t c memo united_states tax_court david f burbach petitioner v commissioner of internal revenue respondent burbach aquatics inc petitioner v commissioner of internal revenue respondent docket nos filed date curtis d smith and yuri b berndt for petitioners christina l cook debra k moe vicki l miller and john c schmittdiel for respondent memorandum findings_of_fact and opinion holmes judge ya got trouble folks right here in river city trouble with a capital ‘t’ and that rhymes with ‘p’ and that stands for pool meredith willson ya got trouble the music man for most americans the upper midwest doesn’t evoke images of beach balls and melting popsicles on hot sand but that didn’t stop david burbach from building a successful pool-design company there his thriving business was swimming right along for years as a sole_proprietorship until he met the late george t eldridge an enrolled_agent or so eldridge claimed from mango florida soon after burbach split his assets into three different corporations and stopped filing tax returns this caused him trouble with a capital t he’s done quite a bit since then to clean up his tax problems and blames eldridge for the ones that persist the commissioner is more skeptical than marian the librarian and way less forgiving he wants us to find burbach and his operating company burbach aquatics inc bai liable for a large tax bill and penalties findings_of_fact a david burbach pool designer david burbach graduated in from the university of wisconsin at platteville with a bachelor’s degree in engineering and he has since become a licensed professional engineer in all nine states where bai does business he those are wisconsin minnesota illinois missouri iowa nebraska south dakota wyoming and oklahoma added to those qualifications practical experience as a land surveyor a licensed residential and commercial building inspector and a soil morphologist--a soil scientist trained to visually classify soils and observe the different characteristics of the soils and their behavior under certain conditions and certain loads this skill stack is unusual and led burbach to great success in an unusual niche in the economy it all started right after college when burbach landed his first job with a chicago suburb where he worked for the city manager that city manager learned of burbach’s skills and volunteered him to design several local pools before long burbach went out on his own as a consultant he started his business in as a sole_proprietorship called d f burbach municipal and civil engineers the business changed its name a few times between and 2001--from d f burbach municipal and civil engineers to burbach municipal and civil engineers to burbach aquatics llc ba llc --but continued to be treated as a sole_proprietorship for tax purposes and its line of work remained the same burbach testified that ba llc was taxed as a sole_proprietorship from which we infer that it was a disregarded_entity see sec_301_7701-2 sec_301_7701-3 proced admin regs that means that burbach was taxed as a sole_proprietor under the internal_revenue_code on any income or loss of ba llc reported on his returns see sec_301_7701-2 proced admin regs all section references are to the internal_revenue_code and regulations in effect continued burbach’s firm specializes in designing municipal pools and aquatic facilities but it does much more the firm’s pre-design services according to burbach are the reason why a lot of cities hire it it helps small cities and towns in the midwest form committees to evaluate their need for a pool plans and markets the pool after their need for one is identified and even helps with fundraisers to finance the pool this is a good business and burbach is good at it over a three-year period his business helped municipalities raise more than dollar_figure million to fund pools and over the entire course of his business burbach has been successful in campaigning for nearly municipal-bond referenda burbach’s business creates a demand for its product and then deftly supplies it and demand has been and remains strong with great success in construction comes great exposure to liability and burbach said that is why he started looking for advice about asset protection he continued for the years at issue and all rule references are to the tax_court rules_of_practice and procedure unless we say otherwise burbach’s business doesn’t construct the pools it designs but it does serve as project manager-- perform ing on-site observations inspections and special inspections that are required by code and company policies and represent ing the interest of the municipal_corporations at the time of trial burbach had designed more than municipal pools and his business had more than cities under contract specifically remembered the horrible kansas city skywalk collapse in as an example of a liability where tremendous loss of life and damage led to tremendous lawsuits against the designers burbach also had some time to contemplate design problems closer to his field over the years he developed a small sideline as an expert witness and has testified in litigation bubbling up from a dozen major pool failures though he carefully noted that he’s had zero failures in any pool that he’s designed he became convinced that an llc wouldn’t sufficiently limit his liability if there was some disaster with one of his pools so he reached out to a local lawyer to talk about asset protection that lawyer referred him to others in another town in wisconsin but burbach said he was not impressed with their knowledge at all and after that he wasn’t exactly heartened when he was referred to a tax preparer who had fled town because of a drug issue burbach’s search for a new adviser was not going well it was then that a close friend threw him a life preserver a specialist who was very good at establishing entities that specialist was george t eldridge b george t eldridge enrolled_agent george t eldridge had a florida firm named a-1 accountants inc eldridge identified himself as an accountant and enrolled_agent burbach didn’t dive right into a professional relationship with eldridge but instead tested the waters with a few phone calls i wanted to talk to him a little bit about limiting my liability burbach maintained at trial and i wanted to establish some type of entity to do that over the course of three or four phone calls eldridge won burbach’s confidence burbach sent eldridge a letter in date in which he outlined the things he wanted to focus on including asset protection but also--and more importantly here--structures to limit tax eldridge got to work and after a few more phone calls proposed a reorganization of burbach’s assets into an engineering corporation a real_estate corporation and then possibly creating a foundation burbach confirmed this proposed plan by letter in date but it would be months before it was completed in the meantime burbach made his first trip to florida to meet eldridge an enrolled_agent is a regular person ie neither a lawyer nor a cpa who--by passing the special enrollment examination--is allowed to represent taxpayers before the internal_revenue_service burbach traveled to florida in date to attend a class that eldridge put on for him and another client--a class that burbach says was about corporations trusts pension plans and private_foundations burbach paid eldridge dollar_figure for this class he took three pages of notes during the two days he was there--notes primarily about pension plans--but we find eldridge’s class handout of much more interest here are just a few noteworthy quotes nevada is the only state without a reciprocal information- sharing_agreement with the i r s what does sic the british say t he subject whether poor and humble or wealthy and noble has the legal right so to dispose_of his capital and income as to attract upon himself the least amount of tax protect your assets from lawsuits don’t have the name of the corporation on deeds titles or other legal conveyances you must apply rule_of law on a daily basis after all you are not working for the irs or the legal thieves in washington dc they will legally take your money they will then redistribute it to those individuals who will not work as you have worked will you use rule_of law and stop the legal thieves a ‘c’ corporation taxpayer wishes to take aggressive positions on business_expense deductions the ‘c’ corporation form offers a higher degree of probability that such deductions will avoid or survive an audit this number is a mystery though it might be a mistaken reference to the members of the u s house of representatives if you have a defined benefit pension_plan you are entitled to an annual pension when you retire the benefits are typically based on a formula that considers that you are self-employed as a board member how you think is everything always be positive think success not failure beware of a negative environment don’t be afraid to innovate be different sic money working for you following the herd and negative people is a sure way to mediocrity taxpayers turtles have something in common they both have to stick their necks out to get ahead are you a beleaguered american taxpayer is the grizzly bear the irs feasting sumptuously in sic your money that you have earned by work are you ever going to use rule_of law to stop paying maximum taxes to the grizzly bear do you have the heart to use rule_of law through me what is your decision the handout’s overall theme is tax_avoidance but it sinks repeatedly into sheer incoherence burbach didn’t balk after the class burbach and eldridge met to go over burbach’s tax_return a return on which he had reported an almost dollar_figure tax_liability eldridge’s thoughts you the irs definitely have an intimate daily love relationship but eldridge said he could fix that and he proposed to do it for the low low fee of over dollar_figure per month in exchange for his fee eldridge calculated his fee by hand on a piece of notebook paper he determined his monthly fee by taking of burbach’s tax_liability and continued eldridge agreed to form the entities necessary to effect burbach’s reorganization transfer real_estate establish a pension_plan and private_foundation a nd then he would also prepare the taxes for all the different entities all the filings and all that stuff that has to be done c new entities and tax planning in date eldridge helped burbach dissolve ba llc he then formed bai grant county real_estate services inc gci ba enterprises inc bae and blue foundation inc bfi we’ll discuss each bai bai is a corporation that burbach wholly owns and formed to hold his operating business burbach is bai’s president and he transferred into bai office equipment things of that nature and the cars and trucks he says bai needed for its business gci gci is also a corporation that burbach wholly owns it holds burbach’s real_estate and he seems to have transferred some farmland that he continued dividing it by there was also a one-time review fee of over dollar_figure to be paid before the monthly payments started burbach and eldridge never had a written_agreement but burbach testified about the gist of their oral agreement owned the buildings used by bfi the office building used by bai and even his personal_residence to this corporation bae bae is another corporation that burbach wholly owns he doesn’t know why it was formed and it is wholly inactive bfi bfi is a nonprofit corporation burbach owns it and would place his ford products collection into it burbach is a collector of all things ford and he transferred lots of his collection to bfi including about cars trucks and tractors some ford satellites and ford philco televisions and several hundred pieces of farm equipment and some limited construction equipment bfi stored this ford stuff in four large buildings on farmland owned by gci burbach stated that he intended to create a museum showing the history of ford equipment but one might doubt his sincerity if one contemplates other things in the record--not the least of which is a note that burbach jotted down at another one of eldridge’s classes in date the note says the museum would be open only from am to am weather permitting and only in the summer months what’s more according to the note he’d planned to advertise the museum’s hours only by notice in one motel and backdated to date as best we can tell bfi was a tentative_tax dodge to enable burbach to take large deductions by contributing his ford collection to a charitable entity that he controlled in the end the irs never granted bfi a tax exemption under sec_501 and burbach does not challenge the commissioner’s disallowance of all the charitable deductions that he claimed eldridge didn’t stop with the new entities he also helped burbach set up a pension_plan burbach says he wanted a pension_plan for the employees of bai but once again other parts of the record make us doubt his testimony the handout from eldridge’s date class described precisely how burbach’s pension_plan would work pension benefits are typically based on a formula that considers that you are self-employed as a board member ie director the corporation pays each director and it must give each director at the end of each calendar_year a misc income e ach director must establish a defined benefit pension_plan and a fter having deposited the corporation check into his own personal checking account the director from his own personal checking account writes a check to his own defined benefit pension_plan nothing about this proposed pension_plan sounds as though it’s for more than burbach alone and its execution leads us to no different conclusion burbach adopted the grant county pension_plan in date though with an inexplicable effective date of january dollar_figure it was set up as a self- employed pension_plan for burbach alone and listed grant county--rather than bai--as the employer as eldridge’s class handout foretold burbach funded the pension_plan by taking director fees out of bai depositing them into his personal checking account and making personal payments into the pension account he reported the director fees on a schedule c-ez net profit from business and then took offsetting deductions for contributions to a self- employed sep simple and qualified_plan how did everything else get reported d burbach’s tax filings since his business’s founding in burbach had prepared and filed his own tax returns--even the schedules c profit or loss from business--and he claimed that he’d never filed late he started farming out his tax preparation to eldridge in eldridge did a poor job--for some time he did nothing at all except cash burbach’s checks as of date he hadn’t prepared a single burbach claims that at that time he saw only the signature page of the plan-adoption agreement and that it would be another four years or so before he saw all the plan documents we find this hard to believe and if true it shows a lack of ordinary business care corporate return and with the exception of the tax_year didn’t prepare burbach’s personal returns either the root of the problem according to burbach is that eldridge insisted that c corporations--such as bai--have six years to file a tax_return this seemed to be eldridge’s version of professor hill’s revolutionary think system applied to tax law--no need to prepare returns or keep records just think positive thoughts burbach says that he questioned eldridge about this but ultimately relied on him we do not find burbach’s testimony on this point to be credible he had timely filed his own returns for decades--returns that included his business income and losses--and he is a sophisticated businessman his actions also show that he didn’t trust eldridge’s wacky claim that corporations have six years to file their returns burbach must have known this was nonsensical because he traveled to florida in to confront eldridge about his failure_to_file corporate returns well before any six-year deadline had passed and while he was in florida burbach made the excellent point that eldridge also failed to file his personal returns on time--the last one that eldridge prepared and filed was for and he didn’t complete it until date burbach’s claims of reliance on eldridge about the due_date for his corporate returns are incredible and even if they are true unreasonable burbach finally had had enough when he returned to florida to confront eldridge he met reggie decotret a disgruntled employee of a-1 accountants according to burbach decotret was reported to be a cpa and he was an employee of a-1 accountants assigned to burbach’s accountdollar_figure decotret told burbach that eldridge was a brilliant tax planner but that he was slow on his service decotret and his colleague doris allen were frustrated and wanted to start their own accounting firm burbach figured they knew his business already and they convinced him they could get his tax filings up to date he thus became one of the first clients of their new firm--r d strategic tax planning inc r d dollar_figure burbach had a copy of decotret’s resume at the time and it’s in the record it says nothing about decotret’s being a cpa though it does make the hard-to-believe representation that he went to harvard for m anagement styles and mit for m athematics their fee agreement was less costly than eldridge’s dollar_figure up front and dollar_figure per month r d started churning out returns it promptly prepared bai’s corporate returns for and burbach’s individual returns for here’s the important bits of burbach’s original individual returns for the years at issue year wages dollar_figure big_number big_number big_number schedule c income dollar_figure big_number big_number big_number gross_income dollar_figure big_number big_number big_number qualified_plan deduction dollar_figure big_number big_number big_number taxable_income dollar_figure big_number big_number big_number and here’s the big picture of bai’s original corporate returns for the years at issue year total income dollar_figure big_number big_number big_number total deductions taxable_income dollar_figure big_number big_number big_number dollar_figure big_number big_number bai’s fiscal_year ends june therefore all references to bai’s tax years at issue refer to the calendar years in which bai’s fiscal years began for example reference to bai’s tax_year refers to its tax_year beginning date and ending date this total also includes a dollar_figure nol carried forward from the previous continued big_number big_number big_number e the audit and burbach’s self-help burbach lost faith in r d sometime in early and started preparing his and bai’s returns himself including bai’s and returns burbach’s and bai’s original returns were finally up to date when the commissioner began an audit in date burbach says he invited the revenue_agent assigned to his case to meet with him and decotret because he knew that the filings had a lot of donations to the blue foundation that these were eccentric and he wanted her to see the whole operation before the revenue agent’s visit burbach claims he didn’t see any flaws in his or bai’s returns he says only that he was very very proud that we were caught up and current with the filings he soon learned that the returns r d prepared were junk and that his self-employed pension_plan didn’t work burbach began fixing the problems himself he started by amending bai’s returns for which resulted in large net changes to the big-picture numbers year net change to total income net change to total deductions net change to taxable_income continued year dollar_figure big_number big_number big_number - - dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number he also hired an employee-benefits lawyer named timothy stewart to review the grant county pension_plan and get it into compliance stewart quickly concluded that the plan didn’t work as soon as he saw the adoption_agreement and the basic plan document he realized that it was set up as a one participant plan stewart thought that was a fairly obvious problem for burbach because an individual who owns a business with employees cannot have a one participant defined benefit pension_plan but he determined that there was a way to save the plan and its assets from drowning the irs’s voluntary correction program vcp stewart described the vcp at trial as a program to sort of retroactively achieve a plan’s original intent which he said he believed was to create an employer-sponsored plan for bai burbach agreed to this salvage operation and stewart proved himself to be a competent adviser he closely followed revproc_2008_50 2008_35_irb_464 and in date submitted a detailed application_for a compliance statement under the vcp the vcp application described three plan faults and proposed three corrections fault proposed correction the plan’s effective date should’ve been date instead of date because burbach signed its adoption_agreement in date bai should’ve been the plan_sponsor because it has several employees and in reality all of the compensation on which plan contributions were based was in fact w-2 compensation paid_by the company to mr burbach as an employee and not board_of director fees burbach over contributed to the plan in and amend the plan to change its effective date to date restate the plan with bai as its sponsor retroactively include all eligible employees in the plan dating back to and for mr burbach the amounts he received as ‘director’s fees’ would all be included as ‘compensation’ for plan purposes redetermine plan liabilities for the newly eligible employees--which would offset some of the excess contributions--and have burbach make additional contributions to correct any underfunding stewart’s key correction was to restate the plan with bai as the sponsor he said that it had been set up as a self-employed pension_plan funded by burbach’s purported director’s fees but burbach was not self-employed he was an officer and employee of bai stewart knew that this meant that burbach couldn’t have a self-employed pension_plan stewart also knew that he had to reclassify these director fees to be both bai’s deductible contributions to the plan and compensation to mr burbach on which those contributions could be made he retained an actuary to determine the proper amount that bai could contribute based on burbach’s highest three years of compensation out of the past ten--compensation that now included his director fees after stewart submitted burbach’s vcp application to the irs there was quite a bit of back and forth before all the details were ironed out their agreement took the form of a compliance statement in date which stated that the irs will not pursue the sanction of revoking the tax-favored status of the plan on account of the failure s described in th e submission its cover letter stated in part a compliance statement constitutes an enforcement resolution solely with respect to certain failures of an employee retirement_plan that is intended to satisfy the requirements of the internal_revenue_code and a t a later date you may be required to verify that the correction of the failures and any modification of administrative procedures have been timely made this meant that bai’s pension_plan was finally in compliance the commissioner however found still more problems with the returns he made several adjustments in notices of deficiency that he issued in date many of which burbach and bai conceded before trialdollar_figure the only issues left to decide are whether the director fees bai paid to burbach should be recharacterized as wages and whether burbach could deduct those fees when he contributed them to the pension_plan whether bai was entitled to the depreciation_deductions it took on numerous pieces of equipment and vehicles and whether burbach is liable for sec_6651 additions to tax and whether bai is liable for sec_6651 additions to tax and sec_6662 penaltiesdollar_figure opinion i director fees and deductible pension contributions burbach argues that his director fees aren’t wages because they weren’t compensatory--he used them only to make contributions to the pension_plan he adds that these contributions were proper and timely and therefore deductible burbach and bai timely filed petitions with our court and the parties stipulated that these cases are appealable to the seventh circuit see sec_7482 the commissioner has the burden of production for the additions to tax he determined against burbach see sec_7491 he doesn’t have the burden of production for the additions to tax and penalties he determined against bai see 126_tc_191 even if he did he’s met the supervisory-approval portion of it by stipulation see sec_6751 graev v commissioner 149_tc_485 citing 851_f3d_190 2d cir aff’g in part rev’g in part t c memo supplementing and overruling in part 147_tc_460 under sec_404 the commissioner argues that burbach’s director fees are wages because they are remuneration for services he performed as an employee of bai and if they are the commissioner says burbach can’t take sec_404 deductions because he has no self-employment_income and bai is the only entity entitled to any such deductions a wages v director fees the decisive question here is whether bai paid burbach the director fees for services he performed as an employee or as an independent_contractor see pariani v commissioner tcmemo_1997_427 wl at jacobs v commissioner tcmemo_1993_570 wl at there’s no doubt that the commissioner wins this one our caselaw tells us to look at the employment-tax rules to decide this issue and those rules say that any officer of a corporation is an employee except one who does not perform any services or performs only minor services and who neither receives nor is entitled to receive directly or indirectly any remuneration sec_3121 sec_31_3121_d_-1 employment_tax regs see also pariani wl at jacobs wl at burbach is bai’s sole shareholder and president the record indicates his hands-on involvement in the company’s day-to- day affairs as a soil morphologist and one of only three registered engineers at the company and bai paid him wages in all the years at issue this strongly suggests that burbach was an employee of bai in the years at issue but he still might be able to swim to safety he was also the sole director of bai and the regulations say that a director of a corporation in his capacity as such is not an employee of the corporation sec_31_3121_d_-1 employment_tax regs there is then a factual question did bai pay burbach for services he performed as an officer-employee or as a director see jacobs wl at citing revrul_82_83 1982_1_cb_151 directorial services typically include things like attending board meetings and sitting on committees while services performed by officers generally include the fundamental everyday decisions about corporate operations see id citing revrul_82_83 c b pincite revrul_68_595 1968_2_cb_378 revrul_57_246 1957_1_cb_338 the problem for burbach on this factual question is that he didn’t present any evidence of specific directorial services he performed for bai and all the glimpses we have into his work at bai involve everyday decisions about engineering project management and marketing we also recognize that the director fees bai paid burbach in the years at issue were approximately ten times the wages it paid him see supra p and that salary arrangements between closely held corporations and their shareholders deserve extra scrutiny with a taxpayer’s characterization of them holding little weight in our analysis see jacobs wl at citing 918_f2d_90 9th cir cf sec_31_3121_d_-1 employment_tax regs indeed the large difference between reported wages and director fees in this case makes us all the more skeptical about the true nature of the latter we find that none of the payments burbach received from bai were for services he performed as a director of the company they were instead all made to him for services he performed as an officer-employeedollar_figure we therefore sustain the commissioner’s determination to recharacterize burbach’s director fees as wages burbach’s position that the director fees aren’t wages is also inconsistent with representations he and bai made to the irs in their application_for a compliance statement for the pension_plan they said that in reality all of the compensation on which plan contributions were based was in fact w-2 compensation paid_by bai to mr burbach as an employee and stated that the amounts burbach received as ‘director’s fees’ would all be included as ‘compensation’ for plan purposes we recognize that the compliance statement isn’t a closing_agreement under sec_7121 but burbach’s and bai’s representations to the irs about burbach’s compensation still bolster our finding they are also consistent with the other facts in evidence that show bai’s payments to burbach were for the services he performed as an officer-employee b deductible pension contributions there is another reason burbach’s deduction of these contributions to bai’s pension_plan must fail sec_404 allows only an employer to claim such deductions unless the employer is self-employed see sec_404 burbach can’t successfully claim to be an employer and sec_404 limits deductions under sec_404 to contributions made to pension trusts by an employer the plan_sponsor and employer in this case is bai not burbach but might sec_404’s exception for the self-employed work instead that section permits a self-employed taxpayer to deduct certain contributions to a pension_plan see sec_404 it does so by redefining the terms employee and employer it says that the term ‘employee’ includes an individual who is an employee within the meaning of sec_401 and the employer of such individual is the person treated as his employer under sec_401 id under sec_404 contributions to a pension_plan on behalf of an individual who is an employee within the meaning of sec_401 shall be deductible to the extent that such contributions do not exceed the earned_income of such individual derived from the trade_or_business with respect to which such plan is established sec_401 says that a n individual who owns the entire_interest in an unincorporated trade_or_business shall be treated as his own employer and sec_401 provides that an employee is an individual who is a self-employed_individual and sec_401 provides that a self-employed_individual is an individual who has net_earnings_from_self-employment as defined in sec_1402 this last part is where burbach’s claim fails sec_1402 provides that net_earnings_from_self-employment means gross_income from any trade_or_business less deductions which are attributable to such trade_or_business but sec_1402 clarifies that trade_or_business for this purpose excludes the performance of services by an individual as an employee we’ve already found that all of burbach’s earnings from bai in the years at issue were for services he performed as an employee of bai he therefore is not entitled to deductions under sec_404 for any contributions he made into bai’s pension_plan for the years at issue see also eg jacobs wl at there are a number of exceptions to this rule in sec_1402 none of which applies here ii depreciation and sec_179 deductions sec_167 allows depreciation_deductions for the exhaustion wear_and_tear of property used in a taxpayer’s trade_or_business determined under sec_168 on the basis of the applicable_depreciation_method convention and recovery_period for some depreciable_property a taxpayer can accelerate depreciation by deducting its cost as an expense in the taxable_year in which the property is placed_in_service see sec_179 a taxpayer can claim depreciation_deductions only for property it owns 124_tc_244 aff’d 469_f3d_436 5th cir and can start depreciating property only when it first places the property into service in its trade_or_business sec_1_167_a_-10 income_tax regs to prove entitlement to a depreciation deduction a taxpayer must also establish the property’s depreciable basis by substantiating its cost_recovery period and any previous allowable_depreciation see 105_tc_324 and for depreciation_deductions on any listed_property a taxpayer must meet sec_274’s heightened substantiation requirements see sec_274 280f d see also eg wsk sons inc v commissioner tcmemo_2015_204 at outlining sec_274 requirements for passenger automobiles the parties stipulated before trial a list of bai’s depreciation_deductions that remain in dispute bai would normally have the burden of proving its entitlement to the disputed deductions see rule a but at trial we shifted that burden to the commissioner under sec_7491 because we found that bai had cooperated with the commissioner’s requests for information on this issue and had produced credible_evidence to substantiate its deductions we will therefore hold that bai’s entitled to the disputed deductions unless we find that the commissioner has proved by a preponderance of evidence that it is not otherwise we reproduce part of the parties’ stipulated list of disputed depreciation_deductions to make our analysis somewhat easier to follow the last column in our table either states that the commissioner has conceded an issue or includes a letter that denotes the section where we discuss items with common issues property computer equip office equip color copier date placed_in_service equipment--krom equipment--henn equipment-- cherokee equipment--henn tc equipment-- henn equipment--f f equipment--henn equipment-- alpha equipment--krom cost dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number -- -- dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number equipment-- alpha w rc equipment--krom big_number big_number big_number big_number sec_179 expense sec_167 deduction sec_167 deduction sec_167 deduction sec_167 deduction sec_167 deduction dollar_figure big_number dollar_figure big_number -- dollar_figure -- dollar_figure -- dollar_figure -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- commissioner’s reason for disallowance c c concedes a a b b b a b e e e e telephone system tc33d equipment-- krom gps system ba463 mustang equipment--sear sec_2 ba201 mustang computer equipment big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number -- big_number big_number big_number big_number ford equip -- krom ford equip -- krom ford 2120--d a auto toolbox--sear sec_3 mc28 w md equip -- henn tc55 equipment-- henn tz22 equipment-- henn big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number ba028 mustang ba884 mustang laptop big_number big_number big_number big_number big_number big_number big_number -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- big_number -- big_number -- -- -- -- -- -- -- -- -- -- -- -- -- -- big_number -- big_number -- -- -- -- -- -- -- -- -- -- -- -- -- -- big_number -- big_number -- -- -- -- -- -- -- -- -- -- -- -- -- -- big_number -- big_number -- -- -- -- -- -- -- -- big_number big_number f e e e d e concedes c e e d e c e e e concedes a property that should have been expensed in an earlier year the commissioner argues that bai placed these assets in service before its tax year--the year bai claimed a sec_179 deduction for them bai’s own records say the equipment--krom and the equipment--henn were placed_in_service after the start of its tax_year but bai admitted on brief that t he evidence shows that these two items were purchased and were depreciated under sec_179 for the tax_year ended date only ie bai’ sec_2002 tax_year bai could expense the cost of these items under sec_179 only in the year they were placed_in_service it is therefore not entitled to sec_179 deductions for any year other than it sec_2002 tax_year the commissioner’s argument about bai’s sec_179 deduction for the cost of the equipment--f f is a little different the table shows that that property was placed_in_service in date which is within bai’s tax_year the commissioner argues though that a store-credit statement in evidence shows that bai bought the property on date--a week before its tax_year started--and that there is no evidence that the property was actually placed_in_service after that date the regulations tell us that property is placed_in_service in the tax_year in which it is placed in a condition or state of readiness and availability in the production_of_income sec_1_167_a_-11 income tax regs this includes replacement parts acquired and set_aside during the taxable_year and farm equipment acquired during one taxable_year even if not practicable to use until the following year sec_1_46-3 and ii income_tax regs sec_1_167_a_-11 income_tax regs stating that sec_1 d applies for purposes of determining when property is placed_in_service while we admit that a week’s difference seems minor we don’t have information to determine that the equipment wasn’t in a condition or state of readiness when it was purchased during bai’ sec_2002 tax_year the only information we have is the date bai bought it with a line of credit and a copy of a bai check that shows how it was paid for that lets us find it very slightly more_likely_than_not that this equipment was ready for use when bai bought it but was set_aside for use a little later bai is not entitled to thi sec_179 deduction either b bai does not own the property the commissioner argues that bai can’t take a sec_179 deduction for these tractors mowers and implements because t here is no documentation showing bai ever owned these tractors see eg arevalo v commissioner t c pincite taxpayer must own the property to deduct its cost he thinks that checks in the record indicate that ba llc rather than bai bought the assets which he finds significant because burbach testified that bai bought its own tractors burbach acknowledged that he bought these items with ba llc checks but argues that that means nothing--ba llc had been dissolved before these items were purchased and bai had replaced it as burbach’s operating entity we believe burbach here--his testimony of his parsimony in using up old checks before moving onto new ones was credible bai wins these the commissioner also had a more specific issue with one item-- equipment--henn placed_in_service in date he points out that this item was actually four different items according to bai’s inventory sheet yet that the total depreciation taken for this equipment--henn accounts for only three items we find this to be a small error on bai’s part that likely results in a slightly smaller deduction bai is entitled to these deductions c insufficient substantiation of basis the commissioner argues that bai can’t deduct depreciation for these items because it hasn’t established depreciable bases for them the first item to address--the computer equip --is listed_property unless it falls within the exception for computer equipment used exclusively at a regular business establishment sec_1_280f-6 income_tax regs the commissioner wins this one by proof that bai lacked documentation to fall within the exception which means bai is subject_to heightened substantiation requirements under sec_274 and he wins disallowance of bai’s deduction for these items because bai provided only a one-page handwritten chart showing estimated depreciation this chart does not confirm the equipment’s purchase_price let alone its use and purpose in bai’s business it is equally difficult for us to confirm bai’s depreciable basis in the office equipment even though it’s not listed_property because the commissioner showed that bai’s only evidence of its basis was the same one-page handwritten chart turning to the other items under this section-- ford equip --krom and tc55 equipment--henn --we find that bai has again provided only homemade one-pagers that cannot allow us to confirm the assets’ depreciable bases as the commissioner shows there is no proof in bai’s records of their price and burbach even testified at trial that no such documentation was in the record bai is not entitled to any of these deductions d insufficient substantiation of ownership and business use the commissioner argues that bai can’t take sec_179 deductions for these items because though it has provided substantiation it hasn’t produced sufficient documentation to prove that it owned the items and used them in its trade_or_business regarding the equipment--sears the commissioner says that bai could easily have provided documentation showing who the cardholder of the credit account used to buy the assets was but chose not to it should be presumed that the credit cardholder was not bai and the items were likely purchased personally or by an entity other than bai we disagree and find that the commissioner fails to meet his burden_of_proof on this issue because the equipment is of a type useful in bai’s business and the record contains a copy of the check bai used to pay the credit card balancedollar_figure bai is entitled to this deduction the toolbox--sears however is a bit different the sears account statement lists a tool chest that could very well be used in bai’s business but it fails to identify the name on the account and as the commissioner points out there is nothing in bai’s records to show how it was paid for or who paid for it bai is not entitled to this deduction e insufficient substantiation of business use most of bai’s remaining sec_179 deductions are lumped together in this section the commissioner argues that they should be disallowed because the substantiation bai turned over is insufficient to show that the items--including tractors mowers and ford mustangs--were used in bai’s trade_or_business rather we note that it appears this bai check was written to cover the full balance on the credit card which could also arguably contain some of burbach’s personal expenses bai’s payment of these expenses however is not at issue than by burbach personally he argues that this is particularly true for the ford mustangs which he says are subject_to the heightened substantiation requirements of sec_274 sec_274’s substantiation requirements for listed_property are laid out in the regulations which specify that adequate_records in the form of a diary log trip sheet statement of expense etc are required sec_1_274-5t temporary income_tax regs fed reg date to show each separate expenditure the amount of each business use and total use and the business_purpose of each item of property see id para b fed reg these requirements are in addition to establishing depreciable basis and ownership the commissioner makes some interesting arguments about bai’s need for all these cars to operate its business--especially in light of burbach’s personal affinity for ford products to substantiate its use of four mustang vehicles-- mustang mustang mustang and mustang --bai provided asset inventory sheets copies of checks bai used to purchase the vehicles purchase agreements and maintenance invoices for some of the vehicles we agree with the commissioner that this documentation falls short of what sec_274 requires and find that he has met his burden on these vehicles he’s proved that it is more_likely_than_not that bai has no mileage documentation no documentation regarding the amount and type of use of these vehicles and no certificates of title for most of them a certificate of title provided for the mustang showed mileage of just miles suggesting it sat essentially unused the commissioner also pointed out that bai had its own service bays making the already spotty maintenance records more questionable there are further issues with the documentation on the mustangs but we think this suffices bai is not entitled to these deductions beyond the mustangs the commissioner argues that the business use of other items was not properly substantiated these items include equipment--alpha a diesel engine mower another equipment--krom a tiller equipment--alpha tractor w rc equip --krom tc33d equipment--krom gps system ford equip --krom tractor ford 2120--d a auto tractor mc28 w md equip --henn and tz22 equipment--henn mower we’ll start by briefly discussing the items of depreciation that we find bai is entitled to the commissioner hasn’t met his burden_of_proof for the equipment--krom tiller the equipment--alpha tractor the ford --d a auto tractor the ford equip --krom and the tz22 equipment-- henn mower the documentation for these items shows the proof and cost of bai’s purchases and also states credible business uses the commissioner dismisses these items because of their traditional use as farm equipment and through comparison to other pieces of nonbusiness equipment owned by burbach that are not at issue burbach credibly testified to these items’ relevance in bai’s business for example burbach testified that the krom tiller was used to conduct soils investigations before opening the ground for a project specifically regarding the tz22 equipment--henn tractor the commissioner argues that this tractor was purchased in date a year not at issue our own review of the invoice for this tractor shows a purchase date of date and we therefore disagree with the commissioner bai is entitled to these deductions now to the items we disallow starting with the equipment--alpha mower we agree with the commissioner that bai bought this item in date before any of the years at issue the check bai provided to confirm its purchase shows the mower was placed_in_service in rather than if it was placed_in_service at alldollar_figure see sec_1_167_a_-10 income_tax regs the w rc equip --krom tractor presents a problem because the documentation on this item shows that it may have been purchased by burbach even though he used a bai check for payment we therefore can’t be sure that this item was truly bai’s property and not burbach’s personal_property the tc33d equipment--krom tractor and the gps system are likewise unsubstantiated for the same reason their documentation also lacks bai inventory sheets with a stated business use finally we find that the commissioner has shown by a slight preponderance of evidence that bai didn’t own the mc28 w md equip --henn there’s a letter from burbach to bill hennessey in the record in which he asked that repairs on the tractor be billed to bfi bai cannot take these deductions f double deduction the final section concerns the sec_179 deduction bai claimed on its amended tax_return for its telephone system the commissioner argues that bai deducted this amount as a sec_162 business_expense on its original return and then after the commissioner allowed that deduction during the we note that the commissioner could have argued this item with the other items falling under the wrong-year-to-expense issue examination doubled-up by reporting it once more as a sec_179 deduction on its amended return bai responded that the commissioner offered no evidence that the phone system was deducted twice mr burbach credibly testified without contradiction that this item was characterized as a depreciable asset when bai prepared its amended returns we saw no evidence that bai had deducted it on its original return and the commissioner didn’t introduce any other evidence that it had bai is entitled to this deduction g conclusion with our analysis of that long list finally complete we find that bai is entitled to the following disputed sec_179 deductions equipment--cherokee for dollar_figure equipment--henn for dollar_figure tc equipment--henn for dollar_figure equipment--henn for dollar_figure equipment--krom for dollar_figure equipment--alpha for dollar_figure telephone system for dollar_figure equipment--sears for dollar_figure ford equip --krom for dollar_figure ford 2120--d a auto for dollar_figure and tz22 equipment--henn for dollar_figure all other deductions are disallowed iii additions to tax and penalties a sec_6651 failure-to-file additions to tax sec_6651 imposes an addition_to_tax for failure to timely file a tax_return unless the taxpayer can establish reasonable_cause the commissioner has no burden of production under sec_7491 for the additions to tax he determined against bai see nt inc t c pincite and he met his burden of production for the additions to burbach’s tax by stipulation burbach and bai assert as a defense however that they each had reasonable_cause for filing late because they relied on eldridge’s erroneous advice about their returns’ due dates we reject burbach’s reasonable-cause defense he prepared his own tax returns long before he met eldridge and he testified that he knew individual tax returns were due april of the following year while it’s true that m ost taxpayers are not competent to discern error in the substantive advice of an accountant or an attorney 469_us_241 burbach was not most taxpayers burbach did not exercise ordinary business care and prudence by relying on advice that he knew or should’ve known was wrong see sec_301_6651-1 proced admin regs and we won’t therefore excuse his late filing see eg 98_tc_294 reliance on erroneous professional advice about filing requirement is in good_faith only if the taxpayer did not otherwise know that the return was due we find for the commissioner on these additions to tax our analysis of bai’s reasonable-cause defense turns on whether bai reasonably and in good_faith relied on eldridge’s advice about the erroneous six- year due_date for corporate returns we have consistently held that reliance on erroneous professional advice about the due_date for a tax_return can constitute reasonable_cause only if such reliance was reasonable under the circumstances estate of la meres t c pincite see also boyle u s pincite n citing a slew of tax_court cases for that proposition burbach claims that eldridge was adamant about the six-year due_date for corporate returns he says eldridge even proved it with an article that supposedly showed the ford motor company had eight years to file its return but the record is replete with examples of burbach’s growing anxiety about bai’s unfiled returns he testified that he pushed eldridge about the returns--in burbach’s experience they had to be filed the next quarter after the tax_year ended--and he even traveled to florida to confront eldridge before any return would’ve been due under a six-year time limit this well- founded anxiety and burbach’s own experience lead us to find that bai did not rely in good_faith on eldridge about the six-year due_date and even if it did that reliance was unreasonable under the circumstances see estate of la meres t c pincite we also find for the commissioner on this addition_to_tax b sec_6662 accuracy-related_penalties the commissioner also determined penalties against bai under sec_6662 which imposes a penalty for an underpayment attributable to n egligence or disregard of rules or regulations or a substantial_understatement_of_income_tax see sec_6662 b and c d the commissioner has no burden of production on these penalties under sec_7491 see nt inc t c pincite but bai argues that it shouldn’t be held liable for them because it had reasonable_cause and acted in good_faith see sec_6664 sec_1 b income_tax regs bai hopes to cross the reasonable-cause threshold on the backs of eldridge and decotret for all of the penalties it argues that it paid eldridge and then decotret a considerable amount of money to properly prepare its returns it even if he did bai conceded on brief that there was a substantial_understatement_of_income_tax for each year at issue under sec_6662 and as we’ve said the commissioner met any supervisory-approval portion of his burden of production by stipulation see supra note provided them with all information necessary to complete the returns and when it learned during audit of decotret’s substantial mistakes it took corrective action and filed amended returnsdollar_figure a taxpayer can establish reasonable_cause and good_faith by reliance on professional advice the regulations circularly state that reliance on professional advice is reasonable_cause and good_faith if under all the circumstances such reliance was reasonable and the taxpayer acted in good_faith sec_1_6664-4 income_tax regs our caselaw clarifies this defense with three factors to determine whether a taxpayer properly relied on professional advice first was the adviser a competent professional who had sufficient expertise to justify reliance second did the taxpayer provide necessary and accurate information to the adviser we note that bai doesn’t argue that its amended returns are qualified_amended_return s within the meaning of sec_1_6664-2 income_tax regs --and for good reason sec_1_6664-2 income_tax regs provides that a qualified_amended_return is an amended_return filed after the due_date of the return for the taxable_year and before t he date the taxpayer is first contacted by the internal_revenue_service irs concerning any examination with respect to the return because bai submitted the amended returns while under audit they are not qualified_amended_return s and bai waived any qualified-amended-return argument by failing to raise it on brief see rule e 92_tc_661 tufft v commissioner tcmemo_2009_59 wl at third did the taxpayer actually rely in good_faith on the adviser’s judgment see 115_tc_43 aff’d 299_f3d_221 3d cir as to the second factor bai has established to our satisfaction that it provided eldridge and then decotret with information necessary to complete its returns for the years at issue and the commissioner hasn’t argued to the contrary bai does struggle however with the first and third factors nothing in the record convinces us that eldridge and decotret were competent professionals with sufficient expertise to justify reliance burbach’s testimony is laced with references to eldridge’s status as an enrolled_agent but the commissioner correctly points out that burbach never verified eldridge’s status with the irs or even looked into what an enrolled_agent actually is even if he had burbach’s initial contacts with eldridge should’ve thrown up more red flags than florida in hurricane season burbach paid eldridge dollar_figure for a two-day class at which eldridge provided a class handout that is comprehensible only in its descriptions of aggressive tax-avoidance schemes--eldridge encouraged burbach to apply rule_of law to stop the legal thieves in washington and stop paying maximum taxes to the grizzly bear based on his promise to help burbach end his intimate daily love relationship with the irs burbach began paying eldridge an outrageous monthly fee a fee he continued to pay even when eldridge didn’t get the work done and used an absurd six-year due_date as an excuse eldridge could not have been confused with a competent tax professional and decotret is only marginally better when burbach met him he was working for eldridge calling into question his own competence he said that eldridge was brilliant at tax planning if a little slow on service burbach says that decotret told him he was a cpa and much as he had with eldridge burbach took that qualification at face value but he didn’t notice that decotret’s resume said nothing about being a cpa decotret at least prepared returns for bai but in doing so followed eldridge’s erroneous tax planning grossly understated income and grossly overstated deductions burbach didn’t give the returns much of a review before they were filed and when he finally did he discovered many reporting mistakes decotret was not a competent tax professional on whom bai could reasonably rely this all shows that bai didn’t reasonably and in good_faith rely on eldridge’s or decotret’s judgment u nconditional reliance on a preparer or adviser does not always by itself constitute reasonable reliance the taxpayer must also exercise ‘ d iligence and prudence’ owen v commissioner t c memo wl at quoting 92_tc_958 aff’d without published opinion 921_f2d_280 9th cir bai had to reasonably rely on eldridge and decotret but the information we have about burbach’s encounters with eldridge show reliance on him was anything but reasonable burbach himself also admitted that once he spent more time reviewing the returns decotret had prepared he was able to identify significant reporting errors in gross_income and deductions--errors that resulted in bai’s reporting over dollar_figure in additional tax_liability on its amended returns these are reporting errors that burbach should’ve identified before the returns were filed and r eliance on a preparer does not constitute reasonable_cause if the taxpayer’s cursory review of the return should have revealed errors id citing 88_tc_654 we therefore find for the commissioner on these penalties as well this is a mixed result so decisions will be entered under rule


id office uilc cca-107434-11 -------------- number release date from ----------------------- sent friday date pm to -------------------------------- cc subject re new - ------------------------------------------------------------------------ it looks like ---- read the g_c_m and rev_rul incorrectly for example --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------ but the g_c_m on page explains that just because the overriding_royalty has separate_property status of which is recognized not only under local law and in the marketplace but also for federal tax purposes does not make the contributed portion the taxpayer's entire_interest and therefore deductible


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si 1-plr-121233-98 date date legend x date pursuant to a power_of_attorney on file in this office this responds to a letter that requests relief under sec_1362 of the internal_revenue_code facts x began doing business on date the shareholder desired s_corporation treatment for x effective date but an election to be treated as an s_corporation was not timely filed law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months of a corporation's taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed sec_1362 provides that if no sec_1362 election is made for any plr-121233-98 taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply x did not file a timely election to be treated as an s_corporation under sec_1362 effective on date x has however established reasonable_cause for not making a timely s election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective date within days from the date of this letter please submit a copy of this letter and a copy of a properly executed form_2553 to the relevant service_center except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transaction described above under any other provision of the code this ruling is directed only to the taxpayer on whose behalf it was requested sec_6110 provides that it may not be cited or used as precedent sincerely yours signed daniel j coburn daniel j coburn assistant to the branch chief branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for purposes


internal_revenue_service number release date index number -------------------------- --------------------------- ------------------------------- ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ------------------ telephone number -------------------- refer reply to cc psi b03 plr-148947-11 date date legend company -------------------------------------------------- -------------------------- subsidiary -------------------------------------------------- ----------------------------------------------- state d1 d2 d3 ------------- ------------------- -------------------------- ---------------------- dear ------------ this letter responds to a letter dated date submitted on behalf of company requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations for company to elect to treat subsidiary as a qualified_subchapter_s_subsidiary qsub under sec_1361 of the internal_revenue_code code facts according to the information submitted company is a state corporation which elected to be an s_corporation effective d2 subsidiary is also a state corporation which elected to be an s_corporation effective d1 on d3 company acquired all of the plr-148947-11 outstanding_stock of subsidiary and intended to treat subsidiary as a qsub effective d3 however company failed to timely file form_8869 qualified_subchapter_s_subsidiary election law and analysis sec_1361 provides that except as provided in regulations prescribed by the secretary for purposes of title i a corporation which is a qsub shall not be treated as a separate corporation and ii all assets liabilities and items of income deduction and credit of a qsub shall be treated as assets liabilities and such items as the case may be of the s_corporation sec_1361 defines the term qualified_subchapter_s_subsidiary as a domestic_corporation which is not an ineligible_corporation as defined in sec_1362 if percent of the stock of the corporation is held by an s_corporation and the s_corporation elects to treat the corporation as a qsub sec_1_1361-3 of the income_tax regulations provides the time and manner of making a qsub election a taxpayer makes a qsub election for a subsidiary by filing form_8869 with the appropriate service_center sec_1_1361-3 provides that a qsub election cannot be effective more than two months and days prior to the date of filing sec_1_1361-3 provides that an extension of time to make a qsub election may be available under sec_301_9100-1 and sec_301_9100-3 sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides 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 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government plr-148947-11 conclusion based on the facts submitted and representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied consequently company is granted an extension of time of one hundred twenty days from the date of this letter to elect to treat subsidiary as a qsub effective d3 the election should be made by filing form_8869 with the appropriate service_center a copy of this letter should be attached to the election except as expressly provided herein we express or imply no opinion concerning the tax consequences of the facts described above under any other provisions of the code specifically we express or imply no opinion concerning whether company is a valid s_corporation or whether subsidiary is eligible to be a qsub under a power_of_attorney on file with this office we are sending a copy of this letter to company's authorized representative 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 the ruling contained in this letter is 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 ruling_request it is subject_to verification on examination sincerely stacy l short senior technician reviewer office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


t c summary opinion united_states tax_court charles mellor hargreaves and karima hargreaves commissioner of internal revenue respondent petitioners v docket no 29208-11s filed date charles mellor hargreaves and karima hargreaves pro sese shannon edelstone for respondent summary opinion haines judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case in a notice_of_deficiency dated date respondent determined a deficiency in petitioners’ federal_income_tax of dollar_figure and a sec_6662 a accuracy-related_penalty of dollar_figure after concessions by respondent the issue sec_3 for decision are whether petitioners are entitled to deduct an additional dollar_figure of interest for and whether petitioners are liable for the sec_6662 accuracy-related_penalty for background some of the facts are stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioners resided in california at the time their petition was filed unless otherwise indicated section references are to the internal_revenue_code in effect for and rule references are to the tax_court rules_of_practice and procedure amounts are rounded to the nearest dollar when they petitioned this court petitioners did not dispute the receipt of dollar_figure of interest_income from ing direct set out in the notice_of_deficiency and they have thereby conceded the issue pursuant to rule b respondent concedes a qualified_residence_interest deduction of dollar_figure for petitioners timely filed a self-prepared form_1040 u s individual_income_tax_return and claimed a qualified_residence_interest deduction of dollar_figure the notice_of_deficiency mailed to petitioners allowed a qualified_residence_interest deduction of dollar_figure consisting of dollar_figure and dollar_figure paid to bank of america and the first federal bank of california first federal respectively but denied the remaining dollar_figure of interest petitioners claimed for in petitioners purchased a home in los gatos california for dollar_figure they paid dollar_figure cash as a downpayment and borrowed the remainder of the purchase_price approximately dollar_figure from first federal the loan petitioners received from first federal was called a negative amortization loan a loan offered to a purchaser to pay a lower interest rate than the actual interest rate which is based on an adjustable index the difference between the amount of interest petitioners pay to first federal and the amount of actual interest accrued is the bank’s margin in a negative amortization loan petitioners received a substitute form_1098 mortgage interest statement from first federal for the form_1098 categorized interest_paid to first federal as gross interest_paid of dollar_figure interest shortage of dollar_figure and net interest_paid of dollar_figure petitioners deducted the gross interest_paid of dollar_figure plus dollar_figure paid to bank of america or dollar_figure on their federal_income_tax return the form_1098 defined gross interest_paid as t otal interest_paid on your mortgage loan it defined interest shortage as a mount of interest charged to your account but remaining unpaid by you after each installment has been applied this may have resulted in an increase in your principal balance and net interest_paid was calculated by subtracting the interest shortage from the gross interest_paid petitioners paid dollar_figure of interest to first federal in the interest shortage of dollar_figure was added to the principal of the loan the beginning balance of the loan in was dollar_figure and its ending balance was dollar_figure there is no evidence in the record that petitioners paid the interest shortage added as principal to the first federal loan discussion i burden_of_proof deductions including those for qualified_residence_interest are a matter of legislative grace 292_us_435 a taxpayer bears the burden of proving entitlement to any deductions claimed see rule a 503_us_79 there is a dollar discrepancy from rounding ii qualified_residence_interest sec_163 generally allows a deduction for all interest_paid or accrued within the taxable_year on indebtedness sec_163 however no deduction is allowed for personal_interest paid_or_accrued during the taxable_year unless specifically allowed by statute sec_163 among the enumerated items of deductible personal_interest is qualified_residence_interest sec_163 qualified_residence_interest is any interest which is paid_or_accrued during the taxable_year on acquisition_indebtedness secured_by any qualified_residence of the taxpayer and interest_paid or accrued during the taxable_year on home_equity_indebtedness secured_by any qualified_residence of the taxpayer sec_163 acquisition_indebtedness is indebtedness incurred in acquiring constructing or substantially improving any qualified_residence of the taxpayer and is secured_by such residence sec_163 there is no dispute that petitioners’ home is a qualified_residence the parties also agree that petitioners paid qualified_residence_interest during respondent has conceded that dollar_figure was paid but petitioners are claiming dollar_figure the difference of dollar_figure is in dispute petitioners are cash_receipts_and_disbursements_method taxpayers sec_1_461-1 income_tax regs provides that under the cash_receipts_and_disbursements_method of accounting amounts representing allowable deductions shall as a general_rule be taken into account for the taxable_year in which paid payment must be made in cash or its equivalent 107_tc_35 aff’d 141_f3d_403 2d cir smoker v commissioner tcmemo_2013_56 the delivery of a promissory note to satisfy an interest obligation without an accompanying discharge of the note is a mere promise to pay and not a payment in a cash_equivalent 429_us_569 similarly because first federal added interest to petitioners’ principal on their loan petitioners are able to postpone paying the interest due to sometime in the future either over the life of the loan or as part of a balloon payment upon maturity see smoker v commissioner tcmemo_2013_ because the dollar_figure of interest added to petitioners’ principal on their loan was not paid in petitioners are not entitled to a current interest_deduction for the dollar_figure see 70_tc_482 aff’d without published opinion 633_f2d_215 6th cir smoker v commissioner tcmemo_2013_56 iii accuracy-related_penalty under sec_7491 respondent bears the burden of production with respect to petitioners’ liability for any accuracy-related_penalty to meet this burden respondent must come forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty 116_tc_438 once respondent sustains his burden of production however petitioners bear the burden of proving that the penalty is unwarranted by establishing an affirmative defense such as reasonable_cause or substantial_authority see id pincite respondent determined that petitioners are liable for an accuracy-related_penalty of under sec_6662 of dollar_figure the penalty applies to any underpayment_of_tax required to be shown on a return that is attributable to negligence or disregard of rules or regulations under sec_6662 negligence is defined as any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code sec_6662 however sec_6664 provides that a penalty under sec_6662 will not be imposed on any portion of an underpayment if the taxpayer shows reasonable_cause for such portion and the taxpayer acted in good_faith with respect to such portion mr hargreaves prepared the federal_income_tax return he credibly testified that he reported the interest_deduction using what he thought the form_1098 stated he made a reasonable attempt to comply with the provisions of the internal_revenue_code and established with his testimony that he acted in good_faith therefore we hold that petitioners are not liable for the sec_6662 penalty in reaching our holdings herein we have considered all arguments made and to the extent not mentioned above we conclude they are moot irrelevant or without merit to reflect the foregoing decision will be entered under rule


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division mar l014 uniform issue list required_distribution sec_401 in general xxxxx xxxxx xxxxx xxxxx xxxxx legend company plan plan xxxxx xxxxx xxxxx dearxxxxx this is in response to your letter dated date in which you request a private_letter_ruling that the minimum distribution_requirements of sec_401 a of the internal_revenue_code code would not be violated if the company amended plan and plan to offer a lump sum payment option during a limited window period to certain participants and beneficiaries for whom annuity payments have already begun the following facts and representations have been submitted under penalty of perjury in support of the ruling requested facts it company the taxpayer is along with its subsidiaries sponsor plan and plan collectively the plans which are intended to be tax-qualified defined benefit plans and having received a favorable page 2q142 determination_letter most recently on each plan covers a significant number of employees and former employees of the company and beneficiaries respectively and current payment options under plan include a single_life_annuity a life annuity-1 years certain a or joint_and_survivor_annuity and a lump sum available for all plan participants beginning commencement age after their earliest current payment options under plan include a single_life_annuity a or joint_and_survivor_annuity and a lump sum for all plan participants beginning after their earliest commencement age the company represents that the pension benefit obligations attributable to the plans and reported on the company's financial statements present particular risks the company represents that reducing its pension obligations through the proposed window program would reduce administrative costs and limit pension financial and demographic risk exposure ' to reduce the impact of the volatility of the large pension obligations the company proposes to amend both plans to offer during a limited period of time a one-time lump sum window benefit to certain participants and beneficiaries of the plans the window would be offered to retired or terminated participants currently receiving benefit payments in annuity form under the plans and beneficiaries who presently are receiving benefit payments in annuity form under the plans eligible annuitants under the amendment the eligible annuitants would have a specified limited window period of no less than days and no more than days during which they could elect to receive in lieu of their current annuity what the company represents is the actuarial present_value of their expected remaining benefits under the plans at the time of such election in the form of a single lump sum payment or to the extent required_by_law a single_life_annuity qualified_joint_and_survivor_annuity or qualified_optional_survivor_annuity elections by eligible annuitants to receive a new distribution option will be subject_to applicable spousal consent each eligible annuitant would be offered optional financial counseling provided by what company represents will be a highly qualified and reputable financial advisor before making his or her election decision the company represents that eligible annuitants that elect a new distribution option will be considered to have a new annuity_starting_date as of the first day of the month in which their new benefit is payable the company represents that the funding levels of the plans are sufficient so that the window programs will not trigger benefit restrictions described in sec_436 of the certain subsets of the otherwise eligible group may be excluded in a nondiscriminatory manner on account of administrative practicalities or other considerations spousal consent must include where the law requires both the current spouse and a former spouse if the annuitant has remarried since the annuity_starting_date page 201424031' code in addition the company represents that the amendment will not change the ability of eligible annuitants to elect during the window period to receive qualified joint and survivor annuities or qualified optional survivor annuities in accordance with sec_401 a and of the code based on the facts and representations stated above company requests a ruling that the minimum distribution_requirements of sec_401 a of the code would not be violated if the company amended the plans to offer the proposed window period of not less than days and not more than days to participants and beneficiaries for whom annuity payments have commenced under the plans applicable law sec_401 a of the code and the regulations thereunder regulations provide rules relating to required minimum distributions from quali'fied plans sec_401 a of the code was enacted to ensure that the amounts contributed to qualified_retirement_plans were used for retirement by requiring that retirement payments begin no later than a certain date with no less than a certain amount being distributed each year of retirement the legislative_history of the original version of sec_401 a of the code in stated that its purpose is in preventing lifetime accumulations which might escape income_taxation altogether congo rec statement of sen smathers in general sec_401 a a of the code states that a_trust shall not constitute a qualified_trust under this subsection unless the plan provides that the entire_interest of each employee i will be distributed to such employee not later than the required_beginning_date or ii will be distributed beginning not later than the required_beginning_date in accordance with regulations over the life of such employee or over the lives of such employee and a designated_beneficiary or over a period not extending beyond the life expectancy of such employee or the life expectancy of such employee and a designated_beneficiary sec_401 a of the code generally provides that a defined_benefit_plan will not be considered a qualified_plan unless vested benefits with respect to a married participant who dies before the annuity_starting_date are payable in the form of a qualified_preretirement_survivor_annuity and with respect to a married participant who dies after the annuity_starting_date a qualified_joint_and_survivor_annuity sec_415 a of the code provides that a_trust which is a part of a pension_plan will not constitute a qualified_trust if the pension_plan provides for the payment of benefits which exceed the limitation of sec_415 sec_415 of the code page generally provides that if the benefit under a defined_benefit_plan is payable in any form other than a straight life_annuity the determination as to whether the sec_41s b limit has been satisfied shall be made by adjusting the bene'fit so that it is equivalent to a straight life_annuity sec_417 of the code provides that a plan meets the requirements of sec_401 a if among other requirements each participant may elect during the applicable_election_period to waive the qualified_joint_and_survivor_annuity form of benefit or the qualified_preretirement_survivor_annuity form of benefit or both sec_417 of the code defines the applicable_election_period as meaning in part in the case of an election to waive the qualified_joint_and_survivor_annuity form of benefit the 180-day period ending on the annuity_starting_date sec_1 a -6 q a-1 a in pertinent part states that in order to satisfy sec_401 a of the code distributions of the employee's entire_interest under a defined benefit pension_plan must be paid in the form of periodic annuity payments for the employee's life or the joint lives of the employee and beneficiary or over a period certain that does not exceed the maximum length of the period certain determined in accordance with a-3 of this section once payments have commenced over a period the period may only be changed in accordance with a-13 or a-14 of this section except as otherwise provided in this section such as permitted increases described in a-14 of this section all payments whether paid over an employee's life joint lives or a period certain also must be nonincreasing sec_1 a -6 q a-13 a states that an annuity_payment period may be changed in accordance with the provisions set forth in paragraph b of this a-13 or in association with an annuity_payment increase described in a-14 of this section sec_1 a -6 q a-14 a states that except as otherwise provided in this section all annuity payments whether paid over an employee's life joint lives or a period certain must be non-increasing or increase only in accordance with one or more of the following with an annual percentage increase that does not exceed the percentage increase in an eligible cost-of-living index as defined in paragraph b of this a-14 for a 12-month_period ending in the year during which the increase occurs or the prior year with a percentage increase that occurs at specified times eg at specified ages and does not exceed the cumulative total of annual percentage increases in an eligible cost-of-living index as defined in paragraph b of this a-14 since the annuity_starting_date or if later the date of the most recent percentage increase however in cases providing such a cumulative increase an actuarial increase may not be provided to re'flect the fact that increases were not provided in the interim years page to the extent of the reduction in the amount of the employee's payments to provide for a survivor benefit but only if there is no longer a survivor benefit because the beneficiary whose life was being used to determine the period described in sec_401 a a ii over which payments were being made dies or is no longer the employee's beneficiary pursuant to a qualified_domestic_relations_order within the meaning of sec_414 to pay increased benefits that result from a plan amendment to allow a beneficiary to convert the survivor portion of a joint_and_survivor_annuity into a single sum distribution upon the employee's death or to the extent increases are permitted in accordance with paragraph c or d of this a-14 sec_1 b - b iii provides that if a participant will have distributions commencing at more than one annuity_starting_date the limitations of sec_415 of the code must be satisfied as of each of the annuity starting dates taking into account the benefits that have been provided at all of the annuity starting dates analysis sec_401 a of the code provides a tax_deferral for retirement benefits accumulated in a qualified_pension plan sec_401 a of the code and the regulations ensure that these tax-deferred accumulations are in fact used during retirement and do not escape taxation sec_1 a -6 sets forth the rules governing required distributions from defined benefit plans and annuity_contracts sec_1 a -6 q a-13 a states that an annuity_payment period may be changed in association with an annuity_payment increase described in a-14 of this section sec_1 a -6 q a a provides that annuity payments from a qualified_plan may increase if the payment of increased benefits results from a plan amendment the company's proposed amendment to the plans adds a lump sum option for eligible annuitants under which eligible annuitants will have the opportunity to elect within a one-time window period of no less than days and no more than days to receive in lieu of their current annuity a lump sum payment elections by eligible annuitants to receive a new distribution option will be subject_to applicable spousal consent the proposed amendment will result in a change in the annuity_payment period the annuity_payment period will be changed in association with the payment of increased benefits as a result of the addition of the lump sum option in addition eligible annuitants who wish to change their current_distribution option will be considered to spousal consent must include where the law requires both the current spouse and a former spouse if the annuitant has remarried since the annuity_starting_date page have a new annuity_starting_date as of the first date of the month in which their new benefit is payable because the ability to select a lump sum option will only be available during a limited window the increased benefit payments will result from the proposed plan amendment and as such are a permitted_benefit increase under sec_1 a -6 q a-14 a in order for a plan to remain qualified under sec_401 a of the code the calculation of the value of the benefit elected under the lump sum window option must comply with the requirements of sec_417 and the regulations thereunder under section dollar_figure of revproc_2014_4 subject_to certain exceptions the irs generally does not issue letter rulings on matters involving qualification issues under sec_401 through of the code qualification matters are generally handled by the employee_plans determination_letter program as provided in revproc_2014_6 accordingly we have not considered among other matters whether the lump sum window benefits comply with the requirements of sec_417 and the regulations thereunder with respect to the amount of the distribution and minimum present_value requirement that is applied based on the present_value of the normal_retirement_benefit instead this letter_ruling is based on your representation that the lump sum window benefit satisfies sec_417 of the code and sec_1_417_e_-1 of the regulations ruling therefore in this circumstance the minimum distribution_requirements of sec_401 a of the code would not be violated if the company amended plan and plan to offer the proposed window period of not less than days and not more than days to the plans' participants and beneficiaries for whom annuity payments have already begun except as specifically ruled above no opinion is expressed as to the federal tax consequences of the transaction described above under any other provision of the code including sec_401 a big_number and or of title i of erisa no opinion is expressed regarding the qualification of either of the plan in addition no opinion is expressed on whether the method for valuing benefits under the lump sum window option satisfies the requirements of sec_417 and the regulations thereunder this letter is directed only to the taxpayer who requested it sec_611 k of the code provides that it may not be used or cited as precedent page if you wish to inquire about this ruling please contact xxxxx at xxx xxx-xxxx please address all correspondence to se t ep ra t2 sincerely j dl i william b hulteng manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose cc xxxxx xxxxx xxxxx xxxxx xxxxx xxxxx xxxxx xxxxx


internal_revenue_service number release date index number ---------------------------- ------------------------ ---------------------- ------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-147434-09 date date legend x country date --------------------------------- ------ ---------------- ---------------- ------------------------ dear ----------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting that the service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect to be treated as a disregarded_entity the information submitted states that x was formed as a company under the laws of country x was eligible to elect to be treated as a disregarded_entity effective date however x inadvertently failed to timely file form_8832 entity classification election sec_301_7701-3 of the income_tax regulations provides that an eligible_entity with at least two members may elect to be classified as either an association and thus a corporation under sec_301_7701-2 or as a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 further provides that so long as a business_entity is not classified as a corporation under sec_301_7701-2 or an eligible_entity it may elect its classification for federal tax purposes plr-147434-09 sec_301_7701-3 provides that except as provided in sec_301_7701-3 unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides that for purposes of sec_301_7701-3 a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date on which the form is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than 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_9100-2 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 solely 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 of sixty days following the date of this letter to file form_8832 and to elect to be treated as a disregarded_entity for federal tax purposes effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose 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 plr-147434-09 this ruling is directed only to the taxpayer requesting it sec_6110 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 curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes