department of the treasury yy internal_revenue_service p o box irs cincinnati oh release number se yy oe date date employer id number contact person id number contact telephone number form you must file tax years dear this letter is our final_determination that you don’t qualify for tax-exempt status under sec_501 of the internal_revenue_code the code recently we sent you a proposed adverse determination in response to your application the proposed adverse determination explained the facts law and basis for our conclusion and it gave you days to file a protest because we didn’t receive a protest within the required days the proposed determination is now final you must file federal_income_tax returns for the tax years listed at the top of this letter using the required form also listed at the top of this letter within days of this letter unless you request an extension of time to file we’ll make this final adverse determination_letter and the proposed adverse determination_letter available for public inspection as required under sec_6110 of the code after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in the notice on how to notify us if you agree with our deletions you don’t need to take any further action if you have questions about this letter you can contact the person listed at the top of this letter if you have questions about your federal_income_tax status and responsibilities call our customer service number pincite-829-1040 tty for deaf or hard of hearing or customer service for businesses pincite-829-4933 letter rev catalog number 47635z sincerely jeffrey i cooper director exempt_organizations rulings and agreements enclosures notice redacted letter proposed adverse determination under sec_501 other than c redacted letter final adverse determination under sec_501 a other than c - no protest letter rev catalog number 47635z department of the treasury internal_revenue_service irs p o box cincinnati oh legend b state c date of formation f city w dollars amount x dollars amount dear date date employer id number contact person id number contact telephone number contact fax number uil we considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code the code based on the information provided we determined that you don’t qualify for exemption under sec_501 of the code this letter explains the basis for our conclusion please keep it for your records issues do you qualify for exemption under sec_501 of the code no for the reasons stated below facts you are a nonprofit corporation formed in the state of b on c you are formed for the social literary educational musical intellectual athletic and physical development improvement benefit and amusement of members you own and operate a local golf course in the city of f you maintain the course for the benefit of members and the public you also operate a clubhouse for the benefit and convenience of members the clubhouse is available for rent for various community functions you are governed by a board_of directors who has hired a clubhouse and course manager as well as several seasonal part-time employees your articles of incorporation state you will have stock that is non-assessable and non-dividend bearing except as provided in your bylaws per your bylaws you will have two classes of members stockholder members and general members stockholder members are members who have purchased a share of your stock the stock will be evidenced by a certificate stockholder members will be the only members who are qualified for a position on the board_of directors except for the role of president they are also they only members who have voting rights for the board_of directors except the president who may vote in the case of atie contravention to your bylaws your form_1024 application_for recognition of exemption indicates that only members belonging to the board_of directors have voting rights in shares of stock issued to stockholder members are not assignable or transferable the holder of stock may apply to the board_of directors for redemption of the stock per your form_1024 you have over shares of common_stock which is sold at w dollars per share however you later indicated that you have less than members who hold shares and those shares have a value of x dollars you do not pay any dividends general members are all your other members who have paid annual dues anyone can be a member who has paid annual dues with no limit to the number of members that can join members receive the benefit of unlimited golfing you only have one annual event exclusively for your members there are different membership rates for students single members couples and families members receive membership cards and you maintain a membership list your board_of directors determines the initiation fee and dues payable the amount is due annually and is the same for both stockholder members and general members a member may be suspended or terminated for cause for ineligibility or being in default of annual dues by vote of the board_of directors you are open for public use non-members are allowed to golf on your course and patronize your clubhouse on a regular basis you calculate that approximately of your receipts are from non-member use of the club there are no restrictions or additional benefits for being a member versus a public consumer you have no special policies for guests of members your sources of revenue include dues and membership food and beverage sales golf course green fees cart rentals space rentals and clubhouse rentals according to the financial data you provided approximately of your revenue is from membership dues the other is derived from the operation of the golf course and includes revenue from the bar cart rentals cart space rent driving range golf merchandise green fees insurance proceeds machine income as well as a few other minimal income sources your expenses are primarily operational expenses related to your activities law sec_501 of the code provides for the exemption from federal_income_tax of clubs organized for pleasure recreation and other non-profitable purposes substantially_all of the activities of which are for such purposes and no part of the net_earnings of which inures to the benefit of any private shareholder sec_1_501_c_7_-1 states that the exemption provided by sec_501 of the code for an organization described in sec_501 of the code applies only to clubs which are organized and operated exclusively for pleasure recreation and other non-profitable purposes but does not apply to any club if any part of its net_earnings inure to the benefit of any private shareholder in general this exemption extends to social and recreation clubs which are supported solely by membership fees dues and assessments sec_1 c -l b states that a club which engages in business such as making its social and recreational facilities available to the general_public or by selling real_estate timber or other products is not organized and operated exclusively for pleasure recreation and other non-profitable purposes and is not exempt under sec_501 solicitation by advertisement or otherwise for public patronage of its facilities is prima facie evidence that the club is engaging in business and is not being operated exclusively for pleasure recreation or social purposes however an incidental sale of property will not deprive a club of its exemption_letter rev catalog number 47628k public law 1976_2_cb_596 provides that a social_club may receive up to percent of its gross_receipts including investment_income from sources outside its membership without losing exemption within thi sec_35 percent amount not more than percent of the gross_receipts should be derived from the use of a social club's facilities or services by the general_public this means that an exempt social_club may receive up to percent of its gross_receipts from a combination of investment_income and receipts from nonmembers so long as the latter do not represent more than percent of the total receipts revrul_58_588 1958_3_cb_265 provides that an organization formed by several individuals to operate a health recreational and social_club but whose predominant activity is the selling of services for profit to an unlimited number of so-called members who have no voice in the management of the club and whose only rights are to the use of the club's facilities upon the payment of specified fees is not a tax-exempt social_club within the meaning of sec_501 of the code revrul_58_589 1958_2_cb_266 sets forth criteria or tests for determining whether an organization qualifies for exemption from federal_income_tax under sec_501 of the code the ruling states that a club that makes its facilities open to the general_public and the purpose is to increase its funds for enlarging its club facilities or for otherwise benefitting its members it is evident that it is not operating as an exempt social_club within the intendment of sec_501 of the code there must be an established membership of individual personal contacts and fellowship a commingling of the members must play a material part in the life of the organization revrul_60_324 1960_2_cb_173 held that a social_club that made its social facilities available to the general_public through its member-sponsorship arrangement cannot be treated as being operated exclusively for pleasure recreation or other non-profitable purposes and no longer qualified for tax exemption under sec_501 of the code revrul_69_219 1969_1_cb_153 states that a social_club that regularly holds its golf course open to the general_public and charges established green fees that are used for maintenance and improvement of club facilities is not exempt under sec_501 of the code in chattanooga automobile club v commissioner warren automobile club inc v commissioner 182_f2d_551 6th cir the united_states court_of_appeals 6th circuit held that to be exempt under the act of congress a club must have been organized and operated exclusively for pleasure recreation and other non- profitable purposes the court further specified that the words other non-profitable purposes must be construed as coming within the same classification as pleasure and recreation in addition there must be at least some sort of commingling of members to constitute a club the court held that the two automobile clubs petitioning the court were not exempt under sec_101 of the internal_revenue_code_of_1939 as a social_club because the members of these clubs did not commingle application of law you are not described under sec_501 of the code because you are not organized for pleasure recreation or other non-profitable purposes you operate a golf course for members as well as for the general_public per sec_1_501_c_7_-1 and sec_1_501_c_7_-1 this exemption extends to social and recreational_clubs which are supported by membership fees dues and assessments and not for an organization that engages in business such as making facilities available to the general_public while you do raise funds letter rev catalog number 47628k through membership fees and assessments you also are open to the public and raise a substantial amount of revenue from non-member sources this demonstrates you are conducting commercial operations rather than a social_club for members you do not qualify for exemption per public law which states no more than of receipts may be from the use of a social club’s facilities or services provided to the general_public you reported your non- member income to be more than of your total receipts which is greater than the conduct of business activities including the public use of your social and recreational facilities is incompatible with exemption so even if you were to meet the facts and circumstances non-member income test you would still fail to qualify for exemption under sec_501 of the code you have only one organized member event per year - a city golf tournament you provided no evidence of regular commingling of members material in the operation of a sec_501 social_club thus as in chattanooga automobile club and revrul_58_589 you are not organized exclusively for the pleasure and recreation of your members because you are formed primarily to offer a facility and services to the public with an insignificant amount of commingling you are similar to revrul_60_324 and because you are making your golf course and clubhouse facilities available to the general_public accordingly you are not operated exclusively for pleasure recreation or other non-profitable purposes you are also similar to the organization described in revrul_58_588 because your social purposes are incidental to your purpose of providing a golf course to the general_public members who choose not to purchase stock have no voting rights and only receive unlimited golfing in return for their dues this is similar to what you offer the general_public who can use your facilities for a fee you also have no limit to the number of your members so your general members are not distinguishable from the general_public except in the manner in which they pay for services when membership requirements are so broad or vaguely stated or the initiation charges or dues are so low that one-time or transient use of the facility by the general_public is encouraged it is questionable if the organization can be viewed as a true club conclusion you are not formed exclusively for pleasure recreation and other non-profitable purposes as required by sec_501 of the code your facility is regularly open to the public and you receive a substantial amount of your income from non-member sources additionally your operations do not require members to commingle accordingly you do not qualify for recognition of exemption under sec_501 if you don’t agree you have a right to file a protest if you don’t agree with our proposed adverse determination to do so you must send a statement to us within days of the date of this letter the statement must include e e your name address employer_identification_number ein and a daytime phone number acopy of this letter highlighting the findings you disagree with letter rev catalog number 47628k e e e e anexplanation of why you disagree including any supporting documents the law or authority if any you are relying on the signature of an officer director trustee or other official who is authorized to sign for the organization or your authorized representative one of the following declarations for an officer director trustee or other official who is authorized to sign for the organization under penalties of perjury i declare that i examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete for authorized representatives under penalties of perjury i declare that i prepared this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete your representative attorney certified_public_accountant or other individual enrolled to practice_before_the_irs must file a form_2848 power_of_attorney and declaration of representative with us if he or she hasn’t already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney we’ll review your protest statement and decide if you provided a basis for us to reconsider our determination if so we'll continue to process your case considering the information you provided if you haven’t provided a basis for reconsideration we’ll forward your case to the office of appeals and notify you you can find more information about the role of the appeals_office in publication how to appeal an irs decision on tax- exempt status if you don’t file a protest within days you can’t seek a declaratory_judgment in court at a later date because the law requires that you use the irs administrative process first sec_7428 of the code where to send your protest please send your protest statement form_2848 if needed and any supporting documents to the applicable address u s mail street address for delivery service internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh letter rev catalog number 47628k you can also fax your statement and supporting documents to the fax number listed at the top of this letter if you fax your statement please contact the person listed at the top of this letter to confirm that he or she received it if you agree if you agree with our proposed adverse determination you don’t need to do anything if we don’t hear from you within days we’ll issue a final adverse determination_letter that letter will provide information on your income_tax filing_requirements you can find all forms and publications mentioned in this letter on our website at www irs gov formspubs if you have questions you can contact the person listed at the top of this letter sincerely jeffrey i cooper director exempt_organizations rulings and agreements enclosure publication letter rev catalog number 47628k


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-128828-13 date date x ----------------------------------------------------------------------------------------------------------------------------- state ------------- year ------- dear ----------------- this letter responds to a letter dated date submitted on behalf of x by x’s authorized representatives requesting a ruling concerning the qualifying_income exception to the publicly_traded_partnership rules of sec_7704 of the internal_revenue_code facts x is a publicly traded limited_partnership organized under the laws of state x was formed in year to own operate acquire and develop a diversified portfolio of energy service assets x earns income in a variety of business lines which include the mining processing marketing and transportation of various natural_resources through x’s service personnel and operating_assets in one distinct business line x earns income derived from the wholesale marketing and transportation of commercial silica also known as frac sand to customers engaged in the exploration and production of oil and natural_gas in particular x will sell frac sand for use in the hydraulic fracturing techniques used to extract oil and natural_gas hydraulic fracturing is a technique in which fluids the fracturing fluids are pumped into an oil or natural_gas well at high pressured to fracture geologic formations and open up pathways for the oil or natural_gas to flow to the well and be produced or extracted the fracturing fluid usually consists of a combination of water a proppant a plr-128828-13 type of granular material and other additives frac sand is one type of proppant used in the hydraulic fracturing process x’s frac sand operations focus on its mining processing marketing and transportation x derives the majority of its income from frac sand through its marketing to oilfield service companies that resell such frac sand to customers engaged in the exploration and production of oil and natural_gas as a part of a services package to be used in hydraulic fracturing activities occasionally x will market its frac sand directly to customers engaged in the exploration and production of oil and natural_gas for use in such producers’ hydraulic fracturing activities in addition in some cases x may provide transportation services with respect to the frac sand for which it will charge a fee law sec_7704 provides that a publicly_traded_partnership shall be treated as a corporation sec_7704 provides that the term publicly_traded_partnership means any partnership if interests in that partnership are traded on an established_securities_market or interest in that partnership are readily_tradable on a secondary market or substantial equivalent thereof sec_7704 provides that sec_7701 shall not apply to any publicly_traded_partnership for any taxable_year if such partnership met the gross_income requirements of sec_7704 for such taxable_year and each preceding_taxable_year beginning after date during which the partnership or any predecessor was in existence sec_7704 explains that a partnership meets the gross_income requirements of sec_7704 for any taxable_year if percent or more of the gross_income of such partnership for such taxable_year is qualifying_income sec_7704 provides that the term qualifying_income includes income or gains derived from the exploration development mining or production processing refining transportation including pipelines transporting gas oil or products thereof or the marketing of any mineral_or_natural_resource including fertilizer geothermal_energy or timber sec_7704 clarifies that for purposes of sec_7704 the term mineral_or_natural_resource means any product of a character with respect to which a deduction for depletion is allowable under sec_611 except that such term shall not include any product described in sec_613 or b describing soil sod dirt turf water mosses and minerals from sea water the air or similar inexhaustible sources plr-128828-13 the conference_report accompanying the omnibus budget reconciliation act of in discussing the type of qualifying_income described in sec_7704 provides the following income and gains from certain activities with respect to minerals or natural_resources are treated as passive-type income specifically natural_resources include fertilizer geothermal_energy and timber as well as oil gas or products thereof for this purpose oil gas or products thereof means gasoline kerosene number fuel oil refined lubricating oils diesel_fuel methane butane propane and similar products which are recovered from petroleum refineries or oil field facilities oil gas or products thereof are not intended to encompass oil or gas products that are produced by additional processing beyond that of petroleum refineries or field facilities such as plastics or similar petroleum derivatives income of certain partnerships whose exclusive activities are transportation and marketing activities is not treated as passive-type income for example the income of a partnership whose exclusive activity is transporting refined petroleum products by pipeline is intended to be treated as passive-type income but the income of a partnership whose exclusive activities are transporting refined petroleum products by truck or retail marketing with respect to refined petroleum products eg gas station operations is not intended to be treated as passive type income h_r rep no 100th cong 1st sess c b the senate report accompanying the technical_and_miscellaneous_revenue_act_of_1988 provides the following with respect to marketing of minerals and natural_resources eg oil_and_gas and products thereof the committee intends that qualifying_income be income from marketing at the level of exploration development processing or refining oil_and_gas by contrast income from marketing minerals and natural_resources to end users at the retail level is not intended to be qualifying_income for example income from retail marketing with respect to refined petroleum products eg gas station operations is not intended to be treated as qualifying_income s rep no 100th cong 2d sess conclusion based solely on the facts presented and representations made we conclude that income derived by x from the mining marketing and transportation of frac sand to oilfield service companies as well as directly to customers engaged in the exploration and production of oil and natural_gas for injection as a proppant in the fracturing technique for the production of oil and natural_gas constitutes qualifying_income within the meaning of sec_7704 plr-128828-13 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular no opinion is expressed as to whether x meets the percent gross_income requirement in sec_7704 to the extent that x’s gross_income from its activities described above are not attributable to its customer’s sec_7704 activities ie to activities of the customer such as drilling exploration and production transportation or mining of a mineral or natural_resources that would generally be expected to produce gross_income that is qualifying under sec_7704 regardless of the customer’s federal tax classification this letter will not apply in determining whether the income that may be derived by x from such other uses constitutes qualifying_income under sec_7704 this ruling is directed only to the taxpayer requesting it however in the event of a technical_termination of x under sec_708 the resulting_partnership may continue to rely on this ruling in determining its qualifying_income under sec_7704 sec_6110 provides that this ruling may not be used or cited as precedent in accordance with the power_of_attorney on file with this office we are sending copies of this letter to your authorized representatives the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely s richard t probst senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date ----------------------------------------- -------------------------- --------------------------- ------------------------------- in re -------------------------- department of the treasury washington dc person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc fip - plr-158742-05 date date ------------------------------------------------------------------------ ------------------------------------------------------------------------ ----------------------------- ------------------------------ legend trustee trust ------------------------------------------------------------------- insurance_company x --------------------------------------------------------------------------------------------------------------- insurance_company y ---------------------------------------------------------------------------------------------------------- old annuity new annuity settlor ------------------------------------------------------------------------------------ beneficiary a ---------------------------------------------------------------------- beneficiary b ----------------------------------------------------------------------- ------------------------------------------------------------------------- ---------------------------------------------------------------------- ------------------------------------------------ --------------------------------------------- -------------------------------------- ---------------------------------- --------------------------- ----- --------- --------- -------------- ------------------------- plr-158742-05 beneficiary c -------------------------------------------------------------------------------- -------------------------------------------------------------------------- ---------------------------------------------------------------------- beneficiary d ---------------------------- -------------------------------------------------------------------------- ------------------------------------------------------------------------- ---------------------------------------------------------------------- month e month f month g year year year year year year dear -------------- this is in reply to a letter dated date submitted on behalf of a_trust requesting a ruling on the subject of the taxability of annuities held by a_trust on behalf of the natural_person beneficiaries of the trust under sec_72 of the internal_revenue_code additional information was submitted in a letter dated date irrevocable_trust and settlor did not retain the right to alter amend revoke or terminate trust or any provision thereof settlor did not retain any right title or interest in the income or the principal of trust and no right title interest power option incident_of_ownership benefit or privilege in any property of trust trust provided that neither settlor nor her estate had any reversionary_interest in trust or in any of trust property settlor funded trust with cash with a view to invest in products sold by life_insurance_companies during settlor’s lifetime trustee had no power to make distributions from trust in month g of year settlor established trust trust was established as an ------- ------- ------- ------- ------- settlor died in year each of the children beneficiaries a b c and d had upon settlor’s death trustee was to divide trust property into equal shares for plr-158742-05 in month e of year trust purchased a deferred_annuity old annuity from insurance_company x old annuity contained the usual commercial_annuity terms trust was the owner and beneficiary of old annuity beneficiary a the son of settlor was the annuitant beneficiaries b and c were also sons of settlor beneficiary d was the daughter of settlor in month f of year old annuity was exchanged for a new deferred_annuity new annuity which was issued by insurance_company y in a transaction represented to have been a sec_1035 exchange new annuity had the usual terms of a commercial deferred_annuity including a contingent deferred sales charge which subtracted certain percentages for an early surrender of new annuity_trust remained the owner and beneficiary of new annuity and beneficiary a was the annuitant beneficiaries a b c and d remained the primary beneficiaries of trust the children of settlor then living and deceased children of settlor with issue then living each share set_aside was to be held by trustee in a separate trust for the benefit of such child the right to and did elect to withdraw his or her share of the principal of trust thus trust was not divided into separate trusts and there are no plans to do so now or at any time in the future new annuity is the only asset that trust presently owns trust will surrender new annuity to insurance_company y and distribute the proceeds to the four children beneficiaries a b c and d after waiting a short_period of time until month f of year when insurance_company y’s contingent deferred sales charge is zero contract is held by a person who is not a natural_person then such contract shall not be treated as an annuity_contract for purposes of subtitle a other than subchapter_l and the income_on_the_contract for any taxable_year of the policyholder shall be treated as ordinary_income received or accrued by the owner during such taxable_year sec_72 further provides that if an annuity_contract is held by a_trust or other entity as an agent for a natural_person then sec_72 shall not apply is held by a person who is not a natural_person such as a corporation then the contract is not treated as an annuity_contract for federal_income_tax purposes and the income_on_the_contract for any taxable_year is treated as ordinary_income received or accrued by the owner of the contract during the taxable_year however the legislative_history further provides that in the case of an annuity_contract the nominal owner of which is not a natural_person eg a corporation or a_trust but the beneficial_owner of which is a natural_person the contract is treated as held by a natural_person h_r conf_rep no 99th cong 2d sess ii-401-402 vol c b although trustee has a role as the contract owner of the annuities his ownership the legislative_history to sec_72 of the code states that if an annuity_contract sec_72 of the internal_revenue_code provides that if an annuity d none of the beneficiaries are employed by trust e any annuity_contracts involved satisfy the terms of sec_72 b each beneficiary is a natural_person as that term is defined in sec_72 of the the following representations were made in connection with this ruling_request c settlor of trust was not considered the owner of trust for purposes of plr-158742-05 interest as a trustee is nominal compared to the interests of the four beneficiaries a b c and d consequently the beneficiaries a b c and d are considered the beneficial owners of old annuity and new annuity a_trust has not and will not receive any consideration from a beneficiary or any other individual or entity in exchange for any distributions with respect to the annuities to a beneficiary code of the code respect to old annuity and new annuity to anyone other than a beneficiary named above a b c or d exchange made and provided trust has or will have filed form sec_1041 u s income_tax returns for estates and trusts for year sec_3 through year by yearend year and will file the year form_1041 by that return’s due_date with allowable extensions we conclude as follows purposes of sec_72 of the code treatment of old annuity new annuity or trust under the provisions of any other section of the code or the income_tax regulations specifically no opinion is expressed as to whether or not old annuity or new annuity were or are in fact annuity_contracts under sec_72 of the code furthermore no opinion is expressed as to whether old annuity or new annuity meet the requirements of sec_72 finally no opinion is expressed as to whether trust is a grantor_trust see of the code except as specifically set forth above no opinion is expressed as to the tax f under no circumstances has trust made or will make any distributions with old annuity and new annuity are considered owned by a natural_person for accordingly based solely on the information submitted the representations g the exchange of old annuity for new annuity in year was a sec_1035 this ruling letter is directed only to the taxpayer who requested it section a copy of this letter should be attached to the federal_income_tax returns to in accordance with the power_of_attorney on file in this office we are sending a plr-158742-05 k of the code provides that it may not be used or cited as precedent temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling will be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in the ruling which it is relevant copy of this letter to your authorized representative donald j drees jr senior technician reviewer branch office of associate chief_counsel financial institutions products sincerely yours s


t c summary opinion united_states tax_court james weldon aaron petitioner v commissioner of internal revenue respondent docket no 14787-04s filed date james weldon aaron pro_se monica j miller for respondent panuthos chief special_trial_judge this case was heard pursuant to the provisions of sec_6330 and sec_7463 of the internal_revenue_code in effect when the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated all subsequent section references are to the internal_revenue_code in effect at relevant times this proceeding arises from a petition for judicial review filed in response to a notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination sent to petitioner on date the issue for decision is whether respondent abused his discretion in sustaining a notice_of_federal_tax_lien filed against petitioner background some of the facts have been stipulated and they are so found the record consists of the stipulation of facts with attached exhibits an additional exhibit introduced at trial and the testimony of petitioner at the time of filing the petition petitioner resided in sebring florida respondent made assessments against petitioner for income taxes related penalties and interest for the taxable years and respondent sent a notice_and_demand for payment for each of the years at issue but petitioner failed to remit payment in date petitioner submitted an offer-in- compromise oic in which he offered to pay dollar_figure to compromise his tax_liabilities for the taxable years and the oic was based on doubt as to collectibility and promotion of effective tax_administration in a written_statement attached to the oic also included the taxable years and but did not include the taxable_year the taxable years and are not before the court the oic petitioner claimed he was unable to pay his tax_liabilities because he earned dollar_figure an hour as a customer service representative had a wife2 and three children had a monthly car payment and contributed to the support and maintenance of his then-94-year-old mother respondent processed petitioner’s oic and assigned it to an offer specialist the offer specialist sent petitioner a letter in date requesting among other things information to substantiate current income for yourself and your spouse w2s 1099s etc the letter states in part if you or your spouse are involved with any businesses as an officer a partner an owner or an investor provide a copy of the last three federal_income_tax reports if other than form_1040 schedule of disbursements made to you including loans dividends interest wages for the past three years names of officers directors and stockholders petitioner and the offer specialist exchanged correspondence over the next several months at some point during that time respondent learned that petitioner was operating a paralegal business that was not mentioned in his oic on date the offer specialist asked petitioner to provide a statement of his income from the paralegal business signed under penalty of perjury petitioner refused to provide the statement at or about the same time the offer specialist determined that petitioner’s offer of dollar_figure was insufficient because the total petitioner’s wife is not a party to this case value of his real_property interests exceeded his unpaid tax_liabilities respondent returned the oic to petitioner on date with a letter that states we requested substantiation of your financial information we have not received all of the required information therefore we have closed your offer respondent filed a notice_of_federal_tax_lien against petitioner on date for the taxable years and the total amount reflected on the notice_of_federal_tax_lien was dollar_figure respondent issued a notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 to petitioner on date petitioner timely submitted a form request for a collection_due_process_hearing the form states only that petitioner wished to continue pursuing an oic petitioner and respondent’s settlement officer held a face-to-face hearing in date petitioner did not dispute his underlying liabilities or raise a spousal defense the settlement officer informed petitioner that his offer of dollar_figure was insufficient because of the total value of his real_property interests the settlement in his oic petitioner indicated he owned four parcels of real_property the notice_of_determination however states that petitioner and the offer specialist reviewed the nine parcels of real_property in which petitioner ha s an interest a notarized document that petitioner signed on date also indicates that he had interests in nine parcels of real_property continued officer suggested an installment_agreement because petitioner lacked liquid_assets with which to pay his tax_liabilities petitioner was not willing to enter into an installment_agreement instead he wanted to discharge his liabilities through a lump-sum payment as part of an oic petitioner and the settlement officer spoke by telephone in the weeks following the face-to-face hearing the settlement officer sent petitioner a proposed installment_agreement that called for monthly payments of dollar_figure until petitioner’s liabilities were paid in full petitioner did not sign the proposed installment_agreement on date respondent issued a notice_of_determination to petitioner sustaining the filing of the notice_of_federal_tax_lien the notice_of_determination states that the requirements of various applicable legal and administrative procedures have been met it also states that the notice_of_federal_tax_lien was filed since the unpaid balance of assessment was dollar_figure or more internal_revenue_manual 13-filing guidelines discussion sec_6321 imposes a lien in favor of the united_states on all property and rights to property of a person when a demand for the payment of the person’s liability for taxes has been made and continued the discrepancy has not been explained the person fails to pay those taxes such a lien arises when an assessment is made sec_6322 sec_6323 requires the secretary to file a notice_of_federal_tax_lien if the lien is to be valid against any purchaser holder of a security_interest mechanic’s_lienor or judgment lien creditor lindsay v commissioner tcmemo_2001_285 affd 56_fedappx_800 9th cir sec_6320 provides that a taxpayer shall be notified in writing by the secretary of the filing of a notice_of_federal_tax_lien and provided with an opportunity for an administrative hearing an administrative hearing under sec_6320 is conducted in accordance with the procedural requirements of sec_6330 sec_6320 at the administrative hearing a taxpayer is entitled to raise any relevant issue relating to the unpaid tax including a spousal defense or collection alternatives such as an offer-in-compromise or an installment_agreement sec_6330 and c sec_301_6320-1 proced admin regs a taxpayer also may challenge the existence or amount of the underlying tax_liability including a liability reported on the taxpayer’s original return if the taxpayer did not receive any statutory_notice_of_deficiency for such tax_liability or did not otherwise have an opportunity to dispute such tax_liability sec_6330 see also 122_tc_384 122_tc_1 at the conclusion of the hearing the appeals officer must determine whether and how to proceed with collection taking into account among other things collection alternatives proposed by the taxpayer and whether any proposed collection action balances the need for the efficient collection_of_taxes with the legitimate concern of the taxpayer that the collection action be no more intrusive than necessary see sec_6330 sec_6330 provides for judicial review of the administrative determination in the tax_court or a federal district_court as may be appropriate where the validity of the underlying tax_liability is properly at issue the court will review the matter de novo however where the validity of the underlying tax_liability is not properly at issue the court will review the commissioner’s administrative determination for abuse_of_discretion 114_tc_176 petitioner does not seek to challenge his underlying tax_liabilities we therefore review respondent’s determination for abuse_of_discretion see 117_tc_183 goza v commissioner supra we generally consider only arguments issues and other matters that were raised at the administrative hearing or otherwise brought to the attention of the appeals_office 118_tc_488 sec_301_6320-1 q a-f5 proced admin regs the sole collection alternative petitioner proposed was an oic sec_7122 authorizes the secretary to compromise any civil case arising under the internal revenue laws as is relevant here grounds for compromise of a liability include doubt as to collectibility or promotion of effective tax_administration sec_301_7122-1 proced admin regs before discussing each of these grounds we address respondent’s contention raised for the first time in his pretrial memorandum that petitioner’s failure to pay hi sec_2002 tax_liability rendered him noncompliant with federal tax laws the court has held that where a taxpayer is not currently in compliance with federal tax laws a determination that the taxpayer is not entitled to an oic does not constitute abuse_of_discretion rodriguez v commissioner tcmemo_2003_153 see also 412_f3d_819 7th cir affg 123_tc_1 the court also has held however that petitioner’s oic does not address the taxable_year it is unclear whether he later proposed an oic as a collection alternative for that year on the basis of our discussion and resolution of the issue for decision infra the result in this case will not change if we find that petitioner offered to compromise hi sec_2002 tax_liability we therefore assume without deciding that the issue of an oic for the taxable_year was raised and is properly before the court we generally do not consider an issue that is raised for the first time at trial see eg 92_tc_376 affd 920_f2d_1196 5th cir 64_tc_989 respondent has offered no explanation for not raising the issue of petitioner’s noncompliance earlier we do not consider this issue nor does it affect the outcome of this case doubt as to collectibility the secretary may compromise a tax_liability for doubt as to collectibility when the taxpayer’s assets and income are less than the full amount of the assessed liability sec_301_7122-1 proced admin regs respondent determined that the total value of petitioner’s interests_in_real_property exceeded the amount of his unpaid tax_liabilities at trial petitioner stated he had no problem with respondent’s determination with respect to his real_property interests he also conceded that he had sufficient assets to pay his tax_liabilities for the years at issue accordingly he is not entitled to compromise his tax_liabilities on the basis of doubt as to collectibility effective tax_administration the secretary may compromise a liability on the ground of effective tax_administration when collection of the full liability will create economic hardship or exceptional circumstances exist such that collection of the full liability would undermine public confidence that the tax laws are being fairly and equitably administered 124_tc_165 sec_301_7122-1 proced admin regs economic hardship factors supporting but not conclusive of a determination that collection would cause economic hardship include but are not limited to a taxpayer is incapable of earning a living because of a long term illness medical_condition or disability and it is reasonably foreseeable that taxpayer’s financial resources will be exhausted providing for care and support during the course of the condition b although taxpayer has certain monthly income that income is exhausted each month in providing for the care of dependents with no other means of support and c although taxpayer has certain assets the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax_liabilities would render the taxpayer unable to meet basic living_expenses sec_301_7122-1 proced admin regs petitioner does not contend that he has a long-term illness medical_condition or disability nor does he claim that borrowing against the equity in his real_property interests would render him unable to meet basic living_expenses although petitioner contributes to the support of his family he has neither argued nor demonstrated that his monthly income is exhausted caring for them or that they have no other means of support accordingly petitioner has not shown that collection of the full liability would cause him economic hardship compelling public policy or equity considerations petitioner argues that his due process rights were violated when respondent’s offer specialist asked him to provide a sworn statement of his income from the paralegal business according to petitioner the offer specialist requested the statement only after informing him that she would reject his oic because of the real_property interests he owned petitioner claims he asked the offer specialist to make her request in writing but she refused petitioner contends that the offer specialist’s actions were arbitrary and capricious and denied him due process although petitioner’s argument is vague we interpret his position to be that his oic should have been accepted on the basis of public policy or equity considerations the secretary may enter into a compromise to promote effective tax_administration where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability sec_301 b ii proced admin regs a compromise will be justified only where because of exceptional circumstances collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner a taxpayer proposing a compromise on the basis of effective tax_administration will be expected to demonstrate circumstances that justify a compromise even though a similarly situated taxpayer may have paid his liability in full id examples of where a compromise is allowed for purposes of public policy and equity include a taxpayer who was hospitalized regularly for a number of years and was unable to manage his financial affairs incurs significant tax_liabilities penalties and interest and a taxpayer learns at audit that he received erroneous advice from the irs and as a result is facing additional taxes penalties and additions to tax speltz v commissioner supra pincite sec_301_7122-1 proced admin regs petitioner has identified no public policy or equity considerations that would justify a compromise on the basis of effective tax_administration the government may request additional information from a taxpayer after an oic is accepted for processing sec_301_7122-1 proced admin regs the taxpayer’s refusal to provide the requested information within a reasonable_time is grounds for returning the oic id petitioner failed to mention the paralegal business in his oic when the offer specialist learned of the existence of this business she was entitled to request additional information which she did in date and date petitioner’s refusal to provide the requested information was grounds for returning his oic accordingly petitioner has not shown that compromising his tax_liabilities would promote effective tax_administration applicable law and administrative procedure petitioner’s final argument is that respondent failed to comply with sec_6330 this section provides that the officer conducting the administrative hearing must verify that the requirements of applicable law and administrative procedure have been met for example the hearing officer must verify that the taxpayer was properly issued a notice_of_federal_tax_lien which must include the amount of unpaid tax the taxpayer’s right to request an administrative hearing the administrative appeals available to the taxpayer and the procedures relating to the release of liens sec_6320 - see also anderson v commissioner tcmemo_2003_112 petitioner’s sole contention with respect to sec_6330 is that the internal_revenue_manual irm prohibits the filing a notice_of_federal_tax_lien if the taxpayer’s unpaid balance of assessment is under dollar_figure the total amount reflected on the notice_of_federal_tax_lien that respondent filed against petitioner was dollar_figure thus petitioner argues the settlement officer erred in determining that petitioner’s unpaid balance of assessment was dollar_figure or more and thereby violated sec_6330 we disagree irm sec_5 date states that a notice_of_federal_tax_lien generally should not be filed if the taxpayer’s aggregate unpaid balance of assessment is less than dollar_figure it also states however that a notice may be filed when in the judgment of the revenue_officer it is in the best interest of the government to record the lien and a group manager approves irm sec_5 a thus there is no absolute prohibition on filing a notice_of_federal_tax_lien if the unpaid balance of assessment is less than dollar_figure even if respondent did fail to comply with the provisions of the irm those provisions govern only the internal affairs of the internal_revenue_service they do not have the force and effect of law 90_f3d_1190 6th cir 714_f2d_206 1st cir see also 114_tc_184 the authoritative sources of federal tax law are the statutes regulations and judicial decisions affd sub nom 293_f3d_1208 10th cir the procedures in the irm do not confer rights on taxpayers united the notice_of_determination refers to irm sec_5 dollar_figure date which was replaced by irm sec_5 and date for purposes of this opinion there is no substantive difference between the older and newer irm provisions states v horne supra pincite 561_f2d_685 7th cir as the court_of_appeals for the eleventh circuit has stated the irs operating procedures contained in the irm do not delineate substantive rights of individuals but instead simply establish intra-agency operating procedures as such they are a species of rule that is not judicially enforceable against the agency 981_f2d_1226 11th cir accordingly petitioner’s argument fails on the basis of our review of the record we conclude that respondent satisfied the requirements of sec_6330 and did not abuse his discretion in sustaining the notice_of_federal_tax_lien filed against petitioner respondent’s determination therefore is sustained in reaching our holding we have considered all arguments made and to the extent not mentioned we conclude that they are moot irrelevant or without merit reviewed and adopted as the report of the small_tax_case division to reflect the foregoing 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 intl b02 plr-141592-12 date date ty ------- legend taxpayer ---------------------------------------------------------- trust -------------- de ------------------------ fc -------------------------------------------- investment_advisor -------------------------------- accounting firm -------------------------------- state -------------- country a ---------------------------- country b ------------ country c ----------------- year ------- year ------- year ------- date ------------------------ date -------------------------- date ------------------------ date ------------------------ date -------------------------- date --------------------------- plr-141592-12 dear ----------------------- this is in response to a letter dated date submitted by your authorized representative that requested the consent of the commissioner of the internal_revenue_service commissioner to make a retroactive qualified_electing_fund qef election under sec_1295 of the internal_revenue_code the code and sec_1_1295-3 with respect to your investment in fc the ruling contained in this letter is based upon information and representations submitted on behalf of taxpayer by its authorized representative and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of this request_for_ruling such material is subject_to verification on examination the information submitted in the request is substantially as set forth below facts taxpayer is an individual at all times relevant to this ruling taxpayer was a united_states_resident for u s federal_income_tax purposes taxpayer is the creator of trust a state trust with respect to which taxpayer is treated as the grantor for u s federal_income_tax purposes trust is the sole owner of de a country a entity that is disregarded for u s federal_income_tax purposes stock owned by de is treated as owned by taxpayer for u s federal_income_tax purposes during year sec_1 and taxpayer through de acquired shares of fc an entity organized under the laws of country b during year sec_1 and taxpayer sold some shares of fc and recognized gain on those sales in addition taxpayer reported income from fc for year sec_1 and at the time of these transactions taxpayer was unaware that fc was a passive_foreign_investment_company pfic as defined in sec_1297 of the code at all times relevant to this ruling investment_advisor handled taxpayer’s investments including his investment in fc and received all statements and tax documents from fc on behalf of taxpayer during year taxpayer retained accounting firm to prepare his year tax_return on date taxpayer filed his year tax_return as of date taxpayer did not know or have reason to know that fc was a pfic or that he as owner of the shares of fc was eligible to make an election to treat fc as a qef at that time neither taxpayer nor his advisors had received any communications from fc identifying fc as a pfic or informing taxpayer of his eligibility to make a qef election on date accounting firm received an email from investment_advisor informing it that investment_advisor had reason to believe that fc was a pfic investment_advisor also suggested that taxpayer consider making a qef election with respect to fc plr-141592-12 investment_advisor subsequently provided accounting firm with a copy of a notice of u s tax information of u s persons the notice issued by fc on date the notice had been mailed to investment advisor’s office in country c it stated that fc was a pfic for the taxable_year beginning on date and ending on date and that any shareholder wishing to make a qef election would be permitted to review fc’s books_and_records investment_advisor did not receive a notice of u s tax information for u s persons from fc for the fiscal_year ending on date taxpayer submitted an affidavit under penalties of perjury that describes the events that led to his failure to make a qef election with respect to fc by the election due_date including the roles of accounting firm and investment_advisor taxpayer also submitted an affidavit from accounting firm which describes accounting firm’s engagement and responsibilities and the advice concerning the tax treatment of fc that it provided to taxpayer in addition taxpayer submitted an affidavit from investment_advisor which describes investment advisor’s engagement and correspondence with accounting firm upon investment advisor’s discovery that fc was a pfic taxpayer represents that as of the date of this request_for_ruling the pfic status of fc has not been raised by the irs on audit for any of the taxable years at issue ruling requested taxpayer requests the consent of the commissioner to make a retroactive qef election with respect to fc for year under sec_1_1295-3 law sec_1295 provides that a pfic will be treated as a qef with respect to a shareholder if an election by the shareholder under sec_1295 applies to the pfic for the taxable_year and the pfic complies with the requirements prescribed by the secretary for purposes of determining the ordinary_earnings and net capital_gains of the company under sec_1295 a qef election may be made for a taxable_year at any time on or before the due_date determined with regard to extensions for filing the return for the taxable_year to the extent provided in regulations the election may be made after the due_date if the shareholder failed to make an election by the due_date because the shareholder reasonably believed the company was not a pfic under sec_1_1295-3 a shareholder may request the consent of the commissioner to make a retroactive qef election for a taxable_year if plr-141592-12 the shareholder reasonably relied on a qualified_tax professional within the meaning of sec_1_1295-3 granting consent will not prejudice the interests of the united state sec_3 government as provided in sec_1_1295-3 the request is made before a representative of the internal_revenue_service raises upon audit the pfic status of the company for any taxable_year of the shareholder and the shareholder satisfies the procedural requirements of sec_1 f the procedural requirements include filing a request for consent to make a retroactive election with and submitting a user_fee to the office of the associate chief_counsel international sec_1_1295-3 additionally affidavits signed under penalties of perjury must be submitted that describe the events that led to the failure to make a qef election by the election due_date the discovery of the failure the engagement and responsibilities of the qualified_tax professional and the extent to which the shareholder relied on the professional sec_1_1295-3 and iii conclusion based on the information submitted and representations made with taxpayer’s ruling_request we conclude that taxpayer has satisfied sec_1_1295-3 accordingly consent is granted to taxpayer to make a retroactive qef election with respect to fc for year provided that taxpayer complies with the rules under sec_1_1295-3 regarding the time and manner for making the retroactive qef election 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 this private_letter_ruling is directed only to the taxpayer requesting it sec_6110 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_ruling is being sent to your authorized representative plr-141592-12 a copy of this letter_ruling must be attached to any federal_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 sincerely jeffery g mitchell chief branch office of the associate chief_counsel international


internal_revenue_service number release date index number --------------- --------------------------- ---------------------------- ------------------- --------------------------- in re request under sec_301_9100-1 and sec_301_9100-3 for an extension of time to make an election under sec_263 and sec_1_612-4 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 b06 plr-129025-12 date date legend taxpayer date dear --------- --------------------------------------------- ------------------------ -------------------------- this letter responds to a letter dated date from taxpayer’s representative requesting an extension of time pursuant to sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations for taxpayer to make an election under sec_263 of the internal_revenue_code for the taxable_year ending date taxpayer an oil_and_gas joint_venture treated as a partnership for federal_income_tax purposes is an accrual_method taxpayer that files a federal partnership income_tax return on a calendar_year basis according to the information submitted taxpayer did not timely make the election under sec_263 for the taxable_year ending date taxpayer has made representations explaining why the election under sec_263 was not timely filed sec_263 allows a taxpayer an election under regulations prescribed by the secretary to deduct idc those regulations are set forth in sec_1_612-4 of the income_tax regulations plr-129025-12 under sec_1_612-4 a taxpayer may exercise the election to expense idc by claiming idc as a deduction on the taxpayer’s return for the first taxable_year in which the taxpayer pays or incurs idc no formal statement is necessary but if the taxpayer fails to deduct idc the taxpayer is deemed to have elected to recover idc through depletion to the extent that they are not represented by physical property and through depreciation to the extent that they are represented by physical property under sec_1_612-4 an election under sec_263 is binding on the taxpayer for the first taxable_year for which it is effective and for all subsequent taxable years under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but not more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-2 and sec_301_9100-3 provide the standards the commissioner will use to determine whether to grant an extension of time to make an election under sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government based solely on the facts and representations submitted we conclude that the requirements of sec_301_9100-3 have been satisfied with respect to the taxable_year ending date accordingly an extension of time is hereby granted until days from the date of this ruling for taxpayer to make an election under sec_263 for the taxable_year ending date except as specifically set forth above we express or imply no opinion concerning the federal_income_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 taxpayer owns working interests in oil_and_gas_properties or whether any costs paid_or_incurred by taxpayer qualify as idc under sec_263 and sec_1_612-4 the rulings contained in this letter are based upon information and representations submitted by taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination plr-129025-12 in accordance with the power_of_attorney we are sending copies of this letter to taxpayer’s authorized representatives we also are sending a copy of this letter to the appropriate industry director lb_i a copy of this ruling 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 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely associate chief_counsel passthroughs special industries by _______________________ brenda m stewart senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter_ruling copy of this letter_ruling for sec_6110 purposes cc


t c memo united_states tax_court barbara k west petitioner v commissioner of internal revenue respondent docket no filed date barbara k west pro_se anne m craig for respondent 1the court initially granted petitioner’s request that the case be conducted as a small_tax_case at the commencement of trial the court noted that the deficiency including the addition_to_tax and penalty for exceeded dollar_figure as a result the court concluded that the case did not qualify for small_tax_case treatment see sec_7463 e the court directed that the small_tax_case designation be removed and that the proceeding not be conducted under small_tax_case procedures see rule c unless otherwise indicated all section references are to the internal_revenue_code code in effect at all relevant times and all rule references are to the tax_court rules_of_practice and procedure memorandum findings_of_fact and opinion thornton judge pursuant to sec_7443a and rule sec_180 and sec_183 this case was assigned to and heard by chief special_trial_judge peter j panuthos his recommended findings_of_fact and conclusions of law were filed and served upon the parties on date petitioner and respondent filed no objection to the chief special trial judge’s recommended findings_of_fact and conclusions of law after reviewing the record in this case and the report of the chief special_trial_judge we adopt the recommended findings_of_fact and conclusions of law of chief special_trial_judge panuthos as the report of the court respondent determined deficiencies additions to tax and penalties for petitioner’s and federal_income_tax in the following amounts year deficiency dollar_figure big_number big_number addition_to_tax sec_6651 penalty sec_6662 dollar_figure dollar_figure dollar_figure -- dollar_figure dollar_figure the issues for decision are whether petitioner received unreported income for and whether petitioner is entitled to business_expense deductions in excess of those respondent allowed for and whether petitioner is liable for a sec_6651 addition_to_tax for and and whether petitioner is liable for a sec_6662 penalty for and findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts the supplemental stipulation of facts and the attached exhibits are incorporated herein by this reference petitioner resided in florida when she filed her petition petitioner moved to florida from colorado in in date she opened alex’s family restaurant and operated it as a sole_proprietorship throughout and petitioner owned and operated sea breeze restaurant as a sole_proprietorship from march through date she also operated and was the sole shareholder of jasmine west llc during and through date petitioner maintained a bank account for each business as well as multiple personal bank accounts she employed a bookkeeper in for her businesses but did not 2the record reflects that petitioner maintained one bank account for alex’s family restaurant one for sea breeze restaurant one for jasmine west llc under the name of barbara west d b a zorba’s and two personal bank accounts otherwise maintain books for the businesses she often borrowed funds from one business to pay the expenses of another business petitioner’s other sources of funds for the businesses included proceeds from the sale of real_estate and personal loans from friends petitioner did not timely file her federal_income_tax return for or a representative of the internal_revenue_service irs contacted petitioner in and informed her of her filing requirement petitioner thereafter filed delinquent returns the irs requested petitioner’s business records to verify her income she provided to the irs check registers for some of the bank accounts and some bank records the irs thereafter requested from the bank petitioner’s complete bank records the irs reviewed petitioner’s business and personal bank accounts and performed a bank_deposits analysis the irs examiner discussed the various entrie sec_3the record does not reflect the scope of the bookkeeper’s responsibilities petitioner did not provide any books_or_records at trial 4petitioner filed a form 1040ez income_tax return for single and joint filers with no dependents and a form_1040 u s individual_income_tax_return on date petitioner also filed a form_1040 on date and a form_1120s u s income_tax return for an s_corporation on date it appears petitioner also submitted at least one amended_return to the irs examiner the return attached as an exhibit to the stipulations does not include a schedule c profit or loss from business or any business income with petitioner and accepted her characterization of many of the deposits she could identify petitioner failed to provide complete records to substantiate business_expenses or nontaxable items and was unable to identify all of the deposits listed in the bank records on date respondent issued to petitioner a notice_of_deficiency for and using a bank_deposits analysis respondent determined that petitioner had omitted income as follows total deposits nontaxable items net deposits gross_receipts amounts reported as gross_receipts adjustment dollar_figure big_number dollar_figure dollar_figure big_number dollar_figure dollar_figure big_number dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure respondent also determined an addition_to_tax for delinquent filing of returns and a negligence_penalty on date petitioner filed a petition disputing the determinations in the notice_of_deficiency opinion i unreported income in general the commissioner’s determination set forth in a notice_of_deficiency is presumed correct and the taxpayer bears the burden of showing that the determination is in error rule a 290_us_111 pursuant to sec_7491 the burden_of_proof as to factual matters shifts to the commissioner under certain circumstances petitioner has neither alleged that sec_7491 applies nor established her compliance with the substantiation and recordkeeping requirements see sec_7491 and b therefore the burden_of_proof remains on petitioner to show that the deposits are not taxable_income see rule a 96_tc_172 aff’d in part rev’d in part and remanded on other grounds 981_f2d_350 8th cir 31_tc_690 aff’d 295_f2d_336 5th cir taxpayers are required to maintain adequate books_and_records which reflect income in order to substantiate claimed tax deductions and to produce those records to the irs when requested sec_6001 sec_1_6001-1 e income_tax regs when a taxpayer fails to keep adequate books_and_records the commissioner is authorized to determine the existence and amount of the taxpayer’s income by any method that clearly reflects income see sec_446 92_tc_661 the commissioner may use indirect methods and he is given latitude in determining which method of reconstruction to apply id the commissioner’s reconstruction of a taxpayer’s income need only be reasonable in the light of all surrounding facts and circumstances 40_tc_30 see also 54_tc_1530 one of the indirect methods of reconstructing income is the bank_deposits method the use of the bank deposit s method for computing income has long been sanctioned by the courts 64_tc_651 aff’d 566_f2d_2 6th cir see also 270_fedappx_899 11th cir 577_f2d_1165 5th cir bank_deposits constitute prima facie evidence of income 87_tc_74 see also 102_tc_632 when a taxpayer’s books_or_records are inadequate or incomplete and the taxpayer has large_bank deposits the commissioner is not acting arbitrarily or capriciously by resorting to the bank_deposits method to reconstruct income see 96_tc_858 aff’d 959_f2d_16 2d cir the bank_deposits method of reconstruction assumes that all of the deposits into a taxpayer’s account are taxable_income unless the taxpayer can show that the deposits are not taxable id pincite the commissioner need not show a likely source of the income when using the bank_deposits method but he must take into account any nontaxable items or deductible expenses of which he has knowledge see 335_f2d_671 5th cir see also dileo v commissioner t c pincite the record reflects that petitioner conducted more than one business activity during the years in issue the record also reflects that petitioner either failed to keep adequate books_and_records or failed to provide them during the examination of her returns as a result respondent used the bank_deposits method to determine gross_receipts and business_expenses during the examination and reconstruction petitioner met with the irs examiner to identify various deposits and their nature as loans proceeds from sale of real_estate and other items although the examiner accepted the characterizations of many entries in the bank records as petitioner proposed petitioner was unable to identify all of the deposits as a result the examiner concluded that petitioner neither included all of the gross_receipts on her returns nor substantiated all of her claimed business_expenses for and at trial petitioner did not assert that any of the deposits characterized as income were nontaxable items she presented some very generalized testimony that her businesses did not make money she did not provide any documents to the court to support a finding that any of the deposits were nontaxable items therefore we find that petitioner had unreported income for and in the amounts respondent determined ii schedule c deductions deductions are a matter of legislative grace 308_us_488 292_us_435 a taxpayer bears the burden of proving entitlement to any deduction claimed rule a 503_us_79 290_us_111 wilson v commissioner tcmemo_2001_ the fact that a taxpayer reports a deduction on the taxpayer’s income_tax return is not sufficient to substantiate the claimed deduction 71_tc_633 62_tc_834 rather an income_tax return is merely a statement of the taxpayer’s claim it is not presumed to be correct wilkinson v commissioner t c pincite roberts v commissioner t c pincite see also 28_tc_1034 a taxpayer’s income_tax return is a self- serving declaration that may not be accepted as proof for the claimed deduction or exclusion 7_tc_245 a taxpayer’s income_tax return is not self-proving as to the truth of its contents aff’d 175_f2d_500 2d cir a taxpayer must substantiate amounts claimed as deductions by maintaining the records necessary to establish that he or she is entitled to the deductions sec_6001 sec_162 provides a deduction for certain business-related expenses in order to qualify for the deduction under sec_162 an item must be ‘paid or incurred during the taxable_year ’ be for ‘carrying on any trade_or_business ’ be an ‘expense ’ be a ‘necessary’ expense and be an ‘ordinary’ expense 403_us_345 deputy v du pont u s pincite to qualify as ordinary the expense must relate to a transaction of common or frequent occurrence in the type of business involved whether an expense is ordinary is determined by time place and circumstance welch v helvering u s pincite a review of this record was made exceedingly difficult as the tax_return information did not align with the adjustments in the notice_of_deficiency although respondent apparently allowed some schedule c business_expense deductions and disallowed others the notice_of_deficiency did not clearly identify these items nor did respondent offer a clear explanation in his trial memorandum or at trial on the other hand petitioner failed to present any documentary_evidence or testimony that would suggest that she is entitled to additional schedule c business_expense deductions the record reflects that petitioner owned and operated several businesses during the years in issue and likely incurred business_expenses however petitioner relies on her very general statement that she did not make a large profit without evidence of the nature or amounts of expenses we have no basis upon which to allow additional schedule c business_expense deductions iii failure_to_file sec_6651 imposes an addition_to_tax for failure_to_file a return on the date prescribed including extensions unless the taxpayer can establish that the failure is due to reasonable_cause and not due to willful neglect respondent has satisfied his burden of production under sec_7491 by establishing as petitioner acknowledges that petitioner did not file her and federal_income_tax returns by their due dates therefore petitioner bears the burden of proving that her failure_to_file the returns was due to reasonable_cause and not due to willful neglect see 116_tc_438 ruggeri v commissioner tcmemo_2008_300 reasonable_cause is a defense to the sec_6651 addition_to_tax to prove reasonable_cause for a failure to timely file the taxpayer must show that she exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time 92_tc_899 sec_301_6651-1 proced admin regs the determination of whether reasonable_cause exists is based on all the facts and circumstances 78_tc_19 estate of hartsell v commissioner tcmemo_2004_211 merriam v commissioner tcmemo_1995_432 aff’d without published opinion 107_f3d_877 9th cir petitioner alleges that she did not file her returns because she believed she did not make enough combined profit in her businesses to be required to file a return when the irs contacted petitioner in the agent informed her that she was required to file tax returns petitioner thereafter hired a return preparer and filed delinquent returns for and petitioner gave no other reason for her failure_to_file the and returns petitioner’s mistaken belief does not constitute reasonable_cause for failure to timely file her returns see 26_tc_528 there is no showing that advice of counsel was in fact sought or relied upon mere uninformed and unsupported belief by a taxpayer no matter how sincere that belief may be that he is not required to file a tax_return is insufficient to constitute reasonable_cause for his failure so to file aff’d 243_f2d_954 4th cir see also soltan v commissioner tcmemo_2010_91 we conclude that petitioner has not shown her failure to timely file returns was due to reasonable_cause therefore we find that petitioner is liable for the sec_6651 addition_to_tax for and iv accuracy-related_penalty taxpayers may be liable for a penalty on the portion of an underpayment_of_tax attributable to negligence disregard of rules or regulations or a substantial_understatement_of_income_tax sec_6662 and b and the term negligence in sec_6662 includes any failure to make a reasonable attempt to comply with the code and the term disregard includes any careless reckless or intentional disregard sec_6662 negligence has also been defined as the failure to exercise due care or the failure to do what a reasonable person would do under the circumstances see 92_tc_1 aff’d 925_f2d_348 9th cir 85_tc_934 negligence also includes any failure by the taxpayer to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs an understatement of income_tax is substantial if it exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 a taxpayer may avoid the application of an accuracy-related_penalty by proving she acted with reasonable_cause and in good_faith see sec_6664 see also higbee v commissioner t c pincite sec_1_6664-4 income_tax regs we analyze whether a taxpayer acted with reasonable_cause and in good_faith by examining the relevant facts and circumstances and most importantly the extent to which the taxpayer attempted to assess her proper tax_liability see neely v commissioner t c pincite stubblefield v commissioner tcmemo_1996_ sec_1_6664-4 income_tax regs in order for the reasonable_cause exception to apply the taxpayer must prove that she exercised ordinary business care and prudence as to the disputed items 115_tc_43 aff’d 299_f3d_221 3d cir respondent has met his burden of production under sec_7491 for the accuracy-related_penalty for negligence by showing that petitioner omitted gross_receipts and failed to maintain adequate_records petitioner provided no documentation to the court and made no attempt to prove the source or nature of the unreported income or to substantiate various disallowed expenses petitioner did not show that she made a reasonable attempt to comply with the code or that she acted in good_faith she failed either to maintain or to produce books_and_records with respect to her business activities we conclude that petitioner is liable for the sec_6662 accuracy-related_penalty for negligence for and because we have found that petitioner is liable for the accuracy-related_penalty for negligence we need not discuss whether she had a substantial_understatement_of_income_tax to reflect the foregoing 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 psi b02 plr-106471-08 date date x ------------------------------------------------------------------------------------------------------ ------------------------ state ------------- d1 ----------------------- dear -------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated in state on d1 it was intended that x elect s_corporation treatment effective d1 however a form_2553 election by a small_business_corporation was not timely filed for x sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective generally if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one-half months of a corporation's taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election for the plr-106471-08 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 then the secretary may treat the election as timely made for such taxable_year and sec_1362 shall not apply based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation effective d1 accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective d1 within days following the date of this letter then such election will be treated as timely made for x's taxable_year beginning d1 a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes 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 pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely bradford r poston senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc