t c memo united_states tax_court anthony tinsman petitioner v commissioner of internal revenue respondent docket no filed date anthony tinsman pro_se ann l darnold for respondent memorandum opinion dean special_trial_judge respondent determined deficiencies in petitioner’s federal income taxes of dollar_figure for dollar_figure for and dollar_figure for respondent also - determined additions to tax under sec_665l1 a ’ for failure by petitioner to file timely his federal_income_tax returns in the amounts of dollar_figure for dollar_figure for and dollar_figure for the issues for decision are whether the notice_of_deficiency is arbitrary and excessive and therefore is not entitled to the presumption of correctness whether petitioner received an unreported ira distribution in whether petitioner is liable for the additional tax on early distributions from qualified_retirement_plans whether petitioner had unreported income for and and whether petitioner failed to file timely federal_income_tax returns for and without reasonable_cause the stipulated documents are incorporated herein by reference petitioner resided in midland arkansas at the time he filed his petition in this case background during the years at issue and at the time of trial petitioner was married and had two children petitioner filed a federal_income_tax return for that he signed and dated date he attached to the tax_return a form_w-2 wage and tax statement from petroleum helicopters inc helicopters reporting wages tips and other compensation section references are to the internal_revenue_code in effect for the years in issue and rule references are to the tax_court rules_of_practice and procedure of dollar_figure as well as federal and state withholding taxes he also attached to the return a form 1099r statements for recipients of distributions from pensions annuities retirement or profit-sharing_plans iras insurance contracts etc reporting from the helicopters federal credit_union a dollar_figure distribution from a qualified_retirement_plan although petitioner overreported his wages as dollar_figure on the face of his form_1040 he also included with the return a schedule d capital_gains_and_losses on the schedule d he reported as property held for year or less labor received as gift from god from through having a basis equal to and a sales_price of dollar_figure he reported as an asset held for more than year the retirement_plan distribution and also characterized it as payment for past labor received as a gift from god having a basis equal to its sale price petitioner included with the tax_return two documents he titled a statement and a declaration in the statement he expressed his belief that upon his study and understanding he was not liable to the income taxes imposed by the code the statement declares that to the extent the form sec_1040 and 1099r contradict the statements in his declaration said forms are this represents the amount of total social_security wages reported on petitioner’s form_w-2 from helicopters for the year rather than wages includable in gross_income respondent concedes that petitioner overreported his wage income subject_to income_tax by dollar_figure dollar_figure-dollar_figure - false and misrepresent the facts and law and are hereby refuted and denied he explained in the declaration that his position was based on his belief that he had a basis in his labor and upon his personal definitions of the words wages compensation_for services employee and employment in the declaration he claimed that while he had sold his labor under contract he had not received wages or compensation_for services in from helicopters he also expressed the opinion that he is a nonresident_alien with no u s -source income the form_w-2 indicates that helicopters is located in lafayette louisiana petitioner signed his federal_income_tax return under protest and listed his occupation as none petitioner did not file federal_income_tax returns for or respondent sent to petitioner a notice dated date advising him that he had not yet filed a tax_return for the notice informed petitioner that if he did not contact the internal_revenue_service irs immediately the irs might have to summons him or begin criminal proceedings if you willfully fail to file a tax_return sometime in late respondent received a document signed by petitioner in which he asserts that he has determined that he was not required to file a tax_return for or but that if he were so required he would file as head_of_household with dependents - - respondent issued a statutory_notice_of_deficiency to petitioner determining that he had failed to report the receipt of an ira distribution of dollar_figure for was liable for the 10-percent additional tax on early distributions from qualified_retirement_plans had failed to report income for and determined by the bureau of labor statistics bls and had failed to file timely a tax_return for each of the years through petitioner filed an amended petition with the court alleging error on respondent's part in failing to allow him deductions allowances and credits proceeding as if he had ira income in or any income in and and in attempting to impose a direct or indirect_tax upon his income if any the facts upon which he based his allegations of error are a he had expenses for the deductions allowances and credits for the maintenance of his home and care of his family including his wife and children b assuming that the bank that held the tra made payments to him in it did not send him a notice signed under penalties of perjury that it had made payments to him c he was neither an employee nor self-employed during and and d respondent is attempting to impose improperly a direct_tax without apportionment or an indirect_tax without identifying the commodity or material consumed -- - before answering the amended petition respondent filed a motion to strike allegations of error and fact referencing the imposition of an improper direct or indirect_tax on petitioner petitioner sent to respondent a motion for enlargement of time to file response to respondent's motion to strike in which petitioner alleged the petitioner works full time and must do his research and draft his response around his work schedule which generally means the weekends after the court granted him additional time petitioner filed an objection to respondent's motion containing a lengthy discussion of whether the federal_income_tax is a direct_tax or an excise_tax and attached a copy of a congressional research report for congress the court subsegquently granted respondent's motion to strike at trial petitioner refused to present any evidence until after respondent had proceeded insisting that respondent has the burden_of_proof because it is an unreported income case respondent called petitioner as a witness whereupon he proceeded to assert the fifth_amendment privilege_against self- incrimination in response to almost every question on direct examination discussion burden_of_proof the threshold issue for decision concerns the placement of the burden_of_proof petitioner argues that when respondent's - determinations are based upon alleged unreported income the burden_of_proof shifts to respondent respondent acknowledges that when allegations of unreported income are made respondent must show some minimal evidence linking the taxpayer to that income before the presumption of correctness attaches to the notice respondent believes that the burden_of_proof remains with petitioner because evidence linking him to income-producing activity has been provided in general the commissioner's determinations contained ina notice_of_deficiency are entitled to a presumption of correctness and the taxpayer has the burden of proving them incorrect see rule a 428_us_433 290_us_111 910_f2d_1374 7th cir affg malicki v commissioner tcmemo_1988_559 as a general_rule we do not look behind the statutory notice to examine the evidence used in making the determination see 92_tc_661 the internal_revenue_service restructuring reform act of rra publaw_105_206 sec 112_stat_685 added sec_7491 which shifts the burden_of_proof to the secretary in certain circumstances sec however is applicable to court proceedings arising in connection with examinations commencing after the date of the enactment of this act rra sec c the rra was enacted on date while the petition and amended petition in this case were filed before date 62_tc_324 the presumption however is not irrebuttable in certain limited circumstances if the taxpayer proves by a preponderance_of_the_evidence that the commissioner's determinations are arbitrary and excessive or without rational foundation then the presumption no longer applies see 58_f3d_1342 8th cir affg tcmemo_1993_398 757_f2d_957 8th cir courts have identified an exception to the presumption of correctness where the commissioner in a case involving unreported income introduces no direct evidence but rests on the presumption of correctness and the taxpayer challenges the deficiency on the grounds that it is arbitrary see 87_tc_609 affd without published opinion 827_f2d_774 11th cir see also senter v commissioner tcmemo_1995_311 thus to rebut the presumption of correctness and shift the burden of producing evidence to the commissioner the taxpayer must demonstrate that the commissioner’s deficiency assessment lacks a rational foundation or is arbitrary and excessive see 100_f3d_1308 7th cir affg tcmemo_1995_243 page v commissioner supra long v commissioner supra petitioner relies on united_states v janis supra and 932_f2d_1128 5th cir revg in part affg in part and remanding tcmemo_1990_68 as support for his position that the notice_of_deficiency in this case is arbitrary and excessive and therefore not entitled to the normal presumption of correctness in janis the supreme court held that a 'naked' assessment without any foundation whatsoever may be excessive and without rational foundation united_states v janis supra pincite in portillo the taxpayer was issued a deficiency_notice determining that he had received unreported income due to a discrepancy between the amount he had reported and the amount on a form_1099 filed by his employer the employer could account for only part of the discrepancy and had no records for the remainder because the taxpayer disputed that he was paid the income the court of apppeals for fifth circuit found that the commissioner had failed to substantiate the deficiency by any other means the court_of_appeals concluded that the deficiency was excessive and arbitrary in a later case the court_of_appeals for the fifth circuit explained that its holding in portillo does not require an although the issue of a naked assessment generally arises when an illegal tax-generating activity is alleged the court_of_appeals for the highth circuit seems to have extended the principle to legal tax-generating activity as well see 975_f2d_534 8th cir affg in part revg in part and remanding on another issue tcmemo_1991_140 - independent investigation by the irs in all unreported income cases 117_f3d_785 5th cir affg per curiam an order of this court where a taxpayer does not dispute that he received the payment in question as reported on a third-party information_return the commissioner has no duty to investigate see id and where the taxpayer fails to dispute a connection with the tax-generating income the naked assessment doctrine does not apply see 168_f3d_1098 8th cir affg tcmemo_1997_474 975_f2d_534 8th cir affg in part and revg in part on another issue tcmemo_1991_140 zuhone v commissioner f 2d 7th cir affg tcmemo_1988_142 andrews v commissioner tcmemo_1998_316 petitioner denies in his trial memorandum that he was an temployee ' engaged in 'employment' or 'self-employment' in either or or that he received 'wages' or 'non- employee compensation' in those years considering petitioner's legal arguments and the evidence in the record in this case we interpret his use of quotation marks around words such as employee and wages to mean that petitioner uses those terms in a personal way that has a special meaning to him not as they are ordinarily understood petitioner does not argue that he did not receive payment for the sale of his labor in or petitioner’s argument is instead based on his gift theory of the taxability of wages his statement attached to the tax_return declares the forms w-2 and 1099r to be erroneous as well as his listing the helicopters payments as wages on schedule d attached to the return petitioner treated his wages as property held for year or less labor received as gift from god having a basis egual to its sales_price petitioner does not argue that he did not receive an ira distribution in petitioner's position is that such distributions represent nontaxable payments received from past sales of labor at no gain he also argues that the form 1099r reporting an ira distribution to him in is invalid unless it is signed under the penalty of perjury citing sec_6065 upon analysis of the record in this case we find that petitioner has not disputed his connection with the tax- generating income ascribed to him by respondent respondent determined for the year that petitioner received an unreported ira distribution and for and unreported income the amount of which was determined by using bls statistics the closest petitioner has come to a denial of the receipt of income is in his amended petition the amended -- petition alleges that respondent erred in determining a deficiency as if petitioner received ira income for and any income for or in view of the arguments he has raised we find this to be short of a denial that he received such income minimal factual predicate even if we were to find that petitioner is actually disputing any connection with the tax generating income determined by respondent our inguiry would not be concluded respondent's notice_of_deficiency maintains the presumption of correctness as long as the determination has some minimal factual predicate pittman v commissioner f 3d pincite 994_f2d_1542 11th cir affg tcmemo_1991_636 bjelk v commissioner tcmemo_1998_169 respondent's determination fails where it is without any foundation or supporting evidence page v commissioner f 3d pincite accord united_states v janis supra 981_f2d_350 8th cir affg in part revg in part and remanding 96_tc_172 we proceed to examine the record to determine whether there is some minimal factual predicate to support respondent's determination examining the form_1040 filed by petitioner for we find that he was an employee who received wages from - - employment for the year petitioner admitted in his amended petition that he had an ira in petitioner stated in correspondence to respondent that if he were required to file a federal_income_tax return for and he would file as head_of_household with four dependents in his amended petition petitioner alleges that for and he had expenses for the maintenance of his home and care of his wife and children in an date motion sent to respondent petitioner admitted that he currently works full time petitioner failed to file returns for of the years in this case and refused to cooperate in the ascertainment of his income for all years from the evidence in the record we find that petitioner was employed in owned an ira in supported a household for himself his wife and children in and and worked full time in respondent has established in this case a minimal factual predicate for the determinations where there is evidence of taxable_income but no evidence as to the amount of such income it is not arbitrary for respondent to determine that the taxpayer had income at least equal to the normal_cost of supporting his family see 54_tc_1530 andrews v commissioner tcmemo_1998_316 otherwise ‘skillful concealment' would be an ‘invincible barrier' to the determination of tax_liability giddio v commissioner supra pincite in 116_f3d_1309 9th cir the court found that the inference that taxpayers must have had sufficient income to support themselves for years when no income was reported along with information linking one of the taxpayers to wages for at least part of a 4-year period was a sufficient evidentiary foundation to establish the presumption of correctness we find the facts of this case to be similar to those of palmer v united_states supra additionally the use of data compiled by the bureau of labor statistic sec_1s an acceptable and reasonable method of income reconstruction see 786_f2d_1063 llth cir affg tcmemo_1984_536 69_tc_729 65_tc_68 affd without published opinion 559_f2d_1207 3d cir giddio v commissioner supra pincite while the presumption remains intact here it creates only a prima facie case placing the burden on petitioner to rebut the the amounts determined as additional income in and in the notice_of_deficiency for petitioner were computed for a single_person with no children petitioner was married and had two children over the age of respondent’s computations understate by percent the actual bls figures for a person supporting a family the size of petitioner’s - - presumption by showing that the inference of taxable earnings for family support is unreasonable see parrish v commissioner supra 58_f3d_1342 8th cir palmer v united_states supra 975_f2d_534 8th cir petitioner’s lack of evidence petitioner presented no testimony nor did he call any witnesses to testify on his behalf that respondent's determinations are erroneous he chose instead to assert his fifth_amendment privilege_against self-incrimination even if this was a valid assertion of the privilege however it is not a substitute for evidence and is not intended to be a sword whereby a claimant asserting the privilege would be freed from adducing proof in support of a burden which would otherwise have been his 460_us_752 841_f2d_643 5th cir affg tcmemo_1987_197 92_tc_661 this rule applies to petitioner's meeting his burden_of_proof with respect to both the tax_deficiency and the addition_to_tax under sec_6651 see 722_f2d_193 5th cir affg tcmemo_1983_20 petzoldt v commissioner supra pincite - not only has petitioner failed to adduce any evidence his legal arguments are frivolous the courts have consistently and uniformly held that wages are income and that a taxpayer has no basis in his labor see eg 793_f2d_139 6th cir affg per curiam 82_tc_766 791_f2d_68 7th cir 784_f2d_1006 9th cir 737_f2d_439 5th cir 687_f2d_264 8th cir affg per curiam tcmemo_1981_506 petitioner’s argument that forms 1099r are invalid unless signed under penalty of perjury is incorrect and is irrelevant to whether he received a distribution under sec_6065 except as otherwise provided a document required to be made under the internal revenue laws or regulations must contain or be verified under a written declaration that it is made under the penalties of perjury the secretary has provided by way of regulation that if a document is required by the regulations contained in chapter or by the form and instructions issued with respect to the document to be verified by written declaration under penalties of perjury the document shall be so verified by the person signing it see sec_1_6065-1 income_tax regs requirements for reports on ira_distributions however are not found in chapter but are contained in chapter sec_1_408-7 income_tax regs describes reports on distributions from individual retirement plans the regulation contains no requirement that forms 1099-r be verified by written declaration under penalties of perjury and neither the form nor the instructions contain such a requirement therefore no written verification by written declaration under penalties of perjury is required for the form petitioner raised no argument and presented no evidence on the issue of his liability for the additional tax on early distributions from qualified retirement accounts on this record we sustain respondent's determinations sec_665l a failure_to_file timely for each year in issue respondent determined that petitioner is liable for the addition_to_tax under sec_6651 for his failure_to_file timely a federal_income_tax return sec_6651 provides for an addition_to_tax of percent of the tax required to be shown on the return for each month or fraction thereof for which there is a failure_to_file not to exceed percent the addition_to_tax for failure_to_file a return timely will be imposed if a return is not timely filed unless the taxpayer shows that the delay was due to reasonable_cause and not willful neglect see sec_6651 -- - there is no evidence in the record that suggests that petitioner's failure_to_file timely a federal_income_tax return for any year in issue was due to reasonable_cause and not due to willful neglect consequently we sustain respondent's determination that petitioner is liable for the additions to tax under sec_6651 for the years through to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number ---------------------------------- ------------------------------------------- ------------- --------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------- id no ------------- telephone number --------------------- refer reply to cc psi b07 plr-133809-04 date date date date target date date subsidiary ------------------- -------------------------- ---------------------------- corporation ---------------------------------------- ------------------------------------------- ---------------------------------- ----------------------- legend dear ---------------- this letter responds to your letter dated date requesting a ruling under ' of the internal_revenue_code the represented facts are as follows corporation is an accrual_method taxpayer that utilizes a date taxable_year corporation is the parent of a sec_41 controlled_group_of_corporations all of which file on corporation’s consolidated_return since its formation corporation has utilized the standard method of sec_41 to calculate its credit_for_increasing_research_activities research_credit on date corporation purchased target and merged target into subsidiary a wholly owned subsidiary of ---------------------------- ---------------------------- date plr-133809-04 corporation target had made an election to use the alternative_incremental_research_credit under sec_41 for its taxable_year ending on date subsequent to the purchase of target_corporation filed its tax_return for its taxable_year ending on date utilizing the standard sec_41 method of calculating the research_credit though no research_credit was claimed for corporation’s taxable_year ending on date corporation requests a ruling that corporation and its sec_41 controlled_group may calculate the research_credit for the taxable_year ending on date and all succeeding years under the standard method of sec_41 without regard to sec_41 sec_41 provides that in determining the amount of the credit under i all members of the same controlled_group_of_corporations shall be treated as a single_taxpayer and ii the credit if any allowable by sec_41 to each member shall be its proportionate shares of the qualified_research_expenses and basic_research_payments giving rise to the credit sec_41 provides that the term controlled_group_of_corporations has the same meaning given to such term by sec_1563 except that -- a more than percent shall be substituted for at least percent each place it appears in sec_1563 and b the determination shall be made without regard to sec_1563 and e c based solely on the facts and representations made we conclude that corporation and its sec_41 controlled_group may calculate the research_credit for the taxable_year ending on date and all succeeding years under the standard method of sec_41 without regard to sec_41 provided that corporation does not make an election to determine its credit_for_increasing_research_activities under the alternative_incremental_research_credit rules of ' c in a later year except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter further we express or imply no opinion concerning expenditures corporation or any member of its sec_41 controlled_group treated as qualified_research_expenses 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 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed plr-133809-04 by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely s brenda m stewart senior counsel branch office of associate chief_counsel passthroughs special industries


department of the treasury_department of the treasury internal_revenue_service internal_revenue_service washington d c washington d c aug number release date cc tege eoeg et1 - cor-126363-01 uilc memorandum for director internal_revenue_service center kansas city mo attn entity control from subject office of division counsel associate chief_counsel tax exempt and government entities cc tege eoeg et1 - cor-126363-01 railroad retirement act tax status in accordance with the coordination procedure established between the service and the railroad retirement board rrb the rrb has provided us with its opinion that the following business became an employer under the railroad retirement act and the railroad unemployment insurance act effective date we have reviewed the opinion of the rrb and based upon the information submitted to the rrb we also conclude that became an employer under the railroad_retirement_tax_act effective date please take the appropriate action regarding this business will e mcleod cc


department of the treasury i n t e r n a l r e v e n u e s e r v i c e washington d c date cc tege eoeg et1 plr-129817-06 office_of_chief_counsel number info release date --uil --------------------------------- ----------------------- ---------------------------- dear -------------- this is in response to your request for a ruling concerning your former employer’s obligation to withhold and pay over to the internal_revenue_service irs the employer’s portion of social_security medicare and federal_unemployment_tax_act futa taxes on certain payments and remuneration that may be due to you for the reasons set out below we are unable to rule upon your request in general the irs has discretionary authority to issue letter rulings to the extent such rulings are consistent with the sound administration of the tax system however the irs may decline to issue a letter due to the factual nature of an issue presented in a case see revproc_2006_1 2006_1_irb_1 section the irs also does not issue letter rulings regarding the tax consequences of transactions involving taxpayers who are not directly involved in the request if the requested letter or determination ruling would not address the tax status liability or reporting obligations of the requester see revproc_2006_1 2006_1_irb_1 section additionally the irs will generally not issue a letter_ruling with respect to issues that are clearly and adequately addressed by statutes regulations decisions of a court revenue rulings revenue procedures notices or other authority published in the internal_revenue_bulletin see revproc_2006_1 2006_1_irb_1 section after carefully reviewing your ruling_request and the statements that you made during the telephonic conference between you attorney nancy hooten of my staff and myself on date we have determined that it is inappropriate to rule on your request for a number of reasons these reasons include the factual nature of the issue --------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- similarly your request seeks a ruling concerning your -------------------------liability and reporting requirements -------------------------------- additionally we believe there is sufficient legal authority that establishes and addresses the general employment_tax plr-129817-06 obligations the internal_revenue_service imposes on employers as a result we are declining to rule on your request consequently the internal_revenue_service will refund the user_fee you submitted in connection with your ruling_request as we explained during our telephonic conference on date your refund will be processed by another office and will follow under separate cover generally it takes the service up to days to process a refund request please contact --------------------in the communications records and user_fee unit if you have questions about the status of your refund ---------------’ telephone number is -------------------- we regret any inconvenience our inability to rule in this matter may cause and we apologize for the length of time that it has taken to provide a response to you in this matter in accordance with your request however we are enclosing copies of a published information_letter and a revenue_ruling along with copies of sec_3101 sec_3102 sec_3111 sec_31_3111-1 sec_31_3111-2 sec_31_3111-3 sec_31_3111-4 sec_31_3111-5 and sec_3121 which should provide information regarding the general employment_tax obligations of employers and employees if you have any additional questions concerning this matter please contact attorney nancy e hooten of my staff who can be reached at -------------------- sincerely michael swim senior technical reviewer employment_tax branch office of division counsel associate chief_counsel tax exempt government entities enclosures as stated


department of the treasury internal_revenue_service washington d c contact person identification_number telephone number employer_identification_number se t-eo ra t tax_exempt_and_government_entities_division number release date date date uil legend university trust dear we have considered your ruling_request dated date concerning the federal_income_tax consequences under sec_512 of the internal_revenue_code_of_1986 as amended hereafter code relating to a proposed contractual arrangement in the manner and for the purposes described below facts university is an educational_institution recognized as a tax-exempt_organization under sec_501 and sec_170 of the code university maintains an endowment fund comprised of privately raised endowments which fund was established to provide economic resources to university to provide for its educational activities the endowment fund is heavily diversified in both domestic and international markets and utilizes alternative investment strategies to reduce the overall risk of the portfolio and to enhance investment returns much of the income earned by the endowment fund consists of passive dividends interest rents and long- and short-term_capital_gains but some income is debt financed or otherwise is treated as unrelated_business_taxable_income university is both the trustee and sole charitable_remainder beneficiary of trust trust is a charitable_remainder_unitrust described under sec_664 of the code under the terms of the trust agreement trust’s donors are the income beneficiaries entitled to an annual payout of a unitrust_amount equal to a percentage of the net fair_market_value of trust’s assets pursuant to sec_643 of the code the remainder_interest is distributable to university upon the death of donors presently trust assets are managed by various investment managers in accordance with a strategy developed by an outside for-profit advisor university represents that as trustee and remainder beneficiary it desires to achieve increased diversification and higher and more stable investment returns for maximum long-term benefit to support its research activities and the education of future university students in perpetuity therefore in an attempt to accomplish these goals university proposes to take advantage of the concept of economies of scale by allowing trust to commingle its assets with those of university’s endowment fund a higher rate of return on trust’s assets would cause its donors to receive a higher unitrust payout and would cause university to ultimately receive a higher final payment as the remainder beneficiary university proposes to enable trust to participate in university’s endowment fund through the acquisition of shares university proposes to create a contractual obligation pursuant to which it will issue to trust a contract right called shares in its endowment fund in exchange for trust investing its assets in the endowment fund university represents that the number of shares trust will receive will be in proportion to the value of trust’s investment in university’s endowment fund the contract will provide that trust will receive an income payout based on the number of shares owned and the annual endowment fund spending rate which rate is determined by university the value of the shares both at the time of acquisition and redemption will be based on the value of all underlying investment_assets held in the endowment fund the contract provides that trust could choose to either reinvest part of the payout or redeem additional shares depending on trust’s cash requirements the payout up to the endowment fund spending rate will be characterized as ordinary_income to trust regardless of whether the underlying income to the endowment fund is characterized as capital_gain ordinary_income or a return_of_capital redemptions of shares by trust over and above receipt of the payout rate will be treated as either long- or short-term_capital_gain or loss depending on the holding_period of the shares furthermore university will pay any_tax owed on unrelated_business_taxable_income earned by its endowment fund university represents that under the contract trust would not have any ownership_interest in the underlying assets of the endowment fund or any contract rights with respect to other trusts trust would have no power or right of any kind to control direct supervise recommend or review university’s business activities operations or decisions with respect to the endowment fund except the right to review the payout computation trust would not have the right to veto or opt_out of any of the underlying endowment investments the contract would provide that with respect to the issuance of shares university is neither a partner nor an agent of trust trust would also never be or become liable for any cost expense or payment incurred or due by university or for which university is liable or responsible relating to the endowment or the underlying endowment assets and university would indemnify and hold trust harmless from and against any liability arising out of any_action or inaction by university with respect to the endowment fund or the underlying assets as to the issue of fees and cost the university states that it will not charge any fee for management of the trust assets although it may recover its actual costs of management of the endowment fund as a charge against total investment return in addition it may recover the actual costs of administration of the trust as a charge against the trust you have requested the following ruling the issuance of endowment fund shares by university to trust the making or receipt of payments with respect to the shares and the holding or redemption of shares will not generate unrelated_business_taxable_income to university or trust law sec_501 of the code in part provides for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable educational scientific and certain other purposes sec_511 of the code in part imposes a tax on the unrelated_business_taxable_income of organizations described in sec_501 sec_512 of the code defines the term unrelated_business_taxable_income as the gross_income derived by any organization from any unrelated_trade_or_business regularly carried on by it less the allowable deductions which are directly connected with the carrying on of such trade_or_business both computed with the modifications provided in sec_512 sec_512 of the code excludes from the definition of unrelated_business_taxable_income all dividends interest payments_with_respect_to_securities_loans as defined in subsection a amounts received or accrued as consideration for entering into agreements to make loans and annuities and all deductions directly connected with such income it also excludes all royalties including overriding royalties whether measured by production or by gross or taxable_income_from_the_property and all deductions directly connected with such income it also excludes certain rents sec_513 of the code defines the term unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of the organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its exempt_purpose or function sec_513 of the code provides that trade_or_business includes any activity which is carried on for the production_of_income from the sale_of_goods or the performance of services an activity does not lose its identity as a trade_or_business merely because it is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which may or may not be related to the exempt purposes of the organization sec_664 of the code defines a charitable_remainder_unitrust as a_trust a from which a fixed percentage which is not less than percent nor more than percent of the net fair_market_value of its assets valued annually is to be paid not less often than annually to one or more persons at least one of which is not an organization described in sec_170 and in the case of individuals only to an individual who is living at the time of the creation of the trust for a term of years not in excess of years or for the life or lives of such individual or individuals b from which no amount other than the payments described in subparagraph a and other than qualified gratuitous transfers described in subparagraph c may be paid to or for_the_use_of any person other than an organization described in sec_170 c following the termination of the payments described in subparagraph a the remainder_interest in the trust is to be transferred to or for_the_use_of an organization described in sec_170 or is to be retained by the trust for such a use or to the extent the remainder_interest is in qualified_employer_securities as defined in subsection g all or part of such securities are to be -3 transferred to an employee_stock_ownership_plan as defined in sec_4975 in a qualified_gratuitous_transfer as defined by subsection g and d with respect to each contribution of property to the trust the value determined under sec_7520 of such remainder_interest in such property is at least percent of the net fair_market_value of such property as of the date such property is contributed to the trust sec_1_512_b_-1 of the income_tax regulations regulations defines certain investment_income to include dividends interest payments_with_respect_to_securities_loans as defined in sec_512 annuities income from notional_principal_contracts as defined in sec_26 cfr or regulations issued under sec_446 other substantially_similar income from ordinary and routine investments to the extent determined by the commissioner and all deductions directly connected with any of the foregoing items of income shall be excluded in computing unrelated_business_taxable_income sec_1_513-1 of the regulations provides that gross_income of an exempt_organization subject_to the tax imposed by sec_511 of the code is includible in the computation of unrelated_business_taxable_income if it is income from a trade_or_business such trade_or_business is regularly carried on by the organization and the conduct of - such trade_or_business is not substantially related other than through the production of funds to the organization's performance of its exempt functions sec_1_513-1 of the regulations provides that the primary objective of adoption of the unrelated_business_income_tax was to eliminate a source of unfair competition by placing the unrelated business activities of certain exempt_organizations upon the same tax basis as the nonexempt business endeavors with which they compete in general any activity of a sec_511 organization which is carried on for the production_of_income and which otherwise possesses the characteristics required to constitute trade_or_business within the meaning of sec_162 - and which in addition is not substantially related to the performance of exempt functions - presents sufficient likelihood of unfair competition to be within the policy of the tax accordingly for purposes of sec_513 the term trade_or_business has the same meaning it has in sec_162 and generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services thus the term trade_or_business in sec_513 is not limited to integrated aggregates of assets activities and good will which comprise businesses for the purposes of certain other provisions of the internal_revenue_code activities of producing or distributing goods or performing services from which a particular amount of gross_income is derived do not lose their identity as a trade_or_business merely because they are carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which may or may not be related to the exempt purposes of the organization thus for example the regular sale of pharmaceutical supplies to the general_public by a hospital pharmacy does not lose its identity as a trade_or_business merely because the pharmacy also furnishes supplies to the hospital and patients of the hospital in accordance with its exempt purposes or in compliance with the terms of sec_513 similarly activities of soliciting selling and publishing commercial advertising do not lose their identity as a trade_or_business even though the advertising is published in an exempt_organization periodical which contains editorial matter related to the exempt purposes of the organization sec_1_513-1 of the regulations provides that in determining whether a trade_or_business from which a particular amount of gross_income derives is regularly carried on within the meaning of sec_512 of the code regard must be had to the frequency and continuity with which the activities productive of the income are conducted and the manner in which they are pursued sec_1_513-1 of the regulations provides that in general gross_income derives from an unrelated_trade_or_business within the meaning of sec_513 of the code if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted the presence of this requirement necessitates an examination of the relationship between the business activities which generate the particular income in question - the activities that is of producing and distributing the goods or performing the services involved - and the accomplishment of the organization’s exempt purposes sec_1_513-1 of the regulations provides that a trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes other than through the production_of_income and is substantially related for purposes of sec_513 of the code only if the causal relationship is a substantial one thus for the conduct_of_a_trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes where the production or distribution of the goods or the performance of the services does not contribute importantly to the accomplishment of the exempt purposes of an organization the income from the sale of the goods or the performance of the services does not derive from the conduct of related trade_or_business whether activities productive of gross_income contribute importantly to the accomplishment of any purpose for which an organization is granted exemption depends in each case upon the facts and circumstances revrul_69_528 1969_2_cb_127 describes an organization that was formed to provide investment services on a fee basis exclusively to organizations exempt under sec_501 of the code the organization received funds from participating exempt_organizations and invested the proceeds in stocks reinvested the income and realized appreciation and upon request liquidated participant's interests and distributed the proceeds to the participant the service held that providing investment services on a regular basis for a fee is a trade_or_business ordinarily carried on for profit the service further held that the activity would constitute an unrelated_trade_or_business even if the services were regularly provided by one tax-exempt_organization for other tax-exempt organizations thus the service concluded that the organization was not tax exempt under sec_501 because it was regularly carrying on a business of providing investment services that would be an unrelated_trade_or_business if carried on by any of the tax-exempt organizations on whose behalf it operated analysis the issue is whether university and trust will each incur unrelated_business_taxable_income upon the issuance of university’s endowment fund shares to trust upon the making or receipt of payments with respect to the shares and upon the holding or redemption of the shares sec_511 of the code imposes a tax on the income earned by an organization described in sec_501 if the income results from the operation of the organization’s unrelated_trade_or_business an organization described in sec_501 that provides services will have unrelated_trade_or_business taxable_income if three conditions are satisfied the trade_or_business generates income the trade_or_business is regularly carried on and the trade_or_business is unrelated to the organization’s exempt_purpose or function see sec_512 sec_1_513-1 of the regulations the term trade_or_business has the same meaning for purposes of sec_513 as it does for sec_162 and generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services sec_1_513-1 the proposed contractual relationship between university and trust is not a trade_or_business that will generate income for university and therefore it does not meet the first condition for a finding of unrelated_business_income university represents that it will not earn any income from the proposed contractual relationship with trust rather university will only be recovering its actual costs of managing its endowment fund and its actual costs of administrating trust furthermore the relationship between university and trust is not of a commercial nature such as that of a trade_or_business university represents that it is both the trustee and remainder beneficiary of trust’s assets as such university will be engaging in investment activity of trust assets partially on its own behalf university represents that trust neither has any ownership_interest in the underlying assets of the endowment fund nor does it have a right to control university’s decisions as to the endowment fund and that trust will not be responsible for any liability relating to the endowment although trust’s donors who are the present income beneficiaries for life may also benefit from the diversification and increased rate of return by commingling trust’s assets with those of university’s endowment fund the unique relationship between university and trust distinguishes it from a trade_or_business this relationship is also distinguishable from revrul_69_258 in which the service held that providing investment services on a regular basis for a fee is a trade_or_business ordinarily carried on for profit and that the activity would constitute an unrelated_trade_or_business even if the services were regularly provided by one tax-exempt_organization for the benefit of other tax- exempt_organizations because university is not charging any fees for investing in its endowment fund and because university is investing funds on its own behalf as sole remainder beneficiary and as trustee revrul_69_258 is not applicable therefore because the services university provides to trust are not a trade_or_business that will generate income university does not meet the first condition listed above for a finding of unrelated_business_income _ as for the issue of whether trust will incur unrelated_business_taxable_income upon the proposed transaction with university the answer is dependent in part on whether the income earned by trust is passive_income and subject_to the unrelated_business_taxable_income exception under sec_512 of the code as stated above sec_511 of the code imposes a tax on an organization’s unrelated_trade_or_business income if three conditions are met the first of which is that the organization engages in a trade_or_business that generates income see sec_1_513-1 of the regulations the term trade_or_business has the same meaning for purposes of sec_513 as it does for sec_162 and generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services sec_1_513-1 however under sec_512 of the code and b -1 of the regulations investment_income is excluded in computing unrelated_business_taxable_income if the income results from d ividends interest payments_with_respect_to_securities_loans as defined in sec_512 annuities income from notional_principal_contracts as defined in sec_26 cfr or regulations issued under sec_446 other substantially_similar income from ordinary and routine investments to the extent determined by the commissioner here the income that trust is expected to receive from commingling its assets with those of the university’s endowment fund falls within the exception for certain investment_income under sec_512 of the code and b -1 of the regulations university represents that much of the income earned by the endowment fund consists of passive dividends interest rents and long- and short-term_capital_gains although university represents that some income is debt financed or otherwise is treated as unrelated_business_taxable_income the tax owed on such unrelated_business_taxable_income will be paid_by university’s endowment fund because trust is only a passive investor and only has a contractual right against university and not any interest in the underlying investment_assets of the endowment fund the unrelated_business_taxable_income generated from any debt-financed_property is not attributable to trust specifically the contractual arrangement between university and trust provides that trust will only receive an income payout based on the number of shares owned in the endowment fund and the annual endowment fund spending rate which payout is characterized as ordinary_income to trust regardless of whether the underlying income to the endowment fund is characterized as capital_gain or a return_of_capital the redemption of shares will be treated as either long- or short-term_capital_gain or loss depending on the holding_period of the units under the terms of the contract trust would neither have any ownership_interest in the underlying assets of the endowment fund nor any contract rights with respect to other trusts trust would have no power or right of any kind to control direct supervise recommend or review university’s business activities operations or decisions with respect to the endowment fund except the right to review the payout computation based upon the above trust is purely a passive investor in university’s endowment fund with the income that trust earns from the endowment fund being substantially_similar to income from ordinary and routine investments therefore trust will not incur unrelated_business_taxable_income upon investing in university’s endowment fund conclusion accordingly based on the information submitted we rule that the issuance of endowment fund shares by university to trust the making or receipt of payments with respect to the shares and the holding or redemption of shares will not generate unrelated_business_taxable_income to university or trust except as we have ruled above we express no opinion as to the tax consequences of the transaction under the cited provisions of the code or under any other provisions of the code this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolved questions concerning your federal_income_tax status this ruling should be kept in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative sincerely robert c harper jr manager exempt_organizations technical group enclosure notice


t c memo united_states tax_court ronald and dorthea joling petitioners v commissioner of internal revenue respondent docket no filed date ronald and dorthea joling pro sese wesley f mcnamara for respondent memorandum opinion gerber judge this case is before us on petitioners’ motion for summary_judgment respondent determined deficiencies in and additions to petitioners’ federal_income_tax for the and taxable years as follows -- - petitioner ronald joling additions to tax_year deficiency sec_6651 a sec_6654 dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure big_number dollar_figure dollar_figure petitioner dorthea joling additions to tax_year deficiency sec_6651 a sec_6654 dollar_figure dollar_figure dollar_figure big_number dollar_figure dollar_figure big_number dollar_figure dollar_figure ' respondent also determined that each petitioner is liable for each taxable_year for an addition_to_tax under sec_6651 in an amount to be computed unless otherwise indicated all section references are to the internal_revenue_code in effect for the periods under consideration petitioners did not file returns contending that their sources of income were not taxable after respondent determined tax deficiencies petitioners brought forward documentation in an attempt to show that they are entitled to deductions if it is decided that their income is from a source that is taxable petitioners have moved for partial summary_judgment on the legal question of whether income from several sources including their trucking business motel business real_estate sale and bank interest is the type of income that is taxable under the internal_revenue_code background petitioners resided at coguille oregon at the time their petition was filed in this case petitioners filed form sec_1040 u s individual_income_tax_return for years prior to for and subsequent years including the years in issue petitioners filed form sec_1040nr u s nonresident_alien income_tax return generally reflecting that they were not subject_to income_tax for the years and petitioner ronald joling hauled goods by truck in return for compensation during the years and petitioners owned the myrtle lane motel from which they received income from rental proceeds during the years and petitioners received income from payments received for the sale of real_property for each petitioner received income from a ' in their argument petitioners reference sec_1 d income_tax regs concerning the definition of substantial_authority for purposes of the accuracy-related_penalty of sec_6662 no accuracy-related_penalty however is in issue here respondent determined income_tax deficiencies and additions for delinguency late-filing and failure to pay estimated_tax in that regard petitioners have admitted that they did not report income and or file form sec_1040 u s individual_income_tax_return for the years in issue accordingly we assume that petitioners’ reference to substantial_authority is some form of guideline or standard by which they personally measure their acceptance of their legal conclusion that the income_tax is in reality an excise_tax a subject that is discussed infra - - distribution due to the liquidation of individual_retirement_accounts and or pension_plan during the years and petitioners received interest_income from bank account s discussion petitioners’ legal premise is that the income_tax is actually an excise_tax and that they did not engage in any excise taxable activities during the years in issue ’ petitioners have gone to great lengths to support their premise by citing cases statutes and related legal materials after thorough review we hold that petitioners’ legal premise is in error and that petitioners have misconstrued the cited legal materials we briefly review petitioners’ arguments petitioners present their legal argument in the classic syllogistic form ie the income_tax is an indirect_tax in the nature of an excise_tax petitioners engaged in no activity that is subject_to excise_tax therefore petitioners are not subject_to tax petitioners’ initial premise however is fallacious in treating the income_tax as synonymous with or the same as an excise_tax petitioners’ reasoning is specious and circuitous in other respects petitioners’ initial premise derives from early supreme court cases where the constitutionality of an income_tax was being petitioners specifically concede that the federal_income_tax laws are valid and constitutional tested the early cases considered the 16th amendment which authorized congress to impose a tax on income without apportionment among the states the supreme court referred to the income_tax as an indirect_tax in the class of excises duties and imposts 240_us_1 for example petitioners cite the following cases 286_f_409 d md affd 265_us_47 brushaber v union pac r r supra 240_us_103 89_f2d_775 4th cir from those cases petitioners postulate that the income_tax is an excise_tax and that petitioners can show that their activities receipts are not subject_to the imposition of the u s excise_tax petitioners have presented several other unfounded arguments legal and procedural and peppered the court with a large volume of material in an attempt to be persuasive in sum and substance petitioners have persuaded this court only that they are highly motivated in their attempt to avoid being subjected to a federal tax on their income wherefore petitioners’ motion for summary_judgment will be denied an appropriate order will be issued


t c memo united_states tax_court bruce a and kathy j krist petitioners v commissioner of internal revenue respondent docket no filed date bruce a krist pro_se joanne b minsky for respondent memorandum findings_of_fact and opinion dawson judge this case was assigned to special_trial_judge pajak pursuant to sec_7443a internal_revenue_code in effect when the petition was filed and rule sec_180 sec_181 and sec_183 tax_court rules_of_practice and procedure the court agrees with and adopts the opinion of the special_trial_judge which is set forth below opinion of the special_trial_judge pajak special_trial_judge respondent determined a deficiency of dollar_figure in petitioners' federal_income_tax for and a sec_6651 addition_to_tax of dollar_figure unless otherwise indicated section references are to the internal_revenue_code in effect for the year in issue and rule references are to the tax_court rules_of_practice and procedure respondent in an answer to the amended petition filed herein claims an increased deficiency of dollar_figure and an increased sec_6651 addition_to_tax of dollar_figure for the parties have stipulated that petitioners incurred at least dollar_figure in advertising and telephone expenses deductible under sec_162 which relate to the locksmith business of bruce krist petitioner we must decide whether petitioners are entitled to deduct the remaining disallowed schedule c expenses of dollar_figure dollar_figure total disallowed minus dollar_figure for the locksmith business whether petitioners had dollar_figure of unreported income for in the form of unexplained bank_deposits whether petitioners had dollar_figure of additional unreported income in the form of unexplained bank_deposits an issue raised for the first time on brief whether petitioners are entitled to a casualty_loss of dollar_figure for the seizure and destruction of the guns held for their alleged firearms business and whether petitioners are liable for the sec_6651 addition_to_tax for failure_to_file a timely income_tax return findings_of_fact some of the facts have been stipulated and are so found petitioners resided in poinciana florida at the time they filed their petition in petitioner and kathy krist mrs krist resided in hazel crest illinois they filed their federal_income_tax return electronically on date on date they filed an amended_return for the notice_of_deficiency was timely mailed to petitioners on date during petitioner operated bk locksmith a locksmith business his brother brett krist brett worked for the locksmith business in petitioner also had a federal firearms license in the name of illinois firearms service owned a rental property operated a limousine business and was in the process of rehabilitating a house for sale petitioner was engaged part-time in these activities however during he spent more time rehabilitating the house than he spent working in his locksmith business mrs krist was employed full-time as a receptionist at baker mckenzie a law firm and part-time at archibald candy corp where she worked for fannie may candies during the easter holiday petitioners had four bank accounts one was mrs krist's personal account one was an account for the locksmith business and firearms service locksmith account one was for the rehabilitation of the house and the limousine business rehabilitation account and one was for the rental_activity rental account receipts from the locksmith business and the firearms service were deposited in the locksmith account and receipts from the rental_activity were deposited in the rental account petitioners took out a bigger loan than was required for the purchase of the house because they needed money to restore it they put the borrowed money in an account that belonged to petitioner's mother so that it would earn interest his mother would apportion their borrowed money as they needed it in they received dollar_figure of their borrowed money from the mother’s account and deposited it in the rehabilitation account along with deposits from the limousine business as part of the locksmith business petitioner made keys for houses businesses and cars and also made keys for repossessed automobiles for one of his clients much of petitioner's work was done in the evenings after regular business hours bk locksmith was located in petitioner's garage apparently not detached at his house in hazel crest illinois because one of his clients was the management company of an apartment building located near his house petitioner had customers who would come to his house the management would bring the locks over to be rekeyed whenever a tenant moved out if someone lost a key petitioner would make it at his house two other car dealer clients would bring automobiles by his house for him to rekey much of petitioner’s work was done onsite such as at a client's house where a lockout occurred or at a car dealership petitioner kept some machines and equipment in his garage petitioner kept records of his daily sales and of his supplies in a checkbook and in a business journal petitioner did not place his business journal in evidence petitioner provided his customers with invoices but he used the type that were duplicates and to get more for his money he used both parts for different jobs essentially making invoices out of what should have been therefore he kept no copy of the invoices petitioner kept some inventory on hand but usually bought it when needed petitioner's brother brett did work for the locksmith business in however petitioner did not file a form_1099 reporting income he paid to his brother he claimed he did not know what to file and he figured it did not matter because his brother was family petitioner claimed he kept a ledger of how much brett was paid but the ledger was not produced respondent calculated that in the check register about dollar_figure was recorded as paid to brett petitioner stated that the complete records were in a spiral notebook however he destroyed the pages in the notebook on a weekly basis in the notice_of_deficiency respondent disallowed the following expenses claimed by petitioners on schedule c of their federal_income_tax return that pertained to the locksmith business advertising s big_number commissions big_number telephone big_number home_office supplies big_number car truck big_number opinion sec_162 allows the deduction of ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business whether an expenditure is ordinary and necessary is a question of fact 320_us_467 an ordinary_and_necessary_expense is one which is appropriate and helpful to the taxpayer's business and which results from an activity that is a common and accepted practice in the business 77_tc_1124 affd without published opinion 9th cir we find petitioner's testimony to be truthful it is clear that petitioner operated a locksmith business in in the operation of such a business he would have incurred expenses for advertising telephone supplies car and truck and commissions deductions are strictly a matter of legislative grace 503_us_79 292_us_435 taxpayers must substantiate claimed deductions 65_tc_87 affd per curiam 540_f2d_821 5th cir moreover taxpayers must keep sufficient records to establish the amounts of the deductions 43_tc_824 sec_1_6001-1 income_tax regs generally except as otherwise provided by sec_274 when evidence shows that a taxpayer incurred a deductible expense but the exact amount cannot be determined the court may approximate the amount bearing heavily if it chooses against the taxpayer whose inexactitude is of his own making 39_f2d_540 2d cir the court however must have some basis upon which an estimate can be made 85_tc_731 claimed expenses for advertising telephone supplies and commissions petitioner's check register for the most part showed his expenses in a consistent manner thus we are able to estimate some of the claimed expenses in addition to the allowance of the dollar_figure for the advertising and telephone expenses agreed to by the parties we find that petitioners are entitled to deduct additional expenses of dollar_figure for advertising and telephone we also find that they are entitled to deduct dollar_figure as expenses for supplies the amount of dollar_figure claimed as commissions paid to brett for his work in the locksmith business is allowed only to the extent of dollar_figure the amount recorded in the check register no other evidence was provided by petitioners claimed car and truck expenses sec_274 imposes stringent substantiation requirements for the deduction of travel_expenses and expenses of certain listed_property defined under sec_280f such as an automobile for such expenses taxpayers must substantiate by adequate_records certain items in order to claim deductions such as the amount and place of each separate expenditure the property’s business and total usage the date of the expenditure or use and the business_purpose for an expenditure or use sec_274 sec_1_274-5t temporary income_tax regs fed reg date to substantiate a deduction by means of adequate_records a taxpayer must maintain an account book diary log statement of expense trip sheets and or other documentary_evidence which in combination are sufficient to establish each element of expenditure or use sec_1 5t c temporary income_tax regs fed reg date if an expense item comes within the requirements of sec_274 this court cannot rely on cohan v commissioner supra to estimate the taxpayer’s expenses with respect to that item 50_tc_823 affd per curiam 412_f2d_201 2d cir the record does not contain any documentary_evidence to support petitioner’s claimed car and truck expenses petitioner failed to maintain adequate_records such as a diary log book or trip sheets to show the distances he purportedly traveled in furtherance of his locksmith business therefore in view of the strict substantiation rules of sec_274 we hold that petitioners are not entitled to deduct car and truck expenses for claimed home_office expenses sec_280a limits the situations in which a deduction of expenses related to a home_office are allowable there is an exception if a portion of the dwelling_unit is used exclusively on a regular basis as the principal_place_of_business for any trade_or_business of the taxpayer or as a place of business which is used by patients clients or customers in meeting or dealing with the taxpayer in the normal course of his trade_or_business sec_280a a b incidental or occasional meetings with customers are not enough to qualify the home_office for this exception crawford v commissioner tcmemo_1993_192 in 506_us_168 the supreme court held that when a taxpayer carries on business in more than one location the principal place of a taxpayer’s business is the most important or significant place of business this turns on -- - two conditions the relative importance of the activities performed at each business location and the time spent at each place here we find that most of petitioner’s locksmith work was done on the premises of customers or third parties the alleged home_office in his garage was not petitioner’s principal_place_of_business although petitioner stored certain equipment machines and some inventory of the locksmith business in his garage he failed to show that the office was used exclusively for business purposes we are aware of the exception provided in sec_280a c that if an office is a separate structure not attached to the dwelling_unit and is used in connection with the taxpayer’s trade_or_business a home_office deduction may be justified however the statute requires that the separate structure be used exclusively for business purposes in order to gualify for the deduction the senate committee report that accompanied the legislation enacting sec_280a c states with respect to a separate structure not attached to the dwelling_unit if the taxpayer uses such structure e g a detached garage for both trade_or_business and personal purposes the exclusive use test is not met s rept pincite 1976_3_cb_57 here petitioner provided limited testimony regarding his use of the garage office while he introduced into evidence a hand drawn sketch of the alleged office it is not possible to determine from the drawing whether the garage unit is a detached garage but even if the garage was detached the drawing shows that the garage was used for both personal and business purposes accordingly on the basis of the facts in the record we sustain respondent’s disallowance of the claimed home_office deduction unreported income using bank_deposits analysis respondent alleged in the answer that petitioners had dollar_figure of bank_deposits that were unaccounted for on brief respondent requested that we address whether an additional dollar_figure of unexplained bank_deposits the amount of mrs krist's wages should be included in petitioners' income because of petitioner's testimony that his wife maintained her own bank account it is well settled that this court will not consider issues raised for the first time on brief when to do so prevents the opposing party from presenting evidence that that party might have introduced if the issue had been timely raised 75_tc_374 59_tc_551 29_tc_754 therefore we shall not consider whether an additional dollar_figure of unexplained bank_deposits should be included in petitioners' income because although petitioners knew they had to account for dollar_figure they were not aware either before or during trial that respondent was asking them to account for an additional dollar_figure as to the dollar_figure of unexplained bank_deposits raised by the answer respondent bears the burden_of_proof rule a sec_61 provides that gross_income means all income from whatever source derived sec_6001 imposes a duty on all persons liable for any_tax to maintain records it is well established that where a taxpayer fails to maintain adequate_records the commissioner may prove the existence and amount of unreported income by any method that will clearly reflect the taxpayer's income sec_446 54_tc_1121 sindik v commissioner tcmemo_1996_47 in this case petitioners' return did not clearly reflect the activity in their bank accounts respondent used a bank deposit analysis to determine the amount of income under the bank deposit analysis the total of all the deposits is treated as petitioners’ income sindik v commissioner supra adjustments are then made to eliminate deposits that reflect nonincome items such as gifts loans transfers between bank accounts and redeposits id respondent determined that dollar_figure was deposited in petitioner's three bank accounts respondent alleged that petitioners accounted for dollar_figure of the income on their return the dollar_figure consists of mrs krist's wages the locksmith income the rental income and the limousine income thus respondent contends a rounded amount of dollar_figure remains to be accounted for as previously stated petitioners had borrowed dollar_figure that was deposited in an account held for them by petitioner’s mother that amount is not income to petitioners on this record we find there were no other nonincome items to reduce the remaining dollar_figure conseguently we find that petitioners had unreported additional income of dollar_figure under the bank_deposits method we agree with respondent that this additional dollar_figure is subject_to self-employment_tax under sec_1401 and petitioners are entitled to a corresponding 50-percent deduction under sec_164 claimed casualty_loss respondent contends that petitioners are not entitled to a casualty_loss of dollar_figure for the seizure and destruction of the guns held for their alleged firearms business petitioners claimed this loss on their amended_return filed on date no evidence was presented regarding this issue accordingly we deem petitioners to have abandoned it 84_tc_716 german v commissioner tcmemo_1993_59 affd without published opinion 46_f3d_1141 9th cir we hold that petitioners are not entitled to a casualty_loss addition_to_tax for failure_to_file timely returns sec_6651 imposes an addition_to_tax for failure_to_file a federal_income_tax return by its due_date determined with regard to any extension of time for filing previously granted the addition equal sec_5 percent for each month that the return is late not to exceed percent sec_6651 additions to tax under sec_6651 are imposed unless the taxpayer establishes that the failure was due to reasonable_cause and not willful neglect petitioners must prove both reasonable_cause and a lack of willful neglect 92_tc_899 reasonable_cause requires the taxpayers to demonstrate that they exercised ordinary business care and prudence 469_us_241 willful neglect is defined as a conscious intentional failure or reckless indifference united_states v boyle id pincite petitioners filed their federal_income_tax return electronically on date they did not testify as to why they did not file their return on time they failed to prove that they had reasonable_cause for their late filing and that there was a lack of willful neglect therefore we hold that petitioners are liable for the sec_6651 addition_to_tax to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number -------------------------------------------------- ------------------------------- ------------------------ -------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-107951-11 date date legend x ------------------------------------------------------ ---------------------------------------------------------- country d1 ----------- ---------------------- d2 --------------------------------------------------------------------------------------------------------------------- --------------------- --------------------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a partnership for federal tax purposes facts according to the information submitted x was organized under the laws of country on d1 x failed to timely file form_8832 entity classification election to be treated as a partnership for federal tax purposes effective d1 on d2 x became a single member entity law and analysis plr-107951-11 sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with at least two members can elect to be classified as either an association or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with two or more members having limited_liability may elect to be treated as a partnership pursuant to the rules of sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed sec_301_7701-3 provides that an eligible_entity classified as a partnership becomes disregarded as an entity separate from its owner when the entity’s membership is reduced to one member under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts 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 days from the date of this letter to make an election to be treated as a partnership for federal tax purposes effective d1 by operation of sec_301_7701-3 x may become a disregarded_entity for federal tax purposes plr-107951-11 effective d2 x should make the election by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form this ruling is contingent on the owners of x filing within days of this letter all required returns for all open years consistent with the requested relief these returns may include but are not limited to the following forms i forms information_return of u s persons with respect to certain foreign_corporations ii forms return of u s persons with respect to certain foreign_partnerships and iii forms information_return of u s persons with respect to disregarded entities such that these forms reflect the consequences of the relief granted in this letter a copy of this letter should be attached to any such returns except as specifically set forth above we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code 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 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely barbara j campbell barbara j campbell senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes


t c memo united_states tax_court michael hazel petitioner v commissioner of internal revenue respondent docket no filed date woodford g rowland for petitioner catherine g chang for respondent memorandum findings_of_fact and opinion haines judge respondent determined a deficiency in petitioner’ sec_2001 federal_income_tax of dollar_figure and additions to tax under sec_6651 and and a of dollar_figure dollar_figure and dollar_figure respectively 1unless otherwise indicated section references are to the continued after concessions the issues for decision are whether the period of limitations for assessment of the deficiency and addition_to_tax has expired we hold that it has not and whether petitioner is liable for an addition_to_tax under sec_6651 for failure to timely file hi sec_2001 return we hold that he is findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts the exhibits attached thereto and the stipulation of settled issues are incorporated herein by this reference at the time he filed his petition petitioner resided in california petitioner’s alcohol and drug abuse at the time of trial petitioner wa sec_55 years old he has a long history of alcoholism and drug addiction during the sec_1 continued internal_revenue_code as amended unless otherwise indicated rule references are to the tax_court rules_of_practice and procedure amounts are rounded to the nearest dollar 2the parties have stipulated that petitioner’s deficiency is dollar_figure respondent concedes that petitioner is not liable for additions to tax under sec_6651 and sec_6654 3in the notice_of_deficiency respondent reduced the amount of the sec_6651 addition by the amount of the sec_6651 addition for the months when both additions applied pursuant to sec_6651 as a result of the concession of the sec_6651 addition_to_tax respondent asserted in his answer an increased sec_6651 addition_to_tax of dollar_figure petitioner made numerous attempts at sobriety meeting with mixed and ultimately disappointing results during one period of sobriety in he obtained his contractor’s license in petitioner began a 45-day period of heavy drinking and drug abuse that culminated in his entering a rehabilitation hospital for the next years he was able to stay relatively sober at some point not disclosed in the record petitioner opened his own construction business hazel construction inc by the late 1990s hazel construction had grown to include approximately employees in or petitioner again began to drink a little bit by or he was drinking heavily and using cocaine petitioner stopped drinking and using drugs on date after being arrested and charged with assault on a police officer and being drunk in public petitioner spent between and hours in jail as a result of the charges petitioner’ sec_2001 return during petitioner received dollar_figure of income from his construction company petitioner and his wife timely requested and were granted an extension of time to file their return the return was due on or before date respondent has no record of petitioner’s submitting a return before date on that date petitioner submitted a joint tax_return to respondent reporting total_tax of dollar_figure a withholding credit of dollar_figure and tax due of dollar_figure the return was signed by petitioner and his wife on date and by his return preparer on date petitioner remitted the tax due with his return the return was submitted and the tax was paid during the pendency of this case and more than a year after the notice_of_deficiency was mailed the payment of tax after the mailing of the notice_of_deficiency does not deprive the court of jurisdiction over the deficiency_suit sec_6213 discussion i whether the period of limitations has expired petitioner argues that respondent is barred from assessing hi sec_2001 tax because the 3-year period of limitations under sec_6501 expired before the mailing of the deficiency_notice accordingly he requests a refund of the tax paid in date sec_6501 provides except as otherwise provided in this section the amount of any_tax imposed by this title shall be assessed within years after the return was filed whether or not such return was filed on or after the date prescribed sec_6501 provides that in the case of a failure_to_file a return the tax may be assessed at any time a taxpayer who claims that the limitations_period on assessment has run is required to prove the date of the filing of a return 78_tc_412 see rule a petitioner contends he timely filed hi sec_2001 return at some point on or before date petitioner testified that his accountant badgered him to file the return he testified that he brought the return home for signature brought it back to his office put the postage on it and mailed it petitioner also testified that he was incapacitated during the period he filed his return by alcoholism addiction withdrawal and type diabetes despite this alleged incapacitation petitioner contends that he filed his return during a moment of lucidity petitioner offered no evidence to corroborate his testimony that he timely filed his return or that he was incapacitated he did not present a certified mail receipt or copy of the return allegedly filed in he did not present the testimony of his accountant who prepared the return or the testimony of his wife who would have signed the purported joint_return similarly he did not present the testimony of his wife family or employees or any documentary_evidence such as medical records which would indicate petitioner was incapacitated the court finds petitioner’s testimony that he suffered from a long history of alcohol and drug abuse credible however with respect to the filing of the return and his incapacity during the relevant period petitioner’s testimony was contradictory general conclusory and self-serving under the circumstances we are not required to accept his testimony and we do not see 87_tc_74 christensen v commissioner tcmemo_2006_62 accordingly we will not rely on his testimony to establish that he timely filed his return as evidence that petitioner failed to file hi sec_2001 return respondent introduced form_4340 certificate of assessments payments and other specified matters which bears no entry indicating a timely return was filed for this court has found that a form_4340 which bears no entry of a filed return is evidence that a return was not filed see eg wheeler v commissioner tcmemo_2006_109 mostafa v commissioner tcmemo_2006_106 silver v commissioner tcmemo_2005_281 maloney v commissioner tcmemo_2005_27 mehner v commissioner tcmemo_2003_203 4petitioner argues that the court erred in admitting the form_4340 into evidence petitioner contends that the form_4340 does not satisfy fed r evid the public records exception to the hearsay rule the form_4340 is a record of a public agency setting forth matters observed pursuant to a duty imposed by law and thus is not hearsay furthermore the form_4340 is self-certifying under fed r evid because it was submitted with a certificate_of_official_record signed under seal by an authorized employee of the internal_revenue_service petitioner also argues that the form_4340 is inadmissible under fed r evid because it lacks trustworthiness fed r evid provides that relevant evidence may be excluded if its probative value is outweighed by confusion of the issues or waste of time in dealing with collateral issues petitioner directs the court to a number of alleged errors on the form_4340 however his claim reflects a lack of understanding of the type of information a form_4340 provides and how that information is presented the form_4340 is relevant to the issue of whether petitioner timely filed hi sec_2001 return and was properly admitted into evidence petitioner argues that a form_4340 does not show whether a return has been filed petitioner directs the court to the title of the form and to the certifying statement which states i certify that the foregoing transcript of the taxpayer named above in respect to the taxes specified is a true and complete transcript for the period stated and all assessments abatements credits refunds and advance or unidentified payments and the assessed balance relating thereto as disclosed by the records of this office as of the account status date are shown therein i further certify that the other specified matters set forth in this transcript appear in the official records of the internal_revenue_service petitioner argues that the document is not evidence of a lack of return filing because the certification does not state that all records as to return filing are shown a form_4340 is a literal transcript containing tax data from an internal_revenue_service irs master_file associated with a particular taxpayer see bowman v commissioner tcmemo_2007_114 internal_revenue_manual irm pt date an irs master_file is opened by the filing of a tax_return or when a taxpayer has not filed a return by the commissioner’s creating a substitute for return sfr see irm pt date therefore a form_4340 contains return filing information such as whether a return has been filed or an sfr has been prepared such information is one of the other matters described in the title of the form_4340 the first entry on petitioner’ sec_2001 form_4340 is substitute for return respondent conceded during preparation for trial that the sfr was procedurally deficient because it was not signed by respondent’s agent nevertheless the irs master_file and thus the form_4340 were opened by the preparation of the sfr in and there is no entry indicating petitioner filed a timely return on the preponderance_of_the_evidence the court finds that petitioner did not file a timely return for ii whether petitioner had reasonable_cause for his failure_to_file sec_6651 imposes an addition_to_tax for failure_to_file a return on the date prescribed determined with regard to any extension of time for filing unless the taxpayer can establish that such failure is due to reasonable_cause and not because of willful neglect the court has found that petitioner did not file a timely return petitioner bears the burden of proving that his failure to timely file is due to reasonable_cause see sec_7491 rule a 116_tc_438 a taxpayer may have reasonable_cause for failure to timely file a return where the taxpayer experiences an illness or incapacity that prevents the taxpayer from filing the return 469_us_241 n jordan v commissioner tcmemo_2005_266 paradiso v commissioner tcmemo_2005_187 however a taxpayer’s illness or incapacity generally does not prevent the taxpayer from filing returns where the taxpayer is able to continue his business affairs despite the illness or incapacity jordan v commissioner supra wright v commissioner tcmemo_1998_224 affd 173_f3d_848 2d cir in support of his contention that he lacked the capacity to file his return petitioner cites harbour v commissioner tcmemo_1991_532 where the court determined that the taxpayer had reasonable_cause for failure_to_file his return but not his return the taxpayer was admitted to an alcohol and drug treatment center on date and stayed until date as evidence of his incapacity the taxpayer offered hospital records and the opinion of his doctor as to his capacity during the time the return should have been filed the court found reasonable_cause for failure_to_file the return because the taxpayer was incapacitated during the time he spent in the drug and alcohol treatment center and most likely for sometime before ie the period when the return would have been timely filed with respect to the return the taxpayer presented no credible_evidence of his incapacity during the period when that return should have been filed for that reason the court found the taxpayer did not have reasonable_cause for his failure_to_file his return petitioner’s attempt to analogize his failure_to_file his return to the failure_to_file the return in harbour falls short of the mark in fact petitioner’s failure_to_file is more akin to the failure_to_file for which relief was not granted in harbour than to the failure_to_file for which relief was granted petitioner was not hospitalized during the time he should have filed his return he did not present medical records the opinion of his doctor or any evidence of his incapacity other than his own inconsistent and self-serving testimony furthermore despite any incapacity petitioner may have suffered the record indicates he was able to continue his business affairs during the period in which petitioner would have timely filed his return petitioner’s adjusted_gross_income was dollar_figure in sum petitioner has provided no credible_evidence that he was incapacitated during the time the return should have been filed during that time he was able to continue his business affairs and thus did not have reasonable_cause for the failure to timely file his return see jordan v commissioner supra wright v commissioner supra therefore he is liable for the addition_to_tax under sec_6651 we have considered all of the contentions and arguments of the parties that are not discussed herein and we find them to be without merit irrelevant and or moot to reflect the foregoing and the concessions of the parties decision will be entered under rule