadows pro_se thomas l fenner for respondent jacobs judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue 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 this case involves innocent spouse relief for the amount of tax shown as due on petitioner and her then husband’s joint income_tax return that has not been fully paid petitioner contends that respondent’s allowance of only partial innocent spouse relief was an abuse_of_discretion consequently we must decide whether respondent abused his discretion in denying petitioner innocent spouse relief under sec_6015 for dollar_figure of the dollar_figure shown as the amount owed on the return background some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time of filing the petition petitioner resided in houston texas petitioner and her husband at that time todd meadows timely filed a joint form_1040 u s individual_income_tax_return for they reported mr meadows’s wage income of dollar_figure and petitioner’s wage income of dollar_figure together with other income items such as a taxable_distribution from a pension_plan interest_income and dividend income their total income for was shown as dollar_figure the total_tax shown was dollar_figure with dollar_figure owed including a dollar_figure estimated_tax penalty petitioner was and is a middle school teacher mr meadows was a property_tax specialist employed by an energy company in march of petitioner and mr meadows divorced in june of respondent determined a deficiency of dollar_figure in petitioner and mr meadows’s income_tax for and issued a notice_of_deficiency for a deficiency and a related penalty under sec_6662 neither petitioner nor mr meadows petitioned this court for a review of respondent’s determination and respondent assessed the deficiency and the related penalty in august of petitioner requested innocent spouse relief for the tax_year pursuant to sec_6015 respondent granted petitioner full relief with respect to the deficiency in and addition_to_tax that had been assessed however respondent denied relief under sec_6015 for dollar_figure of the unpaid liability shown on the joint tax_return respondent asserts that he is seeking recovery only of that part of the tax_liability shown on the joint_return that is attributable to the earnings_of petitioner respondent issued a final notice_of_determination with respect to petitioner’s request for innocent spouse relief under sec_6015 in date discussion married couples may choose to file their federal_income_tax returns jointly sec_6013 couples filing joint returns are jointly and severally liable for the taxes due thereon sec_6013 sec_6015 provides relief from liability for filers of joint returns in some circumstances under sec_6015 a spouse may seek relief for understatements of tax attributable to certain erroneous items on a return under sec_6015 the tax_liability may be apportioned between two former or separated spouses these provisions apply when there is a deficiency in tax petitioner was successful in obtaining relief under sec_6015 for the deficiency respondent determined in cases of underpayment sec_6015 applies sec_6015 provides in part that a taxpayer may be relieved from joint_and_several_liability if it is determined that taking into account all the facts and circumstances it is inequitable to hold the taxpayer liable for the unpaid tax and relief is not available under sec_6015 or c if relief is denied then to prevail the taxpayer must prove that the commissioner’s denial of equitable relief from joint liability under sec_6015 was an abuse_of_discretion 114_tc_276 the court defers to the commissioner’s determination unless it is arbitrary capricious or without sound basis in fact 118_tc_106 affd 353_f3d_1181 10th cir whether the commissioner’s determination was an abuse_of_discretion is a question of fact the requesting spouse bears the burden of proving that there was an abuse_of_discretion 115_tc_183 affd 282_f3d_326 5th cir abelein v commissioner tcmemo_2004_274 as directed by sec_6015 the commissioner has prescribed guidelines in revproc_2003_61 2003_2_cb_296 modifying revproc_2000_15 2000_1_cb_447 that are to be used in determining whether it is inequitable to hold a requesting spouse liable for all or part of the liability for any unpaid tax or deficiency respondent in denying relief to petitioner applied guidelines found in revproc_2000_15 supra which we will refer to as the superseded guidelines the superseded guidelines were modified by guidelines found in revproc_2003_ supra which we will refer to as the applicable guidelines the applicable guidelines are effective as to requests for relief filed on or after date and for requests for relief pending on date as to which no preliminary determination_letter had been issued as of that date revproc_2003_61 sec c b pincite petitioner’s application_for relief was filed after date on date respondent’s determination_letter was issued on date according to section dollar_figure in both sets of guidelines the requesting spouse must satisfy seven conditions threshold conditions before the commissioner will consider a request for relief under sec_6015 revproc_2003_61 sec_4 c b pincite revproc_2000_15 sec_4 c b pincite the threshold conditions in the modified guidelines however are different from the threshold conditions in the superseded guidelines the modified guidelines contain a threshold requirement that the income_tax_liability from which the requesting spouse seeks relief be attributable to an item of the individual with whom the requesting spouse filed the joint_return with exceptions not applicable here respondent at trial and in his pretrial memorandum stated that petitioner satisfied the threshold conditions but when respondent made this concession he was referring to the threshold conditions found in the superseded guidelines which did not include the threshold requirement pertaining to attribution respondent contends that he is seeking to recover only that portion of the tax_liability that is attributable to the earnings_of petitioner petitioner does not dispute that claim consequently pursuant to the applicable guidelines innocent spouse relief would be denied because petitioner does not meet 1this factor attribution of the item generating the income_tax_liability appears in sec dollar_figure of the superseded guidelines rather than as a threshold requirement of sec dollar_figure of those guidelines therefore respondent considered this factor in denying petitioner’s request for innocent spouse relief but did not regard it as a threshold condition the threshold condition that the tax_liability be attributable to an item of the nonrequesting spouse although petitioner has not met the threshold requirements for relief found in section dollar_figure of the applicable guidelines we consider other factors to be taken into consideration when the threshold requirements are met because respondent applying the superseded guidelines conceded that petitioner had met the threshold conditions and denied petitioner’s claim for innocent spouse relief on other bases the applicable guidelines specify in sec_4 three other conditions assuming that the threshold conditions were met which respondent erroneously assumed was the case that if met will normally entitle the spouse to relief revproc_2003_61 sec_4 c b pincite to qualify petitioner must show that a she is no longer married b it was reasonable for her to believe that mr meadows would pay the reported tax_liability and c she will suffer economic hardship if she is not granted innocent spouse relief economic hardship generally means that the individual is unable to pay reasonable basic living_expenses petitioner showed that she and mr meadows are divorced thereby satisfying the first condition however we cannot find 2see sec_301_6343-1 proced admin regs referred to in the revenue_procedure in making the determination of whether economic hardship is present that petitioner reasonably believed that mr meadows would pay the tax_liability reported on the joint_return it appears from the record that petitioner filed tax returns for at least the preceding years as a married taxpayer filing separately petitioner testified that mr meadows prepared those returns for her and that she merely signed them on one occasion mr meadows signed her name to the return petitioner testified that mr meadows convinced her that it would be advantageous to them to file a joint_return for even though at the time the return was due they were contemplating divorce petitioner asserts that at mr meadows’s request she signed the joint return while it was blank ie before any figures appeared on it petitioner testified that in doing this she should have known better than to trust mr meadows according to petitioner mr meadows then filed the return which showed the tax_liability and the balance still owed the address on the tax_return was a mailbox to which mr meadows had access but petitioner did not consequently petitioner testified that she was unaware of any further developments or correspondence from respondent pertaining to the tax_year and did not obtain a copy of the joint_return until respondent began collection efforts petitioner could not reasonably have believed that mr meadows would pay the reported tax_liability because petitioner was unaware they had any_tax liability having signed a blank return petitioner testified that even though mr meadows assured her that he would properly manage their tax obligations she was aware that she could not trust him to actually do so moreover petitioner testified that mr meadows had always prepared and filed her tax returns both the joint and separate returns and that several years before respondent had garnished her wages nothing in petitioner’s testimony establishes that petitioner believed that mr meadows would pay the reported tax_liability even if we could find which we do not that petitioner believed that mr meadows would pay the reported tax_liability we could not find that her belief was reasonable on the contrary petitioner’s experience in relying on mr meadows to pay income taxes had resulted in the garnishing of her wages further we do not find that petitioner will suffer economic hardship if she is not granted innocent spouse relief the record shows that petitioner earned more than dollar_figure in the unpaid tax that respondent seeks to recover including interest as of the date of trial is approximately dollar_figure petitioner did not provide any supporting documentation but she testified that she contributes to the support of her young adult children and her elderly parents even if we were persuaded that petitioner’s living_expenses include the cost of supporting adult children and elderly parents these costs were not quantified and we cannot conclude from this record that petitioner will not be able to pay her reasonable basic living_expenses if she is not granted relief in sum assuming petitioner met the threshold requirements found in section dollar_figure of the modified guidelines we conclude petitioner does not qualify for relief because she did not meet the additional requirements found in section dollar_figure of the modified guidelines where the requesting spouse meets the seven threshold conditions set forth in section dollar_figure of the modified guidelines but does not qualify for relief under section dollar_figure of those guidelines we employ a balancing test to determine whether taking into account all the facts and circumstances it would nevertheless be inequitable to hold the requesting spouse liable for all or part of the unpaid liability section dollar_figure of the modified guidelines enumerates six nonexclusive factors that may be considered in making this determination because respondent applied the superseded guidelines he considered petitioner’s request for relief in the light of eight factors listed in section dollar_figure of the superseded guidelines we now examine section dollar_figure of the modified guidelines which includes six factors to be considered a description of each factor underscored and our evaluation of that factor in this case follows a marital status the requesting spouse is separated or divorced from the nonrequesting spouse petitioner has shown that she is divorced from mr meadows this factor weighs in her favor b economic hardship the requesting spouse will suffer economic hardship if relief from the liability is not granted for reasons explained supra we do not find that petitioner would suffer economic hardship if relief were not granted this factor weighs against her c knowledge or reason to know in the case of an income_tax_liability that was properly reported but not paid whether the requesting spouse did not know and had no reason to know that the nonrequesting spouse would not pay the income_tax_liability we are unable to determine petitioner’s actual knowledge as to whether her husband would pay the tax shown on their joint_return for indeed because she signed the return in blank we are 3in addition to these six factors the superseded guidelines included as a factor in sec dollar_figure whether the income_tax_liability was attributable to an item of the nonrequesting spouse as explained supra note this factor is a threshold requirement found in sec dollar_figure of the modified guidelines in addition the superseded guidelines included spousal abuse as a factor to be considered in sec_4 that factor is part of the threshold considerations of sec dollar_figure in the modified guidelines the parties agree that there was no such abuse in this case unable to say whether petitioner knew that any_tax was due however if petitioner was aware that any_tax was due on the basis of past experience she would have had reason to believe that her husband might not pay the tax_liability it is also true that the address shown on the return was a business mailbox to which petitioner did not have access so that she was not aware of any correspondence between respondent and mr meadows after the filing of the return this factor weighs neither in favor of nor against petitioner d nonrequesting spouse’s legal_obligation whether the nonrequesting spouse has a legal_obligation to pay the outstanding income_tax_liability pursuant to a divorce decree or agreement this factor will not weigh in favor of relief if the requesting spouse knew or had reason to know when entering into the divorce decree or agreement that the nonrequesting spouse would not pay the income_tax_liability petitioner’s divorce decree assigns responsibility for all federal_income_tax liability from the date of marriage through date to mr meadows we are unable to determine petitioner’s actual knowledge at the time of the decree as to whether mr meadows would pay the income_tax_liability on the basis of past experience petitioner had reason to believe that her husband would not pay the income_tax_liability this factor weighs neither in favor of nor against petitioner e significant benefit whether the requesting spouse received significant benefit beyond normal support from the unpaid income_tax_liability petitioner credibly testified that she received no gifts or other_benefits from the unpaid tax_liability mr meadows did not honor his child_support_obligations under the divorce decree and at one point simply remained out of touch with his family for years this factor weighs in favor of petitioner f compliance with income_tax laws whether the requesting spouse has made a good_faith effort to comply with income_tax laws in the taxable years following the taxable_year to which the request for relief relates petitioner filed a tax_return for the tax_year but did not file tax returns for any subsequent years petitioner testified that the reason for her failure_to_file was that she believed she was owed a tax_refund with respect to the tax_year which according to her accountant would have been jeopardized by subsequent filings that might have shown tax due in other words petitioner admitted that she might owe taxes for years after as she had owed taxes for some years before and that the government might offset her claimed refund for the tax_year against taxes owed for subsequent tax years 4we note that petitioner’s youngest child for whom she claimed the child_tax_credit in attained the age of in continued petitioner testified that she relied on her accountant who is a certified_public_accountant petitioner further testified that she provided her accountant with the necessary information for him to prepare returns and that she believed her accountant had requested extensions of the time to file we are not satisfied that petitioner’s actions amounted to a good_faith effort to comply with income_tax laws even giving petitioner the benefit of the doubt that she relied on or more likely misunderstood her accountant’s advice petitioner was certainly aware of the obligation to file income_tax returns which she did for the tax_year for which she believed she was entitled to a refund her understanding or more likely misunderstanding of her accountant’s advice with respect to later years amounts to an endorsement of a strategy of preventing the government from applying the refund she expected with respect to the tax_year to a tax that she might owe in later years this does not constitute a good_faith effort to comply with income_tax laws consequently this factor weighs against petitioner not all the factors in section dollar_figure of the modified guidelines weigh against petitioner just as not all of the factors in section dollar_figure or dollar_figure of the modified guidelines weigh against her however because we find that respondent i sec_4 continued petitioner was therefore not entitled to this tax_credit for years after seeking to collect the portion of the income_tax that is attributable to petitioner petitioner did not in good_faith believe that mr meadows would pay the income_tax owed petitioner has not shown that she would suffer economic hardship if relief were not granted and petitioner did not make a good_faith effort to comply with income_tax laws in subsequent years we conclude that respondent did not abuse his discretion in denying innocent spouse relief to petitioner under sec_6015 to reflect the foregoing decision will be entered for respondent


acknowledged significant advice may be disseminated office_of_chief_counsel internal_revenue_service memorandum tl-n-6671-97 date apr to district_counsel new england sca released from assistant chief_counsel income_tax accounting cc dom it a subject significant service_center advice this responds to your request for significant advice dated date in connection with a question posed by the andover service_center disclosure statement unless specifically marked acknowledged significant advice may be disseminated above this memorandum is not to be circulated or disseminated except as provided in ccdm d and e this document may contain confidential information subject_to the attorney-client and deliberative_process privileges therefore this document shall not be disclosed beyond the office or individual s who originated the question discussed herein and are working the matter with the requisite need to know in no event shall it be disclosed to taxpayers or their representatives issue whether two unmarried individuals each living with their own dependent_children in a shared dwelling can each claim head_of_household filing_status what expenses should be considered in determining whether each taxpayer furnished more than one-half the cost of maintaining a household what constitutes acceptable verification of expenses for the cost of maintaining a household conclusion the determination of whether two unmarried individuals each living with their own dependent_children in a shared dwelling may each claim head_of_household filing_status is not a matter simply determined by physical boundaries but by all the facts of a case sec_1_2-2 of the income_tax regulations details the expenses that should be considered in determining whether a taxpayer has furnished more than one-half the cost of maintaining a household such expenses include property taxes mortgage interest rent utility charges upkeep and repairs property insurance and food consumed on the premises the cost of maintaining a household under sec_2 of the internal_revenue_code does not include the cost of clothing education medical treatment vacations life_insurance and transportation or any amount which represents the value of services rendered in the household by the taxpayer or by a person qualifying the taxpayer as a head_of_household acceptable verification of expenses for the cost of maintaining a household includes cancelled checks and receipts for the expenses such as taxes interest rent utilities repairs insurance and food consumed on the premises records to show who paid or contributed toward the payment of the expenses and the amount contributed by each person involved and amounts received from governmental agencies such as rent subsidies facts taxpayers x and y are single parents each with their own dependent_children who share a dwelling neither x nor y is a surviving_spouse or a nonresident_alien the kitchen and other living areas are common areas but the adults have their own bedrooms x and y each claimed head_of_household filing_status relying on the case of estate of fleming v commissioner 33_tcm_619 acq aod lexi sec_65 x itemized his deductions while y took the standard_deduction for herself x and y maintain joint accounts from which they paid household bills as in the fleming case x paid over one-half of the expenses attributable to himself and his dependent_children y also paid over one-half the expenses attributable to herself and her dependent_children background discussion sec_1 of the internal_revenue_code provides for slightly lower tax_rates for heads of households than the rates for single individuals or married individuals filing separately a taxpayer who qualifies as a head_of_household may use the sec_1 tax_rate schedule which contains rates that fall between the rates payable by single individuals and those payable by married individuals filing joint returns sec_2 generally provides that an individual shall be considered a head_of_household if the individual is not married at the close of the taxable year1 is not a surviving_spouse as defined in sec_2 maintains as his or her home a household which constitutes for more than one-half of the taxable_year the principal_place_of_abode as a member of such household of a qualified dependent as defined in sec_2 or maintains a household which constitutes for the taxable_year the principal_place_of_abode of the individual's father or mother if the individual is entitled to a sec_151 dependency_exemption for the parent furnishes more than one-half the cost of maintaining the household during the taxable_year and is not a nonresident_alien under the facts at issue we will assume that taxpayers x and y each clearly fulfill the above-mentioned first second and fifth requirements of sec_2 therefore this guidance will focus on the third and fourth requirements of sec_2 to determine whether taxpayers x and y can each be considered as maintaining and furnishing more than one-half the costs of a separate household sec_2 of the code in pertinent part provides that a taxpayer who is not married at the close of the taxable_year can qualify for head_of_household filing_status by maintaining as his home a household which is for more than half of the taxable_year the principal_place_of_abode of a child sec_1_2-2 of the regulations provides in pertinent part the following parameters for what constitutes maintaining a household in order for a taxpayer to be considered as maintaining a household by reason of an individual described in a or b of this section eg taxpayer x and y's children the household must actually constitute the home of the taxpayer for the taxable_year a physical change in the location of such home will not prevent a taxpayer from qualifying as a head_of_household such home must also constitute the principal_place_of_abode of at least one of the persons specified in such paragraph a or b of this section sec_1_2-2 details the expenses that should be considered in determining whether a taxpayer has furnished more than one-half the cost of maintaining a household as follows a taxpayer shall be considered as maintaining a household only if he pays more than one-half the cost thereof for his taxable_year the cost of however sec_2 provides that certain married individuals living apart from their spouses may qualify for head_of_household status if they satisfy certain conditions under sec_7703 maintaining a household shall be the expenses_incurred for the mutual benefit of the occupants thereof by reason of its operation as the principal_place_of_abode of such occupants for such taxable_year the cost of maintaining a household shall not include expenses otherwise incurred the expenses of maintaining a household include property taxes mortgage interest rent utility charges upkeep and repairs property insurance and food consumed on the premises such expenses do not include the cost of clothing education medical treatment vacations life_insurance and transportation in addition the cost of maintaining a household shall not include any amount which represents the value of services rendered in the household by the taxpayer or by a person qualifying the taxpayer as a head_of_household or as a surviving_spouse in the estate of fleming case the tax_court specifically addressed the issue of whether two individuals each with their own children who share a dwelling can each be considered to maintain a separate household for tax purposes estate of fleming t c m pincite during the years involved a residence constituted the principal_place_of_abode of petitioner-decedent hereinafter decedent jean foster fleming decedent’s unmarried daughter jean f fleming jean decedent’s married daughter louise fleming mercke decedent’s son-in-law evans mercke and three of decedent’s grandchildren the three mercke children the merckes contributed two-thirds of the total cost for food consumed on the premises utilities and servant hire used by both the merckes and the flemings and the flemings contributed one-third the merckes and flemings each contributed fifty percent of the total cost for residence maintenance_expenses consisting of mortgage interest property taxes upkeep and repairs property insurance replacement costs and yard care although decedent contributed more than fifty percent of the household expenses jointly contributed by her and jean she did not contribute more than fifty percent of the expenses relating to the residence id pincite the family residence occupied by the merckes and flemings contained four levels the first level consisted of a game room recreation room two garages for four cars kitchenette storage room utility room workshop and patio the second level consisted of a bedroom sitting room office bath and one-half storage rooms laundry servants’ living room servants’ bath and servants’ bedroom decedent and jean were the principal occupiers of the second level’s bedroom sitting room office and bath the third level consisted of an entrance hall living room family room sun room dining room kitchen pantry and bar the fourth level consisted of four bedrooms office three baths and storage rooms this fourth level was principally occupied by the merckes the first level a portion of the second level and the third level were common areas shared by all seven family members in addition all seven family members had free access to all portions of all four levels the merckes and flemings also shared a common dinner table and took their meals together as one family id the service contended that the house constituted only one household and being only one household the petitioner had failed to prove that she furnished more than one-half the cost of maintaining such household however petitioner successfully argued that the house contained two households one of which consisted of the decedent and jean id pincite the tax_court stated that the extent of a household is not determined solely by physical or tangible boundaries but by all the facts of the case id see also 51_tc_520 aff’d 422_f2d_873 9th cir acq c b xvi 158_fsupp_745 d s d the tax_court also found that it would be an elevation of form over substance to say only one household existed simply because only one building was involved and certain areas were used in common id pincite the court found that separate households were intended and resulted accordingly the court held that decedent qualified as a head_of_household id in jackson v commissioner 71_tcm_2022 the tax_court also considered the issue of whether petitioner who during the year at issue was unmarried and resided in a two-bedroom apartment with jewel m cleckley two of ms cleckley’s children and petitioner’s daughter fatimah born to ms cleckley and petitioner was entitled to claim head_of_household filing_status id pincite in jackson petitioner testified that he paid dollar_figure per month in cash to ms cleckley pursuant to an oral leasing agreement between petitioner and ms cleckley for himself and fatimah for the exclusive use of one room of an apartment owned by ms cleckely in addition to the dollar_figure per month petitioner testified he paid everything towards his daughter’s clothing food and medical insurance however other than petitioner’s testimony petitioner presented no evidence of the amounts expended id petitioner contended that the room he rented in ms cleckley’s apartment constituted a household he also stated that he could not use the telephone or kitchen without permission id pincite other than the dollar_figure per month allegedly paid petitioner incurred no additional expenditures_for utilities repairs or any other household expenses id the service contended that petitioner failed to satisfy the head_of_household filing_requirements the service acquiesced with the decision as the court’s findings are not without support in the record and cannot be considered clearly erroneous aod lexi sec_65 the tax_court found that petitioner bears the burden of proving that respondent’s determination is incorrect the court is not bound to accept the unverified undocumented testimony of petitioner and a taxpayer is required to substantiate the amounts claimed as deductions credits etc by maintaining the records needed to establish such entitlement id pincite5 specifically the tax_court found that petitioner failed to prove that he paid dollar_figure a month or if paid that it constituted more than half the cost of maintaining a household as his home the tax_court was unconvinced that petitioner provided more than half of the cost of maintaining a principal_place_of_abode for his daughter given that ms cleckley apparently paid all expenses of maintaining the household to which petitioner allegedly contributed only dollar_figure per month the tax_court found that the one room allegedly lived in by petitioner and fatimah in the two-bedroom apartment owned by fatimah’s mother without use of a kitchen or telephone does not constitute a separate household id taxpayers x and y’s head_of_household status as the above two cases demonstrate the determination of whether taxpayers x and y may each claim head_of_household filing_status is not a matter simply determined by physical boundaries but by all the facts of the case given the fact- specific nature of this determination and that neither x nor y is married a surviving_spouse or a nonresident_alien the first issue to determine is whether each x and y is maintaining a household by reason of his her children under the facts presented the shared dwelling constitutes the home of x and y for the taxable_year and the principal_place_of_abode of x and y’s children the kitchen and other living areas are common areas but the adults have their own bedrooms x and y’s children share a room however other facts are necessary to establish whether x and y conduct themselves as separate households or one household pursuant to sec_1_2-2 in order for x and y to be considered as maintaining a household by reason of their children the household must actually constitute the home of x and y for the taxable_year a physical change in the location of such home will not prevent x and y from qualifying as a head_of_household such home must also constitute the principal_place_of_abode of at least one of x's children and one of y's children see also 721_f2d_873 2d cir cert_denied 467_us_1214 denying head_of_household status to husband living with estranged spouse pursuant to a written_separation_agreement providing for mutual exclusivity of room use in addition as in estate of fleming the service may consider whether each family acts independently of each other in matters not related to the house for example in estate of fleming the tax_court considered the following facts to determine that separate households existed each family maintained and paid for a separate telephone each family gave christmas presents christmas cards wedding gifts and charitable_contributions independently of the other estate of fleming t c m pincite the tax_court found that while the use of shared areas is a factor it is not determinative id taxpayers may argue that in the case of multi-family dwellings the standard set forth in sec_1 44a-1 d that separate families are treated as separate households should also be used for purposes of head_of_household filing_status under sec_2 under sec_44a redesignated as sec_21 for tax years beginning after date a credit for certain child care expenses is allowed for individuals who maintain a household that includes one or more qualifying individuals with respect to multi- family dwellings sec_1 44a-1 d provides that if two or more families occupy living quarters in common each of the families is treated as constituting a separate household while the term household is used in both sec_2 and 44a in similar contexts the standard set forth in sec_1 44a-1 d does not control the determination of whether two or more families should be treated as separate households under sec_2 first sec_1_44-1 specifically provides that the separate family separate household rule applies solely for purposes of sec_44a and sec_1 44a-1 of the regulations further it is clear from the cases discussed above that contrary to the standard set forth in sec_1 44a-1 d all of the relevant facts and circumstances must be considered in determining whether for purposes of using head_of_household filing_status under sec_2 two or more families occupying common living quarters maintain separate households sec_1 44a-1 d expenses for household and dependent care services necessary for gainful employment provides in pertinent part as follows solely families two or more for purposes of sec_44a and this section if two or more families occupy living quarters in common each of the families is treated as constituting a separate household and the taxpayer who provides more than one-half of the costs of maintaining such a separate household is treated as maintaining that household thus for example if two unrelated taxpayers each with children occupy living quarters in common and each taxpayer pays more than one-half of the household costs incurred by each respective family each taxpayer will be treated as maintaining a separate household assuming that the facts show that two separate households are intended to occupy the shared dwelling then x needs to show that x contributed over one-half the household expenses jointly contributed by x and x’s children and y has to show that y contributed over one-half the household expenses jointly contributed by y and y’s children x does not need to show that x contributed over one-half of the total expenses of maintaining the shared dwelling and y does not need to show that y contributed over one-half of the total expenses of maintaining the shared dwelling the cost of maintaining a household is the expenses_incurred for the mutual benefit of the occupants thereof by reason of its operation as the principal_place_of_abode of such occupants for such taxable_year sec_1_2-2 the expenses of maintaining a household for x and y include property taxes mortgage interest rent utility charges upkeep and repairs property insurance and food consumed on the premises such expenses do not include the cost of clothing education medical treatment vacations life_insurance and transportation in addition the cost of maintaining a household does not include any amount which represents the value of services rendered in the household by the taxpayer or by a person qualifying the taxpayer as a head_of_household or as a surviving_spouse acceptable verification of expenses for the cost of maintaining a household includes cancelled checks and receipts for the expenses such as taxes interest rent utilities repairs insurance and food consumed on the premises records to show who paid or contributed toward the payment of the expenses and the amount contributed by each person involved and amounts received from governmental agencies such as rent subsidies see eg irm exhibit irm exhibit if you have any questions regarding this memorandum please contact john moran at jody j brewster assistant chief_counsel income_tax accounting by s stephen toomey acting assistant to chief branch


internal_revenue_service ull rreakakireikeiseiiaiak rkkkkkkkkkekekkerkeek kkkkkkkerkkerkeererrek kekkkkereerkriiieierirar department of the treasury washington dc contaahretaeniick tk km telephone number kkekkekekkeerkrekek in reference to datet ep ra t2 oct attn krrkrkkkkreikrrirererakerer ere rrr ererrereerererererereeere state a - krkkkkkkkekkkkkkrekkrerkrekkerekrerereee tee re employer m kkkkkkkkkkkkekckkkkeekkekekkekekekeekereek group b employees - kkekkkkkkkkkkkkkekrerkekrkekekekeekekeke plan x krkkekkkekrkkkkkkkkekekkkkkekrkekkerekekekek statute r kkkkkekkkekkekkkrkekekrkkerkkekrekeekeekek kkkekkkkkekereaekekeerkerereeekererererkk ordinance a i kkkkkekkkkkkkkkkkekkekkkekeekekekeeekeekrrrek e agreement 8b kkkkkkkkkekkekkekkekkkekekrekkkkkekkeeekr proposed ordinance c board s krkkkkkkkekkekkrekererekrrererereeekeerer kkkkkkkkekkkkkkererkereerekeekrekerereek dear krkkek kkkkekkkke this letter is in response to a ruling_request dated date which was submitted on your behalf by your authorized representative concerning the federal_income_tax treatment under sec_414 of the internal_revenue_code code of certain contributions to plan x the following facts and representations have been submitted employer m is a municipality and political_subdivision of state a on date the board_of supervisors of employer m adopted ordinance a electing to enroll its municipal employees in pian x pursuant to article iv of statute r membership in plan x is mandatory for all permanent group b employees of employer m on that same day employer m and board 5s the administrator of plan x signed agreement b kakkrkkkkkkkkkekkkkkreaeek page -2- agreement b acknowledges employer m's desire to establish a pension_plan for its group b employees and that employer m has negotiated an optional retirement_plan contract with board s further agreement b contains the retirement pension_plan for the group b employees as agreed to by employer m and board s you represent that plan x is qualified under sec_401 of the code and the associated trust is exempt from federal_income_tax under sec_501 group b employees are required to contribute three per cent of their compensation to plan x employer m now proposes to pick-up the mandatory employee contributions made by its group b employees to plan x to implement the pick up of such contributions employer m has proposed to adopt ordinance c which will be enacted after receipt of a favorable letter_ruling from the internal_revenue_service proposed ordinance c provides that employer m agrees to pick up the mandatory member contributions to plan x in lieu of the group b employees paying such contributions proposed ordinance c also provides that the proposed pick up is effective for service rendered on or after the effective date of the pick up proposed ordinance c further provides that the total gross compensation of each group b employee will be reduced by the amount of the required mandatory member contribution and that the group b employee under no circumstances shall have the option of choosing to receive directly the amounts picked up by employer m instead of having such amounts paid_by employer m to plan x based on the aforementioned facts you request the following rulings that no part of the mandatory employee contributions picked up by employer m on behalf of the group b employees included in plan x shall be includible in the gross_income of the group b employees for federal_income_tax purposes in the year in which such amounts are contributed that the contributions picked up by employer m though picked up by salary reduction and designated as employee or member contributions will be treated as employer contributions for federal_income_tax purposes that no part of the contributions picked up by employer m will constitute wages for federal_income_tax withholding purposes in the taxable_year in which they are contributed to plan x sec_414 of the code provides that contributions otherwise designated as employee contributions shall be treated as employer contributions if such contributions haekkkkkkkkkkkkekkkkee kk page -3- are made to a plan determined to be qualified under sec_401 established by a state government or a political_subdivision thereof and are picked up by the employing unit the federal_income_tax treatment to be accorded contributions which are picked up by the employer within the meaning of sec_414 of the code is specified in revrul_77_462 1977_2_cb_358 in that revenue_ruling the employer school district agreed to assume and pay the amounts employees were required by state law to contribute to a state pension_plan revrul_77_462 concluded that the school district's picked-up contributions to the plan are excluded from the employees’ gross_income until such time as they are distributed to the employees the revenue_ruling held further that under the provisions of sec_3401 of the code the school district's contributions to the plan are excluded from wages for purposes of the collection of income_tax at source on wages therefore no withholding is required from the employees’ salaries with respect to such picked-up contributions the issue of whether contributions have been picked up by an employer within the meaning of sec_414 of the code is addressed in revrul_81_35 1981_1_cb_255 and revrul_81_36 1981_1_cb_255 these revenue rulings established that the following two criteria must be met the employer must specify that the contributions although designated as employee contributions are being paid_by the employer in lieu of contributions by the employee and the employee must not be given the option of choosing to receive the contributed amounts directly instead of having them paid_by the employer to the pension_plan for purposes of the application of sec_414 of the code it is immaterial whether an employer picks up contributions through a reduction in salary an offset against future salary increases or a combination of both in revrul_87_10 1987_1_cb_136 the internal_revenue_service considered whether contributions designated as employee contributions to a governmental_plan are excludable from the gross_income of the employee the service concluded that to satisfy the criteria set forth in revenue rulings and with respect to particular contributions the required specification of designated employee contributions must be completed before the period to which such contributions relate in this request proposed ordinance c if adopted as proposed would satisfy the criteria set forth in revrul_81_35 and revrul_81_36 it provides that employer m will make contributions to plan x in lieu of contributions by the group b employees and that the group b employees may not elect to receive such contributions directly rakkrkkkakkekrekkkeekkrkekrak page -4- accordingly we conclude that with regard to ruling requests one two and three the mandatory employee contributions picked up by employer m pursuant to proposed ordinance c on behalf of the group b employees who participate in plan x shall be treated as employer contributions and will not be includible in the gross_income of the group b employees for federal_income_tax purposes in the year in which such amounts are contributed by employer m to plan x these amounts will be includible in the gross_income of the group b employees or their beneficiaries only in the taxable_year in which they are distributed to the extent the amounts represent contributions made by employer m to plan x because we have determined that the picked up amounts are to be treated as employer contributions they are excepted from wages as defined in sec_3401 of the code for federal_income_tax withholding purposes in addition no part of the amounts picked up by employer m will constitute wages for federal_income_tax withholding purposes in the taxable_year in which they are contributed to plan x these rulings apply only if the effective date for the commencement of any proposed pick up is not earlier than the later of the date proposed ordinance c is signed into law or the date it is put into effect these rulings are based on the assumption that plan x will be qualified under sec_401 of the code at the time of the proposed contributions and distributions in addition these rulings are contingent upon the adoption of proposed ordinance c as contained in your correspondence dated date no opinion is expressed as to whether the amounts in question are subject_to tax under the federal_insurance_contributions_act no opinion is expressed as to whether the amounts in question are paid pursuant to a salary reduction agreement within the meaning of sec_3121 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 by others as precedent kakakkakekkkkkekeerkeke page -5- a copy of this letter has been sent to your authorized representative in accordance with the power_of_attorney on file with this office sincerely yours ‘ igned jotor b floyd joyce e floyd manager employee_plans technical group tax_exempt_and_government_entities_division enclosures copy of this letter deleted copy notice


t c memo united_states tax_court david furniss petitioner v commissioner of internal revenue respondent docket no filed date david furniss pro_se william f castor for respondent memorandum opinion marvel judge in separate notices of deficiency respondent determined the following income_tax deficiencies and penalties with respect to petitioner’s federal income taxes ‘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 monetary amounts are rounded to the nearest dollar -- - addition_to_tax addition_to_tax taxable_year deficiency sec_6651 a sec_6654 dollar_figure dollar_figure dollar_figure big_number big_number big_number after concessions the only remaining issues for decision are whether petitioner received unreported income during and of dollar_figure dollar_figure and dollar_figure respectively whether petitioner is liable for additions to tax for failure_to_file federal_income_tax returns for and and whether petitioner is liable for additions to tax for failure to make sufficient estimated_tax payments in and some of the facts have been stipulated and the stipulations are incorporated herein by this reference petitioner resided in lawton oklahoma at the time the petition was filed during petitioner received commissions of dollar_figure a pension of dollar_figure unemployment_compensation of dollar_figure dividends of dollar_figure and wages of dollar_figure during petitioner received unemployment_compensation of dollar_figure dividends of dollar_figure and wages of dollar_figure during petitioner received a pension of petitioner did not dispute nor did he present evidence regarding respondent’s determination that petitioner had self- employment income in of dollar_figure and was liable for self- employment_tax on that income this adjustment is deemed conceded in accordance with rule b ‘the only other issues raised in the notices of deficiency are computational dollar_figure unemployment_compensation of dollar_figure interest of dollar_figure dividends of dollar_figure and wages of dollar_figure petitioner did not file income_tax returns for or i unreported income respondent determined that all of petitioner’s receipts during the years in issue were income to petitioner petitioner does not dispute that he received the income rather he contends there is insufficient authority to hold him liable for an income_tax the crux of petitioner’s argument is found in his trial memorandum and supplement to trial memorandum these trial memoranda are merely lists of disjointed brief quotations and erroneous statements of law giving petitioner the benefit of the doubt we construe petitioner’s argument to be that the income_tax is unconstitutional and alternatively that the definition of income excludes his receipts we reject the court directed the parties to file simultaneous briefs together with simultaneous reply briefs petitioner did not file a brief we could declare petitioner in default and dismiss his case see rule 84_tc_693 affd without published opinion 789_f2d_917 4th cir pace v commissioner tcmemo_2000_300 we also could conclude that petitioner abandoned his claims after trial and decide this case against petitioner because he failed to meet his burden_of_proof see 84_tc_716 hartman v commissioner tcmemo_1999_176 we choose instead to decide the case on the merits in the hope that this opinion will guide petitioner’s future decisions regarding his tax obligations see calcutt v commissioner supra pincite pace v commissioner supra bissell v commissioner tcmemo_1991_163 - petitioner’s argument for well-established reasons first the income_tax repeatedly has been held constitutional see 771_f2d_471 10th cir affg tcmemo_1983_433 82_tc_403 bivolcic v commissioner tcmemo_2000_62 see also 761_f2d_1113 5th cir listing cases in each circuit holding the income_tax constitutional second sec_61 defines gross_income generally as all income from whatever source derived including but not limited to compensation_for services commissions interest dividends and pensions see sec_61 sec_85 provides in the case of an individual gross_income includes unemployment_compensation under sec_61 and and sec_85 petitioner clearly is required to include in gross_income all his receipts in the years in issue petitioner contends that income is defined only by sec_911 and the regulations under sec_861 and that his receipts are excluded from those definitions neither sec_911 nor sec_861 operates to prevent sec_61 from applying to petitioner’s receipts see solomon v commissioner tcmemo_1993_509 affd without published opinion 42_f3d_1391 7th cir petitioner’s reliance on sec_911 is misplaced sec_911 allows an exclusion_from_gross_income for foreign_earned_income at the election of a gualified individual defined as an individual whose tax_home is in a foreign_country see sec_911 petitioner had no foreign_earned_income and is not a gualified individual for purposes of sec_91l a sec_911 has no bearing on the taxation of petitioner’s receipts petitioner’s reliance on sec_861 likewise is misplaced petitioner reads sec_861 to provide that items not defined therein are not subject_to tax sec_861 and provides that interest from the united_states and compensation_for labor or personal services performed in the united_states with exceptions not applicable here are items of gross_income which shall be treated as income_from_sources_within_the_united_states nothing in sec_861 operates to exclude from income any of petitioner’s receipts we hold that petitioner received unreported income of dollar_figure dollar_figure and dollar_figure during and respectively il schedules a and c deductions petitioner asserted that he was entitled to schedule a itemized_deductions and schedule c profit or loss from -- - business deductions for the years in issue petitioner has the burden_of_proof on this issue see rule a we allowed petitioner ample time to present evidence establishing these deductions petitioner failed to introduce any such evidence or even indicate the specific deductions to which he believed he was entitled we hold that petitioner failed to carry his burden_of_proof see 503_us_79 292_us_435 6_tc_1158 affd 162_f2d_513 10th cir petitioner is not entitled to any schedules a or c deductions for the years in issue til sec_6651 addition_to_tax sec_6651 authorizes the imposition of an addition_to_tax for failure_to_file a timely return unless it is shown that such failure is due to reasonable_cause and not due to willful neglect see sec_665l1 a 469_us_241 38_f3d_440 9th cir harris v commissioner tcmemo_1998_332 petitioner also asserted he was entitled to schedule b interest and ordinary dividends deductions for the years at issue schedule b is a form used to report the taxpayer’s receipt of interest and ordinary dividends there are no schedule b deductions therefore petitioner is not entitled to any such deduction - petitioner did not file federal_income_tax returns or applications for extensions of time to file for or petitioner stated in his petition that he was not liable for penalties as determined by respondent the record is devoid of any evidence establishing a reasonable_cause for his failure_to_file a return thus we hold petitioner is liable for the sec_6651 addition_to_tax iv sec_6654 addition_to_tax sec_6654 imposes an addition_to_tax in the case of any underpayment of estimated_tax by an individual unless a statutory exception applies the addition_to_tax under sec_6654 is mandatory see sec_6654 e 91_tc_874 75_tc_1 33_tc_1071 this section has no provision relating to reasonable_cause and lack of willful neglect it is mandatory and extenuating circumstances are irrelevant none of the statutory exceptions under sec_6654 applies in this case petitioner stated in his petition that he was not liable for penalties as determined by respondent but presented no further argument regarding payments of estimated_tax we thus hold petitioner liable for the sec_6654 a addition_to_tax v conclusion we have carefully considered all remaining arguments made by petitioner for contrary holdings and to the extent not discussed find them to be irrelevant or without merit to reflect the foregoing decision will be entered for respondent


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 2-plr-104399-01 date date legend x s state law firm industry director d1 dear this letter responds to your letter dated date submitted on behalf of x requesting that the service grant x an extension of time to elect to treat s as a qualified_subchapter_s_subsidiary qsub under sec_1361 of the internal_revenue_code effective d1 the information submitted states that s was incorporated under state law on d1 and was wholly owned by x an s_corporation x instructed law firm to prepare and file a proper qsub election for s effective d1 due to inadvertence by law firm however s’s qsub election was not timely filed sec_1361 defines a qsub as a domestic_corporation which is not an ineligible_corporation if percent of the stock of the corporation is held by the s_corporation and the s_corporation elects to treat the corporation as a qsub plr-104399-01 sec_1_1361-3 of the income_tax regulations provides the time and manner of making a qsub election sec_1_1361-3 provides that a qsub election cannot be effective more than two months and days prior to the date of filing notice_2000_58 2000_47_irb_491 provides that form_8869 qualified_subchapter_s_subsidiary election should be used by all s_corporations wishing to elect qsub treatment as directed in instructions to the form sec_301_9100-1 of the procedure and administration regulations provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-1 sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government based on the information submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time until days from the date of this letter to file a form_8869 to elect to treat s as a qsub effective d1 with the appropriate service_center a copy of this letter should be attached to the form_8869 a copy of this letter and the election should be sent to the industry director 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 specifically no opinion is expressed concerning whether x otherwise was a valid s_corporation or whether s is otherwise eligible to be a qsub for federal tax purposes this ruling is directed only to the taxpayer who requested it sec_6110 plr-104399-01 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 sent to x’s authorized representative sincerely yours paul f kugler associate chief_counsel passthroughs and 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 ita b02 plr-121701-12 date date legend legend taxpayer advisor year1 date a date b taxable_year ------------------------------------------------------------------------------------------------------------------- -------------------------------- ------------------------------ ------- ------------------ ----------------- ------------------------------------------------------------------------ dear ------------ this is in response to the letter dated date submitted on your behalf by your authorized representative advisor in the letter you request permission to attach an election statement to taxpayer’s originally filed federal tax_return for taxable_year the election statement was not included with taxpayer’s originally filed federal tax_return for taxable_year although it was required in order for taxpayer to use a safe_harbor method_of_accounting the request is made in accordance with sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations taxpayer represents the following facts taxpayer and its shareholders began the process of trying to sell itself in year taxpayer was successful and entered into a stock purchase agreement on date a on date b the taxpayer executed the stock purchase agreement and sold itself to new unrelated shareholders which resulted in a short tax_year for the period taxable_year in connection with its sale in year taxpayer incurred transaction costs including success-based fees thessee success-based fees were paid upon the closing of the transaction on date b taxpayer capitalized the transaction costs in accordance plr-121701-12 with sec_263 of the internal_revenue_code and sec_1_263_a_-2 and sec_1_263_a_-5 of the income_tax regulations taxpayer capitalized percent of the success-based fees and deducted the remaining percent on its taxable_year return consistent with the safe_harbor election provided in revproc_2011_29 2011_18_irb_746 taxpayer timely filed its taxable_year return prepared by advisor but failed to attach the mandatory statement required in revproc_2011_29 for any taxpayer electing to use the safe_harbor method of allocating success-based fees this oversight was uncovered prior to taxpayer filing any other returns and prior to any discovery by the service taxpayer requests that an extension of time be granted solely for the purposes of allowing taxpayer to attach to its taxable_year return the mandatory statement regarding the election to use the safe_harbor method of allocating success-based fees sec_263 and sec_1_263_a_-2 provide that no deduction shall be allowed for any amount_paid out for property having a useful_life substantially beyond the taxable_year in the case of an acquisition or reorganization of a business_entity costs that are incurred in the process of acquisition and that produce significant long-term benefits must be capitalized 503_us_79 397_us_572 under sec_1_263_a_-5 a taxpayer must capitalize an amount_paid to facilitate a business acquisition or reorganization transaction described in sec_1_263_a_-5 an amount is paid to facilitate a transaction described in sec_1_263_a_-5 if the amount is paid in the process of investigating or otherwise pursuing the transaction sec_1_263_a_-5 provides that an amount that is contingent on the successful closing of a transaction described in sec_1_263_a_-5 success-based_fee is presumed to facilitate the transaction and thus must be capitalized a taxpayer may rebut the presumption by maintaining sufficient documentation to establish that a portion of the fee is allocable to activities that do not facilitate the transaction and thus may be deductible a taxpayer's method for determining the portion of a success-based_fee that facilitates a transaction and the portion that does not facilitate the transaction is a method_of_accounting under sec_446 because the treatment of success-based fees was a continuing subject of controversy between taxpayers and the service the service published revproc_2011_29 revproc_2011_29 provides a safe_harbor method_of_accounting for allocating success-based fees paid in business_acquisitions or reorganizations plr-121701-12 described in regulations sec_1_263_a_-5 in lieu of maintaining the documentation required by sec_1_263_a_-5 this safe_harbor permits electing taxpayers to treat percent of the success-based_fee as an amount that does not facilitate the transaction ie amounts that can be deducted the remaining portion of the fee must be capitalized as an amount that facilitates the transaction section dollar_figure of revproc_2011_29 allows the taxpayer to make a safe_harbor election with respect to success-based fees section dollar_figure provides that the service will not challenge the taxpayer’s allocation of success-based fees between activities that facilitate a transaction described in sec_1_263_a_-5 costs that must be capitalized and activities that do not facilitate the transaction cost that may be deductible if the taxpayer does three things first the taxpayer must treat percent of the amount of the success-based_fee as an amount that does not facilitate the transaction and thus may be deductible second the taxpayer must capitalize the remaining amount of the success-based_fee as an amount which does facilitate the transaction finally the taxpayer must attach a statement to its original federal_income_tax return for the taxable_year the success-based feed is paid_or_incurred stating that the taxpayer is electing the safe_harbor indentifying the transaction and stating the success-based_fee amounts that are deducted treated as not facilitating the transaction and capitalized treated as facilitating the transaction it is this last requirement that taxpayer requests permission to accomplish with this ruling_request taxpayer requests permission with this ruling_request to attach the statement required by section dollar_figure of revproc_2011_29 to its return by amending its original filed return and superseding it with a return with the proper election statement completed and attached sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make certain regulatory elections sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government plr-121701-12 sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment sec_301_9100-3 provides special rules for accounting_method regulatory elections sec_301_9100-3 provides that the interests of the government are deemed prejudiced except in unusual or compelling circumstances if the accounting_method regulatory election for which relief is requested is subject_to the advance consent procedures for method changes requires a sec_481 adjustment would permit a change from an impermissible method_of_accounting that is an issue under consideration by examination or in any other setting or provides a more favorable method_of_accounting if the election is made by a certain date or taxable_year conclusion based upon our analysis of the facts as represented taxpayers acted reasonably and in good_faith and granting relief will not prejudice the interests of the government and therefore the requirements of sec_301_9100-1 and sec_301_9100-3 have been met furthermore granting relief will not result in taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than taxpayer would have had if the election had been timely made nor will any closed years be affected therefore the interests of the government will not be prejudiced by granting the request for relief furthermore granting relief will not prejudice the interests of the government associated with the special rules for accounting_method regulatory elections in this case the safe_harbor election for success-based fees the election provided by revproc_2011_29 for allocating the success-based fees is granted on an automatic basis if all proper procedures including the attaching the mandatory statement are followed does not require a sec_481 adjustment is not an issue under consideration and does not provide a more favorable method_of_accounting if the election is made by a certain date or taxable_year taxpayer is granted an extension of days from the date of this ruling to file its mandatory statement as required by section dollar_figure of revproc_2011_29 stating that it is electing the safe_harbor for success-based fees identifying the transaction and stating the success-based_fee amounts that are deducted and capitalized plr-121701-12 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as 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 in particular no opinion is expressed as to whether taxpayer properly included the correct costs as its success-based fees subject_to the retroactive election or whether taxpayer’s transaction was within the scope of revproc_2011_29 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 a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely thomas d moffitt branch chief branch income_tax accounting cc