tcmemo_1996_39 united_states tax_court tolbert s wilkinson and suzanne t wilkinson petitioners v commissioner of internal revenue respondent docket no filed date irwin d zucker for petitioners gerald l brantley for respondent memorandum findings_of_fact and opinion körner judge respondent determined deficiencies and penalties with respect to petitioners' federal income taxes for the years and in the amounts as follows penalty year deficiency sec_6662 dollar_figure big_number dollar_figure big_number all statutory references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure except as otherwise noted the issues for decision are whether petitioners' medical corporation and ranching activity should be considered as one activity for purposes of sec_183 whether petitioners were engaged in their ranching activity with the objective of making a profit for purposes of sec_183 and whether petitioners are liable for the accuracy-related_penalty for a substantial_understatement_of_income_tax under sec_6662 and b findings_of_fact some of the facts are stipulated and are so found the stipulations of facts and exhibits attached thereto are incorporated herein by this reference respondent objects to the admission of the third supplement to the stipulations of facts and the exhibits attached thereto alleging that petitioners did not timely submit the exhibits contained therein thereby preventing respondent from using the information contained within the documents for impeachment purposes at trial respondent had agreed to one extension of the submission deadline established by the pretrial order yet petitioners did not provide the documents by this deadline the exhibits consist of copies of bills and canceled checks at trial respondent stipulated their authenticity petitioner seeks to introduce the exhibits to show that the records were kept and that these were the records but not necessarily that these records were correct or accurate the admission of these documents for that limited purpose will not prejudice respondent and accordingly the objection is overruled petitioners resided in san antonio texas at the time the petition was filed and filed joint income_tax returns for the years in issue references to petitioner are to tolbert s wilkinson petitioner was a plastic surgeon employed by the institute for aesthetic plastic surgery the institute a corporation wholly owned by petitioner in the years in issue petitioner wife is also employed by the institute petitioner received his undergraduate degree from wake forest university graduated from duke university medical school in and has practiced in the field of surgery petitioner has no formal education in agriculture horses cattle or farming ranching-related activities petitioner has been involved with horses in different capacities since the mid-1970's petitioner became involved in polo in the early 1980's the retama polo center near san antonio attracted petitioner because it hosted numerous large social events which garnered a great deal of publicity petitioner concluded early in his career that because his services were elective there was a limited clientele who could afford them and he believed those involved in equestrian activities traditionally an activity of the wealthy would be a source of patients for him initially in some years prior to those before us petitioner kept horses at an independent ranch petitioner began looking for land to purchase to start his own ranch to avoid paying the fees to the independent ranch and to facilitate breeding petitioner intended to retire to the ranch and possibly open a small family practice or in the alternative to sell the ranch upon retirement he stated at trial that a horse ranch would allow him to occupy himself with something about which he had some know-how a statement that may have startled some of his patients on date petitioners purchased acres in bandera county texas for dollar_figure on date petitioners purchased 50-acre and 10-acre pieces of property in bandera county texas each for dollar_figure the total cost_basis in the properties considered as a whole was dollar_figure at the end of petitioners hired a mr white to live on the ranch and act as foreman petitioner initially bought and sold horses and later added the training and breeding of horses a cattle business a hay business deer and goat operations a general store and guest accommodations petitioner considered that polo ponies could sell for as much as dollar_figure but he aimed to sell them in the dollar_figure to dollar_figure range petitioner targeted new polo players as customers he sold four horses between and at an average of approximately dollar_figure per horse petitioner's primary sources of ponies were area dude ranches which would periodically bring a group of ponies to the ranch for petitioner to ride and try out petitioner would then purchase the ponies he thought had potential petitioner considered that it would then take as many as years to train them to showcase the ponies for sale he would ride them at polo matches petitioner played polo rode and trained the polo ponies in part and hosted various social gatherings at the ranch petitioner enjoyed training and riding the polo ponies and on one occasion stated that it was wonderful to get on a horse after a long day of surgery the social gatherings often received publicity petitioner considered that this type of publicity would attract clients to the medical corporation petitioner was a contributing editor of polo magazine which periodically printed articles by petitioner as well as his picture and address petitioners spent on average weekends per month at the ranch as well as some weekday evenings mr white saw to the day-to-day affairs of the ranch but deferred to petitioner for any major decisions petitioner kept some records and paid bills the records shown to the court consisted of some receipts and canceled checks handwritten logs kept since and typed summaries prepared by petitioner for each year the logs contained one or two pages for each month and listed expenditures and the method of payment--for instance a charge at a gas station or a cash payment to a veterinarian petitioner made summaries from the logs that he used to gauge operations and they were also used to prepare the tax returns at the end of the year the summaries were given to the tax_return_preparer the parties herein agreed in writing that the contents of certain stipulated documents relating to the ranch were the authentic documents that were kept but they were not stipulated to be accurate the summaries were not always accurate or complete petitioner maintained records of purchase and registration documents for many of the horses and longhorn cattle that were sold petitioner did not introduce contemporaneously made records of sales of the ponies petitioner introduced no records regarding contract labor nor did he issue forms or w-2 to such employees although such forms were maintained by the medical corporation which paid petitioners their salaries and hired a payroll company there was a small amount of gross_income from various activities at the ranch although there were few horse sales there were various other sales of cows calves rabbits goats and bulls petitioner leased bryan the buffalo in and for a total of dollar_figure finally there was some rental income from the guest cabins located on the ranch petitioners reported the following losses and income on their joint returns for the years through petitioner's gross_income from year farm expenses farm_losses farm gross_income medical corp dollar_figure dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number total big_number big_number big_number big_number the negative farm gross_income in was the result of a reported loss on the sale of a horse some of the farm expenses claimed from through are as follows mortgage repairs year depreciation interest taxes labor feed maintenance dollar_figure -- -- -- -- -- big_number dollar_figure dollar_figure dollar_figure dollar_figure -- big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number opinion a relationship between petitioners' ranching activity and their medical corporation petitioner claims that he participated in polo as a means of obtaining clients and that therefore the ranching activity and the medical corporation should be considered as one activity for purposes of determining the overall profitability of the ranch respondent contends that the two activities are separate for purposes of sec_183 petitioners argue that under 868_f2d_833 6th cir affg in part and revg in part tcmemo_1986_569 the entire economic relationship and its consequences should be examined to determine whether there is an actual profit objective in the campbell case the court held that a taxpayer could deduct losses from a partnership where the partnership's only business_purpose was to lease an airplane to a corporation controlled by the partners of the partnership despite repeated losses the court found a profit_motive by considering the increase of overall wealth of the partners through the corporation petitioners also cite 797_f2d_1049 d c cir revg and remanding tcmemo_1984_105 35_tc_231 and louismet v commissioner tcmemo_1982_294 petitioners' reliance on these cases is inappropriate in de mendoza v commissioner tcmemo_1994_314 we distinguished campbell v commissioner supra from facts very similar to those before us as the latter case did not consider whether two activities could be considered one for purposes of sec_183 but rather it considered whether a profit_motive for one activity could be derived from the income and profit_motive of a related corporation in campbell the plane leasing partnership was conducted solely to benefit another business and was wholly dependent on that business while in de mendoza the polo activity was in no way dependent on the legal activity the facts of de mendoza are very similar to those before us today the taxpayer in that case was an attorney who claimed that his polo activity was conducted to obtain clients we found that any benefit to the legal practice from the polo activity was at best incidental we make a similar holding today petitioner has failed to establish any correlation between the ranching activity and the medical corporation we think it is significant that the three parcels of land making up petitioners' farm or ranch were purchased separately by them were apparently never conveyed to the institute to augment its assets nor merged into the institute's accounts and the losses therefrom were claimed in petitioners' tax returns as a deduction without reference to the institute the only connection between petitioner's ranch activity and the medical practice of the institute was the rather vague assertion by petitioner that the publicity he derived from playing polo helped him get patients for his cosmetic_surgery such argument was not supported by any patient of petitioner or by any other witness or evidence herein to us it is at least as far fetched and unconvincing as was the alleged connection between a legal practice and polo in de mendoza v commissioner supra b the conduct of the ranch for profit we must decide whether petitioners conducted their ranching and ranching-related activities with a profit objective for the and tax years to meet his burden rule a petitioner must establish that there was an activity which was engaged in for profit within the meaning of sec_183 sec_183 limits any deductions attributable to an activity of a taxpayer not engaged in for profit except as provided in sec_183 sec_183 provides that a deduction may be taken where the taxpayer is not engaged in an activity for profit where a deduction is otherwise allowable to the extent that the gross_income from such activity exceeds the claimed deductions sec_183 defines an activity_not_engaged_in_for_profit as any with respect to which deductions would not be allowed under sec_162 or under paragraph or of sec_212 expenses_incurred in carrying_on_a_trade_or_business are allowable under sec_162 if they are ordinary and necessary to the conduct of that trade_or_business 91_tc_686 affd 893_f2d_656 4th cir sec_212 allows deductions for expenses_incurred in connection with an activity engaged in for the production_or_collection_of_income or for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income an activity will be considered as conducted for profit if the facts and circumstances indicate the taxpayer entered into the activity or continued the activity with the actual and honest objective of making a profit antonides v commissioner supra 78_tc_642 affd without opinion 702_f2d_1205 d c cir 72_tc_411 affd without published opinion 647_f2d_170 9th cir there is no requirement that a reasonable expectation of profit exist elliot v commissioner 90_tc_960 affd without published opinion 899_f2d_18 9th cir a taxpayer's mere statement of intent to make a profit is not controlling rather the objective facts must be examined and greater weight will be given to these rather than a mere statement of intent dreicer v commissioner supra pincite sec_1_183-2 and b income_tax regs petitioner bears the burden of proving that he had a profit objective rule a 81_tc_210 sec_1_183-2 income_tax regs provides nine factors to be considered in determining whether an activity is engaged in for profit they are the manner in which the taxpayer carries on the activity the expertise of the taxpayer or his advisors the time and effort expended by the taxpayer in carrying on the activity the expectation that assets used in activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer's history of income or losses with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayer and the elements of personal pleasure or recreation that may be present no single factor is controlling 86_tc_360 we will consider these factors separately in this case the manner in which the ranching activities were conducted maintaining complete and accurate books_and_records may indicate that the activity is engaged in for profit elliot v commissioner supra pincite sec_1_183-2 income_tax regs respondent contends that the records kept here were inaccurate contained omissions and did not disclose the most rudimentary information a prospective purchaser would want in purchasing horses petitioner argues that the records were adequate that from them the c p a was able to prepare petitioners' tax returns and that they were able to assess profitability and respond accordingly the records consisted of handwritten logs kept since and typed summaries for each year the logs contain one or two pages for each month and list expenditures and the method of payment--for instance a charge at a gas station or cash to a veterinarian at the end of the logs are summaries the summaries may not have always been accurate or complete but may have provided at best a rough picture of the profitability of the ranch we cannot judge how accurate or complete they were in this case they were accepted into evidence solely for showing that petitioner kept some kind of records not for the purpose of proving their contents and petitioner testified about them only in the most vague and general fashion abandonment of unprofitable methods a change in operating methods or the adoption of new techniques to improve profitability may indicate a profit objective sec_1 b income_tax regs respondent argues that petitioner did not reduce expenses while petitioner claims to have adopted methods designed to reduce expenses for instance after analyzing the summaries prepared petitioner says he realized that he should expand his operations to improve profitability petitioner added cattle exotic goat and guest ranch operations he hired mr white to live on the ranch and act as foreman and he purchased land for hay production the hay operation was designed to reduce expenses while the others were designed to increase revenue even if the expenditures petitioners sought to reduce were in fact reduced the ranch would not have become profitable two of the most significant expenses reported each year were mortgage interest and depreciation nothing short of significant revenue increases would have made the venture profitable in light of these significant expenses and though the added activities may have raised revenue slightly they also caused an increase in expenses although we believe that petitioner had a business plan to expand operations the facts indicate that such expansion did not constitute a plausible plan to increase profitability see de mendoza v commissioner tcmemo_1994_314 this factor favors respondent expertise of petitioner or his advisers preparing to enter into an activity by consulting with experts or extensive study may indicate that a taxpayer has a profit objective sec_1_183-2 income_tax regs petitioner has no formal schooling in agriculture or equestrian activities his participation in equestrian activities began during the 1970's while his participation in polo began around petitioner was very involved in the polo community and was even a contributing editor for polo magazine although we believe he was quite knowledgeable as to polo or even equestrian affairs we do not feel that he was an expert in making equestrian affairs profitable and it does not appear that he had any experience or expertise in the cattle other animals hay or guest quarters business petitioners have failed to establish that they sought expert advice to make the ranch profitable this factor favors respondent the time and effort expended by petitioner a devotion of a great deal of a taxpayer's personal time to an activity especially where there is no recreational element may indicate a profit objective and the fact that only a limited amount of time is so devoted does not necessarily give rise to a contrary indication sec_1_183-2 income_tax regs petitioners were employed full time by the medical corporation and accordingly spent only weekends and some evenings at the ranch petitioner may have not allowed polo to interfere with his surgery schedule and there was also an obvious recreational element to time spent at the ranch the fact that taxpayers devote a limited amount of time to an activity may not indicate a lack of profit objective where the taxpayers utilize the services of qualified persons to conduct the activity cornfeld v commissioner f 2d pincite de mendoza v commissioner supra sec_1_183-2 income_tax regs petitioners hired mr white who acted as a full-time ranch supervisor his duties were broad but it was clear to us that he managed the day-to-day activities of the ranch this factor favors petitioner expectation of appreciation in value an expectation that the appreciation of assets used in an activity will produce an overall profit when netted against the losses from that activity may indicate a profit objective sec_1_183-2 income_tax regs there is no outright requirement that any appreciation offset the aggregate losses but there must be a bona_fide expectation that appreciation will produce a profit at some time in the future see 72_tc_28 72_tc_659 additionally sec_1_183-1 income_tax regs provides that the possible increase in the value of land used in a farming activity should be considered only if the income from the farming activity exceeds the carrying cost of the land the carrying cost of the land includes the mortgage interest and taxes lamusga v commissioner tcmemo_1982_742 after purchasing the ranch petitioner says he caused fences to be erected and roads and buildings to be built and made various other improvements neither the fact nor the amount of such improvements was established petitioners intended to one day retire live on the ranch and open a small medical practice petitioner stated that the ranch would give him something to do we doubt that petitioners in fact expected that any appreciation would ever produce an overall profit no credible_evidence to that effect was presented here each year from through the ranch produced losses of over dollar_figure we infer that the losses_incurred each year simply outpaced any appreciation furthermore the mortgage interest deductions claimed from through totaled dollar_figure and the taxes paid for that period totaled dollar_figure the gross_income from the ranching activity totaled only dollar_figure because the income from the ranch does not exceed the carrying cost of the land any potential appreciation of the ranch cannot be considered at all events petitioners did not prove that any of the ranch assets could be expected to appreciate to any significant extent this factor favors respondent petitioner's success in other activities a taxpayer's involvement in similar activities in the past especially where he has converted them from unprofitable to profitable operations may indicate a profit objective despite a currently unprofitable activity sec_1_183-2 income_tax regs there is no evidence that petitioner has ever operated a ranch before nor that he has had any profit from any ranching farming or guest cottage activities this factor favors respondent petitioner's history of income or losses neither startup losses nor losses that result from unforeseen circumstances necessarily show that the taxpayer lacked a profit objective engdahl v commissioner supra pincite sec_1_183-2 income_tax regs however losses_incurred over many years with little likelihood of future profits indicate a lack of profit objective golanty v commissioner t c pincite since its inception and through petitioners have consistently reported significant expenses and negligible gross_income thus producing losses from the ranching activity the expenses claimed for the years the parties considered total dollar_figure while the total income over the same period was only dollar_figure petitioner argues that considerable expenditures were incurred getting the ranch in working order buying and training the horses and that the return for these expenditures would not be seen until several years later we are not persuaded by this argument to the contrary in the formative years which were and petitioner reported losses of dollar_figure and dollar_figure in the losses grew to dollar_figure with a high in of dollar_figure although it is true that the gross_income of the ranch did grow to dollar_figure dollar_figure and dollar_figure during the years through respectively we find that petitioner has failed to establish that there was any likelihood of making the ranch profitable and even more unlikely that petitioner would ever recoup his total losses through which were dollar_figure see de mendoza v commissioner tcmemo_1994_ the amount of occasional profits if any analysis of the amount of profit earned especially in relation to the losses_incurred the value of the investment and the value of the assets involved may be helpful in determining profit objective an occasional small profit from an activity that generates otherwise consistently large losses may not be determinative that the activity is conducted with a profit objective while an occasional substantial profit may indicate a profit objective especially where the losses or investment are small sec_1_183-2 income_tax regs since its inception petitioners have never earned a profit from their ranching activity this factor favors respondent financial status of petitioner substantial income from other activities particularly where the losses from the activity produce a tax_benefit may indicate a lack of profit objective sec_1_183-2 income_tax regs petitioners reported gross_income from the medical corporation of dollar_figure and dollar_figure for and respectively while the farm_losses for those years were dollar_figure and dollar_figure there was no convincing reason to combine the two activities other than to save taxes this factor favors respondent elements of personal pleasure or recreation the presence of recreational elements may indicate that an activity is not engaged in for profit although the mere fact that personal pleasure is derived will not be sufficient to cause the activity to be classified as not engaged in for profit if other factors indicate that the activity was in fact engaged in for profit sec_1_183-2 income_tax regs petitioner admits that he enjoys his work on the ranch as well as training and riding polo ponies but he argues that if he wanted the ranch for purely recreational purposes he could have built a more elaborate ranch with more frills as opposed to a working ranch we think that the fact he could have built a ranch with more frills does not negate the recreational quality present this factor favors respondent ___________________________ of the nine factors discussed above only one factor favored petitioner additionally the objective facts presented to this court indicate that petitioners did not have an actual and honest objective to make a profit by continuing the ranching activity we hold that petitioners have failed to prove that respondent's determination was in error c sec_6662 a --accuracy-related penalty sec_6662 and b imposes a penalty of percent of any part of the underpayment attributable to a substantial_understatement_of_income_tax the understatement is substantial if it exceeds the greater of percent of the proper tax or dollar_figure sec_6662 the penalty will be reduced for any portion for which there was substantial_authority for the position of the taxpayer or where the relevant facts affecting the treatment of the item were adequately disclosed on the return sec_6662 the standard for determining whether there is in fact substantial_authority for a position is whether the weight of the authorities supporting that position is substantial in relation to the weight of authorities supporting contrary positions schirmer v commissioner 89_tc_277 sec_1 income_tax regs on brief petitioners referred to sec_162 and sec_183 which they assert allow for deductions for ordinary and necessary business_expenses they also point out that the service has never challenged their business intent in prior years despite similar positions and therefore their reliance on the service's position is warranted the regulations specifically provide that the possibility that an item will not be raised on audit or that there will be no audit is not relevant in determining whether there is substantial_authority sec_1_6662-4 income_tax regs petitioners' reliance on respondent's prior inaction is unwarranted petitioners did not cite any authority to bolster their assertions that there was substantial_authority for their returns and we find none petitioners point to revproc_90_16 1990_1_cb_477 which describes what constitutes adequate_disclosure for certain items unfortunately these less stringent requirements are only applicable to the specific items enumerated in that revenue_procedure because none of those items were claimed by petitioners here the revenue_procedure provides no assistance for them the disclosure must enable the service to identify the potential controversy involved schirmer v commissioner supra pincite citing s rept vol pincite petitioners did not attach a form_8275 to their return nor did they attach a statement that identified itself as a disclosure under sec_6661 the requirement of adequate_disclosure is not satisfied merely by listing the deductions on schedule f attached to the tax_return and therefore we find that there was no adequate_disclosure if there was reasonable_cause for the underpayment and the taxpayer acted in good_faith the penalty will not be imposed sec_6662 sec_6664 whether a taxpayer acted in good_faith depends upon the pertinent facts and circumstances 104_tc_352 sec_1_6664-4 income_tax regs the most important factor is the extent of the taxpayer's effort to assess his proper tax_liability cf beard v commissioner tcmemo_1995_41 sec_1_6664-4 income_tax regs petitioners have not impressed upon this court that there was reasonable_cause or basis for the underpayment or that they adequately sought to determine their proper tax_liability we find in favor of respondent decision will be entered for respondent


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 corp b06 plr-122561-10 date date legend parent ---------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- ---------------------------- parent worldwide group ------------------------------------------------------ -------------------------- holdings -------------------------------- ---------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- f1 ----------------------------------------------------------------------------------------------- -------------------------------------------------- f2 ----------------------------------------------------- -------------- -------------------------------------------------------------------------------------------------- f3 --------------------------------------------------------------------------------------------- ---------------------------------------- transferee ----------------------------------------------------- -- ------------------------------------------------------------------------------------------------ country a ------------ country b --------------- plr-122561-10 country c --------------- country d ------------ state a -------------- a b ------------------------- -------------- ------------ this letter responds to your date request for rulings on the federal_income_tax consequences of a proposed transaction the information submitted in that request and in later correspondence is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process facts parent is a state a corporation and the common parent of an affiliated_group_of_corporations filing a u s consolidated federal_income_tax return parent owns all the stock in holdings a state a corporation holdings owns all the equity interests in f1 a country a entity resident in country b classified as a corporation for u s federal tax purposes f2 a country c entity classified as a corporation for u s federal tax purposes and f3 a country d entity classified as a corporation for u s federal tax purposes in addition holdings directly owns all the equity interests in a number of entities that are not relevant to the proposed transaction described below f1 is a holding_company whose only significant assets consist of equity interests in entities that are members of the parent worldwide group f2 and f3 are both operating companies each of f1 f2 and f3 collectively the target cfcs is a controlled_foreign_corporation within the meaning of sec_957 the shares of each of the target plr-122561-10 cfcs were acquired at different times and at different prices thus the shares of the target cfcs have various bases and holding periods parent has determined that it would be advantageous to transfer f1 f2 and f3 to a new holding_company to achieve several business objectives first it will provide the parent worldwide group with a holding_company with increased share equity and share premium accounts under the corporate laws of country a and country b eliminating a local corporate law impediment to efficient deployment of funds within the parent worldwide group second it will provide the parent worldwide group with a holding_company with a capital structure that will facilitate the integration of foreign targets and foreign operations of domestic targets within parent worldwide group third it will align the legal ownership of the parent group’s foreign affiliates under a single foreign holding_company fourth the new foreign holding_company structure may permit parent group to reduce country b withholding_tax on potential future distributions of share premium proposed transaction to achieve the business_purpose described above the parent worldwide group proposes to undertake the following steps holdings will form transferee a country a company resident in country b and holdings will transfer all of the stock of the target cfcs the target cfcs stock to transferee in exchange for a shares of voting common and b shares of non-voting common transferee stock the transferee stock following the proposed transaction holdings will own all of the outstanding shares of transferee stock representations the following representations have been made with respect to the proposed transaction a no stock_or_securities will be issued for services to or for the benefit of transferee in connection with the transaction and no stock_or_securities will be issued for indebtedness of transferee b the property will not be transferred subject_to any liabilities and transferee will not assume any liabilities of holdings in connection with the transfer of such property plr-122561-10 c the transfer is not the result of the solicitation by a promoter broker or investment house d holdings will not retain any rights in the property transferred to transferee e there is no indebtedness between transferee and holdings and there will be no indebtedness created in favor of holdings as a result of the transaction f the proposed transaction will occur under a plan agreed before the transaction in which the rights of the parties are defined g there is no plan or intention on the part of transferee to redeem or otherwise reacquire any stock or indebtedness issued in the proposed transaction h taking into account any issuance of additional shares of transferee stock any issuance of stock for services the exercise of any transferee stock_rights warrants or subscriptions a public offering of transferee stock and the sale exchange transfer by gift or other_disposition of any of the stock of transferee to be received in the exchange holdings will be in control of transferee within the meaning of sec_368 i none of the target cfc’s stock to be transferred to transferee in the proposed transaction will be sec_306 stock within the meaning of sec_306 of the code j the aggregate fair_market_value of the target cfc’s stock will exceed the aggregate adjusted_basis of such stock k the fair_market_value of the assets of transferee will exceed the sum of the liabilities whether indebtedness or other forms of obligations including contingent obligations of transferee immediately after the proposed transaction l holdings will receive stock approximately equal to the fair_market_value of the property transferred to transferee m transferee will remain in existence and retain and use the property transferred to it in a trade_or_business n there is no plan or intention by transferee to dispose_of the transferred property other than in the normal course of business operations o each of the parties to the transaction will pay its own expenses if any incurred in connection with the transaction plr-122561-10 p transferee will not be an investment_company within the meaning of sec_351 and sec_1_351-1 of the treasury regulations q holdings is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 and the stock_or_securities received in exchange will not be used to satisfy the indebtedness of such debtor r transferee will not be a personal_service_corporation within the meaning of sec_269a s none of holdings transferee or the target cfc’s will be a passive foreign investment companies pfics within the meaning of sec_1297 immediately before or after the proposed transaction t with respect to any existing gain_recognition_agreement entered into by holdings in connection with a prior transfer by holdings of stock_or_securities to f1 holdings will in accordance with sec_1_367_a_-8 enter into a new gain_recognition_agreement as described in sec_1 c that designates transferee as the transferee foreign_corporation for purposes of sec_1_367_a_-8 and will comply with the notification requirements thereunder u holdings will enter into gain recognition agreements satisfying the requirements of sec_1_367_a_-8 with respect to the transfer by holdings of the stock of target cfcs to transferee in the proposed transaction rulings based solely on the information submitted and representations set forth above we rule as follows with respect to the proposed transaction holdings shall recognize no gain_or_loss upon the transfer of the target cfc’s stock to transferee solely in exchange for the transferee stock sec_351 and sec_357 no gain_or_loss shall be recognized by transferee upon the receipt of the target cfc’s stock in exchange for newly issued transferee stock sec_1032 the aggregate basis of the transferee stock received by holdings shall be the same as the aggregate basis of the target cfcs stock surrendered in exchange therefor and shall be allocated between the class of voting common shares of transferee stock and the class of nonvoting common shares of transferee stock received in the exchange in proportion to the fair market values of the classes plr-122561-10 such that each voting common share shall have an identical averaged basis and each nonvoting common share shall have an identical averaged basis sec_358 sec_1_358-2 the basis of each share of the target cfc’s stock received by transferee shall be the same as the basis of the shares in the hands of holdings determined immediately before the transfer sec_362 the holding_period of the transferee stock received by holdings shall include the period during which the property exchanged therefore was held provided such property was held as a capital_asset by holdings on the date of the exchange sec_1223 the holding_period of the target cfc’s stock received by transferee shall include the period during which holdings held the stock sec_1223 caveats we express no opinion on the tax effect of the proposed transaction under any other provision of the code or regulations or the tax effect of any condition existing at the time of or effect resulting from the proposed transaction that is not specifically covered by the rulings set forth above procedural statements this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling in accordance with the power_of_attorney on file in this office a copy of this letter is being sent to your authorized representatives sincerely _____________________________ richard heinecke assistant to the branch chief branch associate chief_counsel corporate


internal_revenue_service uil index no number release date cc dom it a plr-103973-99 date kdo legend x dear sir or madam this is in response to your authorized representative’s letter and submissions of date requesting certain rulings regarding the proper federal_income_tax treatment including any reporting and or withholding obligations for certain stipends paid_by you x to individuals in connection with the research training programs and activities briefly described below x is recognized as exempt from federal_income_tax under sec_501 of the internal_revenue_code and is a medical_research facility described in sec_170 the information submitted indicates that x conducts extensive research training and educational programs and activities respecting a certain chronic disease x is a recognized leader in both basic and clinical research in this field in connection with its research activities x conducts an extensive program of research training designed to foster and develop the research skills and abilities of participants the training programs are typically organized according to their principal educational goals for example there are programs designed to develop basis laboratory research skills programs designed primarily for clinical investigators and programs dedicated to the training of those whose skills will be devoted to bridging the gap between laboratory and clinical disciplines these research training programs vary in length but generally last from three to five years x pays participants in these research training programs research fellows stipends to help defray general living_expenses during their period of training in recent years x has typically supported approximately postdoctoral fellows and or clinical research fellows annually in these training activities x’s research training programs are modeled after the national institutes of health’s nih’s national research service awards nrsa program and are designed to mirror it the focus of the programs is research training and the development of research skills and not the performance of research services x’s research fellows do not serve as medical residents or as laboratory technicians as part of the research programs and are not replacements or substitutes for either the activities of the research fellows during their training programs does not materially benefit x research issues are determined by the research fellows in conjunction with their faculty mentors after selection into the programs nrsa grants partially fund x’s research programs and the activities of their research fellows and nrsa fellows are the same research fellows are not required to have performed past services or to agree to perform future services for x as a condition to receiving a research training program stipend the federal tax treatment of qualified scholarships and fellowship grants is addressed in sec_117 of the code sec_117 provides that gross_income does not include any amount received as a qualified_scholarship by an individual who is a candidate_for_a_degree at an educational_organization described in sec_170 describing generally a school to be considered a scholarship or fellowship_grant an amount need not be formally designated as such generally a scholarship or fellowship_grant is any amount_paid or allowed to or for the benefit of an individual to aid such individual in the pursuit of study or research a scholarship or fellowship_grant may for example be in the form of a reduction in the amount owed by the recipient to an educational_organization for tuition room and board or any other fee only qualified scholarships may be excluded from income a qualified_scholarship is defined as an amount expended for qualified_tuition_and_related_expenses qualified_tuition_and_related_expenses are tuition and fees required for the enrollment or attendance of a student at an educational_institution and fees books supplies and equipment required for courses of instruction at such an educational_organization amounts received for room board travel and incidental living_expenses are not related expenses thus scholarship receipts that exceed expenses for tuition fees books supplies and certain equipment are not excludable from a recipient’s gross_income under sec_117 fellowship stipends made to non-degree candidates for general living_expenses are a typical example of includible scholarship amounts sec_117 of the code implementing changes made by the tax_reform_act_of_1986 pub_l_no provides that the exclusion for qualified scholarships shall not apply to that portion of any amount received which represents payment for teaching research or other services by the student required as a condition for receiving the qualified_scholarship or fellowship regulations governing the includibility of compensatory grants in income have been upheld by the supreme court of the united_states which has described excludable grants as relatively disinterested ’no-strings’ educational grants with no requirement of any substantial quid pro quo from the recipient 394_us_741 a scholarship or fellowship_grant represents payment for services when the grantor requires the recipient to perform services in return for the granting of the scholarship or fellowship a requirement that the recipient pursue studies research or other activities primarily for the benefit of the grantor is treated as a requirement to perform services a scholarship or fellowship_grant conditioned upon either past present or future services by the recipient or upon services that are subject_to the direction or supervision of the grantor represents payment for services a scholarship or fellowship_grant that is includible in gross_income under sec_117 of the code is considered wages for purposes of sec_3401 the grantor of such an amount is subject_to certain withholding and reporting requirements respecting wages including withholding for income taxes and the filing of forms w-2 the application of federal_insurance_contributions_act fica and federal_unemployment_tax_act futa taxes depends on the nature of the employment and the status of the grantor see notice_87_31 1987_1_cb_475 although payments for research services are not excludable under current law not all payments for research activities represent payment for services the code and regulations make clear that a scholarship includes any amount_paid or allowed to aid an individual in the pursuit of study or research accordingly research activities by a student may qualify for exclusion_from_gross_income to no less an extent than formal classroom studies it is only where the research required by the grantor falls within the ambit of sec_117 that inclusion in income is required determining whether a particular awards program makes compensatory payments within the contemplation of sec_117 of the code is an inherently factual matter requiring a consideration of the nature and extent of the impositions and duties imposed upon the participants and of all other relevant facts and circumstances of the program based on the information presented and representations furnished and assuming x’s research training programs are conducted substantially as described we have determined that the scholarship and or fellowship stipends awarded thereunder do not represent compensation_for services within the meaning of sec_117 of the code the awards are not paid for or in_connection_with_the_performance_of_services and appear to be relatively disinterested grants to participants to enable them to pursue programs of independent research training and original study focusing on the experience to be gained by the recipient rather than on any grantor benefit we note that the service does not regard the research and research training activities sponsored by institutional nrsa awards as constituting the performance of services within the contemplation of either current or prior_law see revrul_83_93 1983_1_cb_364 such grants remain eligible for exclusion from federal_income_tax under sec_117 of the code to the extent of the recipient’s qualified_tuition_and_related_expenses x’s grants are awarded under programs substantially_similar if not identical to the nrsa awards program and are thus entitled to similar tax treatment accordingly such amounts do not constitute wages for purposes of sec_3401 additionally such amounts are not subject_to sec_3402 relating to withholding for income taxes at source sec_3102 relating to withholding under the federal_insurance_contribution_act fica or sec_3301 relating to the federal_unemployment_tax_act futa x is not required to file forms w-2 or any returns of information under sec_6041 with respect to such grants finally since x’s research training stipends do not represent payment for services such amounts are also not subject_to self employment contribution act seca taxes imposed by sec_1401 of the code see 102_tc_394 see also revrul_60_378 1960_2_cb_38 which states the service’s position that noncompensatory scholarship and fellowship grants do not constitute income from a trade_or_business whether or not such amounts are required to be included in gross_income the recipient of a scholarship or fellowship_grant is responsible for determining whether such grant is in whole or in part includible in gross_income for federal_income_tax purposes where participants are degree candidates such grants will ordinarily be excludable from the recipients’ gross incomes to the extent of their qualified_tuition_and_related_expenses in the case of non-degree candidates the entire amount of scholarship or fellowship awards is includible in gross_income you may wish to advise participants in your research programs that the amount of their scholarship or fellowship stipends that exceeds their qualified_tuition_and_related_expenses if any is generally includible in gross_income for federal_income_tax purposes this letter_ruling is based on the facts and representations provided by x and is limited to the matters specifically addressed no opinion is expressed as to the tax treatment of the transactions considered herein under the provisions of any other sections of the code or regulations which may be applicable thereto or the tax treatment of any conditions existing at the time of or effects resulting from such transactions which are not specifically addressed herein final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling may be modified or revoked by adoption of final regulations to the extent the regulations are inconsistent with any conclusions in this ruling see section dollar_figure of revproc_99_1 1999_1_irb_6 however when the criteria in section dollar_figure of revproc_99_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances because it could help resolve federal tax issues a copy of this letter should be maintained with x’s permanent records pursuant to a power_of_attorney currently on file with this office the original of this ruling is being sent to x’s first designated authorized representative and copies are being furnished to x and its other representatives this ruling is directed only to the taxpayer who requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent sincerely yours s william a jackson assistant chief_counsel income_tax accounting by william a jackson chief branch enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service index no number release date department of the treasury washington dc person to contact telephone number refer reply to plr-112337-99 cc intl b1 date date a date b year c country d country e dear this is in response to your letter dated date requesting a ruling under sec_877 of the internal_revenue_code_of_1986 code that a’s loss of u s citizenship did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code the information submitted for consideration is substantially as set forth below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by penalty of perjury statements executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination a was born on date b and became a u s citizen at birth on the basis of being born in the united_states a since birth has also been a citizen of country d a has been a resident of country e since year c a plans to renounce her united_states citizenship shortly after the issuance of this ruling on the date of a’s expatriation her net_worth will exceed the net_worth required under sec_877 sec_877 generally provides that a citizen who loses u s citizenship or a u s long-term_resident who ceases to be taxed as a lawful permanent resident individuals who expatriate within the 10-year period immediately preceding the close of the taxable_year will be taxed under sec_877 and the special rules of sec_877 for such taxable_year unless such loss did not have for one of its principal purposes the avoidance of u s taxes plr-112337-99 sec_2107 and sec_2501 a provide special estate and gift_tax regimes respectively for individuals who expatriate with a principal purpose to avoid u s taxes a former citizen or former long term-resident will be treated as having expatriated with a principal purpose to avoid u s taxes for purposes of sec_877 sec_2107 and sec_2501 a if the individual’s average income_tax_liability or the individual’s net_worth on the date of expatriation exceed certain thresholds see sec_877 sec_2107 and sec_2501 a b a former u s citizen or former long term-resident whose net_worth or average tax_liability exceeds these thresholds however will not be presumed to have a principal purpose of tax_avoidance if that former citizen is described within certain statutory categories and submits a request for a ruling within one year of the date of loss of u s citizenship for the secretary’s determination as to whether such loss had for one of its principal purposes the avoidance of u s taxes see sec_877 sec_2107 and sec_2501 under notice_98_34 1998_27_irb_40 an eligible former citizen will not be presumed to have a principal purpose of tax_avoidance if that former citizen submits a complete and good_faith request for a ruling as to whether such loss had for one of its principal purposes the avoidance of u s taxes notice_98_34 requires that certain information be submitted with a request for a ruling that an individual’s expatriation did not have for one of its principal purposes the avoidance of u s taxes a is eligible to request a ruling under sec_877 because for each year in the year period ending on the date of loss of u s citizenship a was present in the united_states for days or less see sec_877 a submitted all the information required by notice_98_34 accordingly based solely on the information submitted and the representations made it is held that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 however because the information submitted does not clearly establish the existence or lack of a principal purpose to avoid taxes under subtitle a or b of the code no opinion is expressed as to whether a’s expatriation had for one of its principal purposes the avoidance of such taxes while this ruling rebuts the presumption of tax_avoidance under sec_877 it is not conclusive as to whether a subsequently may be found to have a principal purpose of tax_avoidance under sec_877 sec_2107 and sec_2501 a a based on all the facts and circumstances see sec_877 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition no opinion is expressed as to a’s u s tax_liability for taxable periods prior to her loss of u s citizenship or for taxable periods after her plr-112337-99 loss of u s citizenship under sections of the code other than sec_877 sec_2107 and sec_2501 a a copy of this letter must be attached to a’s u s income_tax return for the year in which a obtained the ruling whether or not a is otherwise required to file a return 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 representative sincerely yours ______________________ w edward williams office of the associate chief_counsel international cc assistant_commissioner international international district operations op in d chief examination_division


t c summary opinion united_states tax_court estate of paul campana deceased gail campana executrix and gail campana petitioners v commissioner of internal revenue respondent docket no 8812-00s filed date gail campana pro_se carol-lynn eb moran for respondent dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure - the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined penalties of dollar_figure dollar_figure and dollar_figure under sec_6663 for the years and respectively in the answer respondent alleges in the alternative that if petitioner gail campana is not liable for the penalties under sec_6663 for the years at issue she is liable for the accuracy-related_penalties under sec_6662 as increases of deficiency under sec_6214 the issues for decision therefore are whether part of the underpayments of tax for the years and is due to fraud or in the alternative whether the underpayments are due to negligence or intentional disregard of rules or regulations some of the facts have been stipulated and are so found the accompanying exhibits are incorporated herein by reference background gail campana petitioner resided in lavallette new jersey when the petition was filed in this case petitioner and her husband paul campana operated a driving school for prospective drivers of noncommercial vehicles they sold the school in in petitioner and mr campana ’ became investors in cnc trading company of marlton new jersey cnc cnc was owned and ‘paul campana died on date primarily operated by charles n cugliari cnc was held out to potential investors as a food broker and distributor mr cugliari and cnc employees sold investments in cnc contracts a contract_cost an investor about dollar_figure and a half-contract about dollar_figure cnc supposedly used investors’ money to purchase food products monthly for subsequent sale to food wholesalers and supermarket chains at a profit cnc made distributions of a fixed amount of funds to investors each month that was represented to be half of the profits made by cnc on its sales of food products typically a full contract would return a monthly amount of about dollar_figure to the investor cnc was in reality a pyramid scheme instead of purchasing food products with investors' money cnc used the money of new investors to make payments to earlier investors petitioner was an investor in cnc from through part of during the year petitioner and her late husband received distributions of dollar_figure from cnc none of the distributions was reported on their joint federal_income_tax return although petitioner received part of her cnc payments in cash typically cnc distributions were made monthly by check included with the monthly checks petitioner received were vouchers indicating a the amount of the investment b a realization amount c a margin gain amount d q4e- petitioner's share of the margin amount and e the amount reinvested uniformly it was the amount of the original investment the federal_income_tax return of petitioner and mr campana was prepared by joseph alfano mr alfano was an enrolled_agent and a self-employed business consultant at some point during the return preparation phase before mr alfano asked for documentation for items on the return petitioner brought up the cnc investment she mentioned cnc and showed him a check she told him where the check came from and described the investment mr alfano advised petitioner that cnc was not a normal type of investment petitioner and mr alfano talked about the taxability of the cnc distributions he asked petitioner if the distributions she had received from cnc exceeded the amount of her investment and she said no mr alfano advised her that he did not think that the transaction was concluded he told petitioner that he did not believe that she would get her invested money back and suggested that she try to have it returned to her some or months after the initial interview but before preparing the return mr alfano asked if she ever got her money back and she said no she may also have shown him an additional check at that time - - because mr alfano felt that the campanas would not recover their initial investment in cnc he decided not to treat cnc distributions as income on the federal_income_tax return tf petitioner and mr campana later were to recover their investment alfano felt that an amended_return could be filed to change their reporting position petitioner did not request mr alfano to prepare subsequent years' returns during the year petitioner and mr campana received from cnc distributions of dollar_figure none of the distributions was reported on the joint federal_income_tax return for the year the return was prepared at green baker and associates and signed by gail campana as surviving_spouse petitioner's individual returns for and were prepared by burton zocks during the year petitioner received from cnc distributions of dollar_figure none of the distributions during was reported on petitioner's federal_income_tax return the joint_return which mr zocks reviewed before preparing the return reported no cnc income and petitioner made no mention of cnc to mr zocks at the time there was a large increase in petitioner's cnc distributions beginning in because she made a large investment in as of june of petitioner and her late husband had invested dollar_figure in cnc contracts -- - during petitioner received distributions of dollar_figure from cnc on line of petitioner's return for she reported receiving dollar_figure of miscellaneous investment_income from cnc some time in after the return was filed petitioner called mr zocks and asked a general question relating to when income from an investment should be reported as part of his preparation of petitioner's federal_income_tax return mr zocks assembled and mailed to her an organizer or questionnaire based upon information in the previous year's return petitioner listed on the organizer her income from different sources among the sources of income she disclosed on the organizer for was dividend income from cnc of dollar_figure that mr zocks later listed on the return as miscellaneous investment_income because there was no form_1099 reporting the distribution she provided no other details of the cnc investment late in petitioner asked for her invested money back from cnc and was told in december of that she could get it back in three months cnc became inactive in when mr cugliari fled to the cayman islands eventually the activities of cnc and its investors came to the attention of the internal_revenue_service irs petitioner was one of the individuals whose income_tax matters were placed - under scrutiny she was contacted by the criminal_investigation_division cid of the irs about her cnc income and investments as a result of the contact by cid petitioner on date filed amended joint federal_income_tax returns for and and amended individual tax returns for and the amended returns reported distributions received from cnc in the tax years for which they were filed on date petitioner pleaded guilty to one count of attempted income_tax evasion for in violation of sec_7201 on date she was ordered imprisoned and fined as her sentence for the guilty plea to attempted evasion of income_tax on date petitioner signed forms waiver_of_restrictions_on_assessment_and_collection of deficiency in tax and acceptance of overassessment agreeing to the assessment of deficiencies in tax for and as well as the fraud_penalty under sec_6663 for further petitioner and the commissioner's delegate signed a form 906-c closing_agreement on final_determination covering specific matters agreeing to the amounts of taxable_income received by petitioner from cnc for the years through - - discussion fraud_penalty the commissioner has the burden of proving fraud by clear_and_convincing evidence sec_7454 rule b 94_tc_654 as part of his burden in the trial of a fraud case the commissioner must first prove an underpayment of some amount of tax sec_6663 81_tc_640 to do this the commissioner may not merely rely on the taxpayer's failure to disprove the deficiency determination parks v commissioner supra the parties in this case however agree that petitioner and her late husband underpaid their income taxes for and and that petitioner underpaid her income taxes for and second the commissioner must show that at least some part of the underpayment_of_tax was due to fraud sec_6663 rule b dilleo v commissioner 96_tc_858 affd 959_f2d_16 2d cir parks v commissioner supra pincite hebrank v commissioner supra if the commissioner establishes that some portion of the underpayment is attributable to fraud the entire underpayment shall be treated as attributable to former sec_6653 was repealed and replaced by sec_6663 see omnibus budget reconciliation act of publaw_101_239 sec a 103_stat_2106 - fraud except with respect to any portion of the underpayment which the taxpayer establishes is not attributable to fraud sec_6663 the commissioner will meet his burden_of_proof if it is shown that the taxpayer intended to evade a tax known to be due and owing by conduct intended to conceal mislead or otherwise prevent tax collection 398_f2d_1002 3d cir parks v commissioner supra pincite 80_tc_1111 the existence of fraud is a question of fact to be resolved upon consideration of the entire record dilleo v commissioner supra pincite the commissioner may prove fraud by circumstantial evidence because direct evidence of the taxpayer's intent is rarely available stephenson v commissioner t c affd per curiam 748_f2d_331 6th cir intent to mislead or conceal may be inferred from a pattern of conduct 317_us_492 a pattern of consistent underreporting of income for several years especially when accompanied by other circumstances showing intent to conceal is strong evidence of fraud 348_us_121 parks v commissioner supra pincite an implausible explanation of behavior is one of the badges_of_fraud 796_f2d_303 9th cir affg tcmemo_1984_601 -- - this court however will not sustain a determination of fraud based only on circumstances that at most create only the suspicion of fraudulent intent 90_tc_1130 66_tc_538 60_tc_569 petitioner does not dispute the fraud penalties by arguing here that the cnc payments to her and her late husband were not income she disputes however any allegation that she knew the distributions were income at the time she filed her joint returns for and and she alleges that she reported what she thought was the correct amount of income on her individual return for she argues in fact that she relied on the advice of her return preparer in not reporting the cnc distributions as income according to petitioner she thought for the years at issue that she would not have income from cnc until she recovered her total investment in cnc fraud for and mr alfano the preparer of the joint return testified that petitioner brought up the cnc investment she mentioned cnc and showed him a check she told him where the check came from and described the investment he testified that he told petitioner that cnc was not a normal type of investment petitioner and mr alfano talked about the taxability of the cnc distributions he asked whether the checks she had received exceeded her investment and she said no mr alfano advised her that he did not think that the transaction was concluded he suggested that she try to get her money back but told petitioner that he did not believe that she would months later before preparing the return he asked whether she ever got her money back and she said no although no was a truthful answer she did not inform mr alfano that she had not yet asked for the return of her money the weight of authority holds that certain distributions to taxpayers in ponzi or pyramid schemes where proceeds of later investors are used to pay distributions to early investors lending an appearance of legitimacy to a fraudulent investment are current income parrish v commissioner t c memo a474 affd 168_f3d_1098 8th cir premji v commissioner tcmemo_1996_304 affd without published opinion 139_f3d_912 10th cir wright v commissioner tcmemo_1989_557 affd without published opinion 931_f2d_61 9th cir murphy v commissioner tcmemo_1980_218 affd per curiam 661_f2d_299 4th cir 431_fsupp_1173 b d va in all but one of the above cases however the taxpayer had recovered and was in either actual or constructive receipt of his initial investment during the same 3see 189_f3d_321 n 3d cir taxable_year as the ponzi distributions in the exceptional case parrish the taxpayer was not a passssive investor but was an officer and director of the scheme's corporate vehicle and did not introduce evidence to show either the amounts he invested or received in two other cases where as here the taxpayer had not recovered the initial investment during the same tax_year as the ponzi distributions courts have held that the distributions were not income but return of investment funds taylor v united_states aftr 2d ustc par big_number e d tenn greenberg v commissioner tcmemo_1996_281 mr alfano advised petitioner that she would not have income from cnc until she had recovered distributions in excess of her investment and that due to its unusual nature he did not think she would recover her investment regardless of the accuracy of the advice given by mr alfano however the question is whether petitioner believed the advice to be correct see 498_us_192 see also twa v thurston 469_us_111 43_tc_50 affd 360_f2d_358 4th cir respondent's unstated argument must be that petitioner knew that the cnc distributions represented income that the law required her to report and despite this knowledge she intentionally or recklessly failed to report it respondent did not introduce evidence that petitioner's distributions in and exceeded her investment or that she knew that they exceeded her investment the record tends to the opposite inference petitioner did not ask for her money back but the court is left to wonder why while we are suspicious of petitioner's motives and inaction suspicion is not evidence when weighed against the evidence in opposition the evidence adduced by respondent does not instantly tip the evidentiary scales in the direction of fraudulent intent on petitioner's part see 467_us_310 respondent has not shown by clear_and_convincing evidence that part of the underpayment_of_tax for the years and is due to fraud id fraud for while it is clear that petitioner received some distributions respondent is unable to determine how much was disbursed by cnc to petitioner and her late husband in and some of which may have been in cash the parties agree however that a total of dollar_figure was distributed to petitioner and her late husband over the years including and since a total of approximately dollar_figure had been invested by june of at the end of petitioner clearly had completely recovered her investment plus close to an additional dollar_figure -- petitioner was circumspect about her cnc involvement when mr zocks her accountant prepared her return for some time in she called him and asked a general question about when to report income from an investment she did not show him any cnc checks or vouchers or give any specifics about cnc mr zocks assembled and mailed to her a guestionnaire based upon information in the previous year's return among the sources of income petitioner disclosed on the organizer for was dividend income from cnc of dollar_figure that mr zocks later reported on the return as miscellaneous investment_income petitioner explained at trial that she came up with the reported cnc income figure through the following steps she totaled what was received from cnc from date through date which she determined to be dollar_figure before her husband died in may of he said we needed approximately dollar_figure more to start retaining a profit from cnc she deducted the dollar_figure that was invested from the dollar_figure which left dollar_figure and she then deducted the dollar_figure that her husband said we still needed and came out with the figure of dollar_figure the court finds this to be an implausible explanation on petitioner's amended returns for through she reported income from cnc in amounts somewhat less than those finally agreed upon with respondent dollar_figure dollar_figure dollar_figure and dollar_figure respectively for a total of dollar_figure the discrepancies are unexplained -- - the court assumes that petitioner misspoke in her testimony about the exclusion of the year from her computation of cnc distributions petitioner however did not explain why she excluded from her computation distributions she and her late husband received from cnc in and also if she were following her husband's instruction before he died in may of that they needed only approximately dollar_figure more to start retaining a profit from cnc almost all distributions in dollar_figure would have been profit even assuming that petitioner believed that she would not realize income from cnc until she had recovered distributions in excess of her combined investment she must have known that for certainly she had realized more income than she reported on her tax_return she failed to disclose to the certified_public_accountant who was preparing her tax_return for the year and would have assisted her any explanation of the cnc investments for the year respondent has shown by clear_and_convincing evidence a pattern of underreporting of income accompanied by an intent to mislead or conceal and an implausible explanation of behavior we find that the underpayment_of_tax on petitioner's return was due to fraud see 348_us_121 parks v commissioner t c pincite 796_f2d_303 9th cir - affg tcmemo_1984_601 because petitioner has not established that any portion of the underpayment is not attributable to fraud we hold that she is liable for the fraud_penalty on the entire amount of the underpayment negligence for and should the court determine that petitioner is not liable for the addition_to_tax for fraud respondent alleges that she is liable for the accuracy-related_penalty for negligence for the years and sec_6662 imposes a penalty equal to percent of the portion of the underpayment_of_tax shown to be attributable to negligence or intentional disregard of rules or regulations negligence includes any failure to reasonably attempt to comply with the tax code including the lack of due care or the failure to do what a reasonable or ordinarily prudent person would do under the circumstances 66_f3d_729 5th cir affg in part and revg in part tcmemo_1994_228 generally courts look both to the underlying investment and to the taxpayer's position taken on the return in evaluating whether a taxpayer was negligent 82_f3d_918 9th cir affg tcmemo_1994_217 under some circumstances however a taxpayer may avoid liability for the accuracy-related_penalty for negligence if - reasonable reliance on a competent professional adviser is shown 414_f2d_749 4th cir affg tcmemo_1968_98 89_tc_849 affd 904_f2d_1011 5th cir affd 501_us_868 such reliance is not an absolute defense to negligence but is merely a factor to be considered id for reliance on professional advice to excuse a taxpayer from the negligence_penalty the taxpayer must show that the professional adviser had the expertise and knowledge of the pertinent facts to provide informed advice on the subject matter leonhart v commissioner supra freytag v commissioner supra stone v commissioner tcmemo_1996_230 reimann v commissioner tcmemo_1996_84 in order for reliance on professional advice to excuse a taxpayer from the negligence_penalty the reliance must be reasonable in good_faith and based upon full disclosure 118_f3d_184 4th cir affg tcmemo_1996_167 freytag v commissioner supra pincite we do not find such reliance on petitioner's part petitioner's return preparer strongly suggested to her that cnc did not sound like a normal investment and that her investment funds were in jeopardy he advised her that she should attempt to recover her investment petitioner offered no evidence that she could not have recovered her investment at any -- - time it is possible that petitioner could have recovered her investment at the time of mr alfano's advice if so she might have been in constructive or actual receipt of her investment and the cnc distributions see wright v commissioner tcmemo_1989_557 had petitioner recovered her investment mr alfano may have advised taking a different return position petitioner failed to heed mr alfano's advice left him with the impression that she had attempted and failed to have her investment refunded and invested additional funds in the pyramid scheme she apparently made no attempt to find out any further information about her invested funds or cnc other than that it had an office with a desk and a computer the court finds that petitioner failed reasonably to attempt to comply with the tax code and regulations her actions evidence a lack of due care or the failure to do what a reasonable or ordinarily prudent person would do under the circumstances see chamberlain v commissioner supra conclusion we hold that petitioner is not liable for the fraud penalties under sec_6663 but is liable for the accuracy- related penalties under sec_6662 for negligence or intentional violation of rules or regulations for and we hold that respondent's determination that the underpayment_of_tax for the year is due to fraud is correct and petitioner - - is liable for the fraud penalties under sec_6663 for that year reviewed and adopted as the report of the small_tax_case division 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 b03 plr-166959-03 date date legend x ------------------------------------------------------------------------------------------------------ ----------------------- ------------------------- a b ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------- state --------------- d1 -------------------- ---------------------- d2 dear ------------ this letter responds to your letter dated date and subsequent correspondence written on behalf of x requesting a ruling under ' b of the internal_revenue_code facts according to the information submitted x was incorporated under state law on d1 x’s shareholders a and b intended for x to be an s_corporation beginning d2 sec_1362 provides that if an election under sec_1362 is made for x requests a ruling under sec_1362 that its sec_1362 election will be treated sec_1362 provides that an election made after the 15th day of the third sec_1362 provides that a small_business_corporation may elect to be an sec_1362 provides that such election is effective for the current taxable plr-166959-03 however x’s form_2553 election by a small_business_corporation was not filed timely as timely made for its taxable_year that began on d2 law and analysis s_corporation year if it is made during the preceding_taxable_year or before the 15th day of the third month of the current taxable_year month of the current taxable_year is treated as having been made for the following taxable_year any taxable_year determined without regard to sec_1362 after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election the secretary may treat the election as timely made for the taxable_year and sec_1362 shall not apply conclusion based on the facts submitted and representations made we conclude that x has established reasonable_cause for its failing to make a timely s_corporation_election and that x is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 effective d2 within days following the date of this letter the election will be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center this ruling is contingent upon x and its shareholders filing amended returns consistent with the treatment of x as an s_corporation from d2 and thereafter the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether x is otherwise eligible to be an s_corporation for federal tax purposes furthermore we express or imply no opinion concerning any other outstanding tax issue that may exist between x or its shareholders and the service except as expressly provided herein we express or imply no opinion concerning pursuant to a power_of_attorney on file with this office we are sending a copy of this ruling is directed only to the taxpayer who requested it sec_6110 plr-166959-03 this letter to x provides that it may not be used or cited as precedent cc --------------------------------- sincerely yours ------------------------ ----------------------- ---------------------------------- ---------------------------------- ------------- ----------------------------- ------------------------------------------------------------- ------------------------------------------------ -------------------------------- s jeanne sullivan senior technician adviser branch office of associate chief_counsel passthroughs and special industries


internal_revenue_service number release date index number ---------------------- -------------------------------------- --------------------------------------------------- --------------------------------------------- ---------------------------------------------------- in re --------------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc corp b01 plr-152509-06 date may --------------------------------------- -------------------------------------------------------- ------------------------ ----------------- ------------------- legend legend parent ------------------------------------------------------------------- sec_1 date date date date year p q r s t u v ----------------- ---------------- --------------- --------------- --------------- ------------- ------- ------ ---- --- ------ ------------- ------------- plr-152509-06 w x y z dear ---------------- we respond to your letter dated date and subsequent correspondence in which you requested rulings as to certain federal_income_tax consequences of the transactions discussed below the rulings contained in this letter are based on facts submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in the support of the request for rulings verification of the information and other data may be required as part of the audit process parent is a holding_company that files a consolidated federal_income_tax return for itself and several subsidiaries on date parent its chief operating subsidiary sec_1 and certain other subsidiaries collectively the debtors filed petitions for reorganization under chapter of the bankruptcy code certain of the debtors emerged from bankruptcy on date the effective date at the end of year the taxpayer had net_operating_loss carryforwards nols in the aggregate amount of approximately dollar_figurep before filing under chapter sec_1 maintained retiree medical_plans covering among others two groups of its retirees the salaried retirees and certain hourly retirees pursuant to the retiree medical_plans and in the case of employees and retirees from bargaining units represented by unions pursuant to collective bargaining agreements sec_1 was contractually obligated to provide comprehensive medical_care benefits to the salaried and hourly retirees because of the high costs of the medical benefits which were continuing to dramatically increase and the debtors’ other significant liabilities the debtors had determined that a substantial modification of their obligations to provide medical benefits was necessary before the debtors could successfully restructure and emerge from chapter as a viable enterprise sec_1 reached negotiated agreements with the unions and with representatives of the salaried employees and ultimately received bankruptcy court approval of such agreements and certain subsequent amendments to those agreements the plr-152509-06 agreements pursuant to the agreements medical benefits were terminated for salaried and hourly retirees and the retirees generally became eligible to receive benefits as provided by two voluntary employees’ beneficiary associations established pursuant to sec_501 of the code one for hourly retirees the hourly veba trust and one for salaried retirees the salaried veba trust collectively veba trusts the benefits provided by the veba trusts have been and will continue to be substantially less than those provided under old medical_plans in accordance with the agreements the plan_of_reorganization por provided that upon taxpayer’s emergence from bankruptcy parent would issue q shares shares of new common_stock stock exclusively to holders of claims and interests under the por of which r of those shares would be contributed to the veba trusts collectively under the por the hourly veba trust was entitled to receive s shares approximately t percent of all outstanding_stock and the salaried veba trust was entitled to receive u shares approximately v percent of all outstanding_stock the interest of the hourly veba trust in its contractual entitlement to receive shares on the effective date is referred to herein as its pre-effective date interest as a consequence of orders of the bankruptcy court dated date and date the orders to restrict transfers that would risk the application of sec_382 to the parent’s nols the hourly veba trust could not sell any part of its pre-effective date interest before the effective date a pre-effective date sale unless it complied with certain conditions the portion of the hourly veba trust’s pre-effective date interest that could have been sold under the orders was limited to approximately w percent of its pre-effective date interest consistent with the order the hourly veba trust made x pre-effective date sales prior to the effective date equal to y shares in the aggregate upon a pre- effective date sale by the hourly veba trust the veba transferee assumed the benefits and risks of ownership of the transferred interest thus in the event that the debtors did not consummate the por but instead liquidated its assets the hourly veba trust would have had no obligation to the veba transferees under the sale documents between those parties on the effective date parent issued to the hourly veba trust z shares attributable to pre-effective date interests not transferred and as directed by the hourly veba trust issued directly to the respective veba transferees collectively y shares attributable to transferred interests parent also issued shares to other qualified creditors as defined for purposes of sec_382 and the regulations thereunder as well immediately after the ownership_change on the effective date qualified creditors of parent owned shares representing more than percent of the outstanding_stock of parent plr-152509-06 based on the information submitted by the taxpayer set forth above we rule as follows the pre-effective date sales by the hourly veba trust of portions of its pre-effective date interest and the resulting issuance of parent stock to veba transferees on the effective date will not constitute a sale of shares following the effective date for purposes of determining whether there has been an ownership_change under sec_382 after the effective date caveat we express no opinion about the tax treatment of the proposed transactions under other provisions of the code and regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transactions that are not specifically covered by the above rulings procedural statements this ruling letter is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively any taxpayer filing its return electronically may satisfy this requirement by attaching a statement to the return that provides the date and control number of this letter_ruling in accordance with the power_of_attorney on file in this office a copy of this ruling letter will be sent to your authorized representatives sincerely _________________________ mark s jennings branch chief branch office of associate chief_counsel corporate