t c memo united_states tax_court paul g gubbini petitioner v commissioner of internal revenue respondent docket no filed date marie l demarco and j paul raymond for petitioner francis c mucciolo for respondent memorandum findings_of_fact and opinion wells judge respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax after concessions the issues remaining for decision are whether petitioner is entitled to a business_bad_debt deduction pursuant to sec_166 for the worthlessness of certain loans and advances made by petitioner to color trick inc color trick and whether petitioner may claim an ordinary_loss pursuant to sec_1244 attributable to the worthlessness of his stock in color trick unless otherwise noted all section references are to the internal_revenue_code as in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts and certain exhibits have been stipulated for trial pursuant to rule the stipulated facts are incorporated herein by reference and are found accordingly at the time he filed the petition in the instant case petitioner resided in dunedin florida beginning in and during the times relevant to the instant case petitioner was an anesthesiologist during petitioner and certain other anesthesiologists formed a partnership known as anesthesia associates of dunedin medical group that provided services at a local hospital petitioner handled operation of the medical group petitioner worked between and hours per week as an anesthesiologist and took weeks of vacation per year from until or petitioner invested with a builder in the construction and sale of homes on speculation additionally petitioner and another physician in the medical group owned an apartment building petitioner maintained the building collected rents and found tenants petitioner sold the building during to pay expenses connected with his divorce during after being approached by an accountant petitioner together with two other physicians invested in a company known as cinevision petitioner expected to reap a profit if cinevision’s business was successful cinevision experienced difficulties after purchasing additional equipment to expand its business petitioner was involved in meetings with cinevision's management in an attempt to resolve the difficulties a tenant in petitioner's apartment building introduced petitioner to leland prentice who held a patent for a simple and inexpensive process of color printing process leland prentice had licensed the patent to prentice color which in turn made an agreement with a b dick a large printing equipment and process distributor to market the process to print shops prentice color had gone bankrupt allegedly due to a b dick’s failure to market the process and a lawsuit was being pursued against a b dick to dissolve the agreement to market the process and to recover damages for a b dick’s alleged failure to market the process the litigation was settled in leland prentice had the right to use the process in two locations but could not market it and had come to florida to set up a print shop using the process leland prentice also hoped to market the process once the lawsuit against a b dick was resolved he however did not have the necessary resources to exploit his rights in the patent petitioner was willing to put money into leland prentice’s business in order to share in the profits when it became successful during october or date color trick was organized pursuant to florida law leland prentice and his wife faye prentice were issued shares of color trick’s stock leland prentice’s son stanley prentice and his wife were issued shares and petitioner was issued shares a 20-percent interest in the corporation petitioner paid dollar_figure for the shares the directors of the corporation were leland prentice faye prentice and petitioner color trick was an s_corporation on date leland prentice assigned the patent to color trick from through petitioner advanced funds and made and guaranteed loans to color trick petitioner continued to make loans to color trick because he believed its business could be profitable petitioner received promissory notes for some of the advances and loans petitioner’s loans and advances to color trick were used to finance its operations and to purchase equipment from through petitioner devoted time and effort to color trick’s business but received no compensation from color trick during the period of its operation color trick experienced continuing difficulties due to lack of sales equipment problems and an excessive number of employees on date color trick reassigned the patent to leland prentice and his wife in exchange for shares of its stock which were to be canceled on that date two other investors in color trick were each issued shares of color trick as a condition for advancing more money to color trick on date leland prentice granted petitioner and other investors a lien on the patent and a financing statement concerning the lien was filed with the florida secretary of state the lien on the patent was the only security petitioner obtained for all of his loans and advances to color trick petitioner also considered any damages that might be awarded in connection with the lawsuit against a b dick as a possible source for the repayment of his loans and advances to color trick during and as petitioner continued to advance funds to color trick he acquired additional stock in color trick and by the end of he had acquired percent of the stock of color trick during in order to induce petitioner to continue to advance funds to color trick leland prentice and his wife returned the remainder of their stock in color trick to the corporation the stock was reissued to petitioner and other investors the transfer of the shares allowed more of color trick’s losses to be passed through to petitioner and the other investors leland prentice continued to work in color trick’s business after he had given up all of his stock in the corporation stanley prentice and his wife also returned their shares of stock in color trick to the corporation during date toward the end of petitioner concluded that color trick could not generate sufficient income to pay its bills that its business could not be turned around and that he could not continue advancing money to the business petitioner’s efforts to sell color trick around that time were unsuccessful except for activities connected with winding down its business color trick ceased operations at the end of its equipment was sold or foreclosed upon and available funds were used to repay certain creditors not including petitioner leland prentice had no assets from which petitioner’s loans could have been repaid petitioner did not attempt to foreclose on or to sell the patent the process had become obsolete by the end of because of the widening availability of digital printers petitioner received no repayment of principal or payment of interest with respect to the loans and advances he had made to color trick on his federal_income_tax returns for and petitioner claimed the following losses with respect to color trick year loss dollar_figure big_number big_number petitioner reported the income or loss connected with cinevision as passive_income or loss on his through returns on his federal_income_tax return petitioner claimed a business_bad_debt deduction with respect to his loans to color trick in the amount of dollar_figure petitioner’s federal_income_tax returns for taxable years through contain no other reference to any lending activity of petitioner opinion the first issue we consider is whether petitioner is entitled to a business_bad_debt deduction pursuant to sec_166 for the worthlessne sec_1 of petitioner’s loans and advances to color trick that section provides in general for the deduction of debts that become wholly worthless during a taxable_year sec_166 however limits the general_rule providing that in the case of a taxpayer other than a corporation nonbusiness bad_debts are to be treated as short- term capital losses in general a nonbusiness_bad_debt is a respondent does not contest the fact that petitioner's loans to color trick became worthless during sec_166 provides sec_166 nonbusiness debts -- general_rule --in the case of a taxpayer other than a corporation-- a subsection a shall not apply to any continued debt other than a debt created or acquired in the trade_or_business of the taxpayer or the loss from the worthlessness of which is incurred_in_a_trade_or_business of the taxpayer sec_166 the question whether a debt is a nonbusiness_bad_debt is a question of fact sec_1_166-5 income_tax regs petitioner has the burden of showing that he was engaged in a trade_or_business to which the debts in question are proximately related 407_f2d_530 5th cir affg tcmemo_1967_216 325_f2d_551 5th cir 73_tc_1081 the question of whether a shareholder’s loans to his corporation are business or nonbusiness bad_debts frequently has been litigated a worthless_debt resulting from a loan by a continued nonbusiness_debt and b where any nonbusiness_debt becomes worthless within the taxable_year the loss resulting therefrom shall be considered a loss from the sale_or_exchange during the taxable_year of a capital_asset held for not more than year nonbusiness_debt defined --for purposes of paragraph the term nonbusiness_debt means a debt other than-- a a debt created or acquired as the case may be in connection with a trade_or_business of the taxpayer or b a debt the loss from the worthlessness of which is incurred in the taxpayer’s trade_or_business shareholder to his corporation may qualify as a business_bad_debt if the shareholder was engaged in the business of promoting organizing financing and selling corporations deely v commissioner supra pincite if a shareholder is only an investor the debt will be treated as a nonbusiness_bad_debt because the management of one’s investments does not constitute a trade_or_business id in 373_us_193 the supreme court set forth the following guidelines for deciding the question devoting one’s time and energies to the affairs of a corporation is not of itself and without more a trade_or_business of the person so engaged though such activities may produce income profit or gain in the form of dividends or enhancement in the value of an investment this return is distinctive to the process of investing and is generated by the successful operation of the corporation’s business as distinguished from the trade_or_business of the taxpayer himself when the only return is that of an investor the taxpayer has not satisfied his burden of demonstrating that he is engaged in a trade_or_business since investing is not a trade_or_business and the return to the taxpayer though substantially the product of his services legally arises not from his own trade_or_business but from that of the corporation if full-time service to one corporation does not alone amount to a trade_or_business which it does not it is difficult to understand how the same service to many corporations would suffice to be sure the presence of more than one corporation might lend support to a finding that the taxpayer was engaged in a regular course of promoting corporations for a fee or commission or for a profit on their sale but in such cases there is compensation other than the normal investor’s return income received directly for his own services rather than indirectly through the corporate enterprise in deely v commissioner supra pincite we concluded that based on whipple v commissioner supra pincite a taxpayer claiming to be in the business of promoting financing and or dealing in corporations must show that the activity is conducted for a fee or commission or with the immediate purpose of selling the corporations at a profit in the ordinary course of that business a taxpayer who seeks a return from long-range investment gains rather than from a quick sale of a corporation after it has become established is more likely to be considered an investor rather than a business promoter deely v commissioner supra pincite5 whether petitioner is engaged in the trade_or_business of promoting corporations is a question of fact 62_tc_263 see also 480_us_23 petitioner claims that he was engaged in the trade_or_business of a venture capitalist or business promoter and that the loans and advances that he made to color trick were made in the course of that trade_or_business petitioner however has not established that he was engaged in the trade_or_business of promoting corporations in addition to his medical practice we note that petitioner's medical practice was his primary occupation to which he devoted approximately to hours per week excluding vacations additionally petitioner admitted that he was not in the business of lending money when he began advancing funds to color trick moreover nothing in petitioner’s federal tax returns that are in the record indicates that he earned_income from rendering services as a promoter although petitioner claims that he had a reputation in his community as a promoter there is little evidence in the record to support that claim and the absence of any indication that petitioner was separately compensated for his activities renders that evidence unpersuasive deely v commissioner supra pincite petitioner points to his activities outside his medical practice to show that he was engaged in the trade_or_business of being a business promoter but the activities do not indicate that petitioner was in that trade_or_business although petitioner was involved in building and selling houses on speculation prior to his dealings with color trick the record does not indicate how he was compensated for his efforts that is whether he received compensation directly for his services or indirectly through the success of the ventures moreover that activity had ceased in or and it therefore does not indicate that petitioner was involved in a business of developing properties for quick sale during when he became involved with color trick petitioner’s other activities such as his ownership of an apartment building and his investment in cinevision do not indicate that he engaged in promoting corporations for a fee or commission or for the profit to be derived from quickly selling them after they were established rather petitioner appears to have sought long-term returns from his ownership interests which is the hallmark of the investor deely v commissioner supra although petitioner was actively involved in the management of the apartment building there is no evidence he was directly compensated for his services moreover it does not appear that he planned to sell the apartment building once it became established rather he sold it as a result of his divorce proceedings similarly petitioner apparently sought a return from cinevision in the form of enhanced value of his investment rather than from direct compensation_for his services to the corporation petitioner moreover reported the income or loss connected with cinevision as passive_income or loss on his through returns petitioner’s activities with respect to cinevision which consisted of meetings with its management to discuss its difficulties appear no different from those of an investor seeking to protect his investment as we discuss below we reach the same conclusion with respect to petitioner’s activities in connection with color trick the record is also devoid of evidence of other indicia of a business of promoting corporations such as the active seeking out of opportunities to promote corporations advertising the maintenance of a separate office or books of account for such a business or the preparation of statements of profit and loss from corporate promotion activities 375_f2d_36 5th cir accordingly we conclude that petitioner was not in the trade_or_business of promoting corporations moreover even if petitioner were engaged in a promoting business we would not conclude that the business encompassed his activities regarding color trick petitioner’s activities in connection with color trick were more consistent with those of an investor rather than those of a business promoter petitioner’s loans and advances to color trick were used to finance its operations and to purchase equipment which furthered color trick’s business petitioner’s rendering of advice and making advances to color trick did not in themselves amount to a promotion of the corporation 358_f2d_892 1st cir furthermore petitioner’s testimony indicates that the only return he expected for his investments in color trick was from dividends or the long-term enhancement of his share holdings generated from the profits to be derived from the success of color trick's business petitioner may also have hoped to share in any recovery from a lawsuit against a b dick in connection with a license it was granted to market the process petitioner further appears to have expected some return from the exploitation of the patent once a b dick’s licensing agreement was dissolved in connection with the litigation petitioner took no salary from color trick and there is no evidence that he expected or was entitled to any direct compensation_for his services although petitioner contended that he did not do so because of color trick’s financial problems there is no evidence that he was owed any salary for his services or that he deferred collecting any salary due him we conclude from the record as a whole that petitioner expected only an investor’s return from color trick in the form of dividends or long-term enhanced value of his shareholdings it does not appear that petitioner planned to sell color trick quickly once it became established indeed there is some question whether the business could have been sold because leland prentice was allowed to use his process in only two locations but was not allowed to market it rather an effort was made to sell the business only after petitioner decided that it would not be successful and that he could not continue financing it petitioner also contends that he made advances to color trick in order to protect his business reputation after he had induced other physicians in the medical group to invest in color trick as noted above we cannot conclude from the record in the instant case that petitioner had a reputation as a business petitioner does not contend that the investments in color trick by other physicians with whom he practiced rendered his advances to color trick proximately related to his medical practice or that his medical practice would be in any way affected by the fate of color trick promoter it appears to us that in making the advances petitioner’s motivation was to protect his reputation as an investor petitioner also contends that he made advances to color trick in an effort to protect the investments of the other physicians who had loaned money to color trick advancing money to a corporation to protect the investments of others however is an indication that the taxpayer is not a promoter united_states v clark supra pincite petitioner also contends that his advances and loans to color trick exceeded his initial investment in its stock by times and that this circumstance indicates the lack of an investment motive for the loans and advances we do not consider the circumstance pointed to by petitioner indicative of the lack of an investment motive given that petitioner acquired additional stock in color trick during and held percent of its stock by the end of and was not entitled to compensation_for his services to color trick it seems quite plausible to us that petitioner’s loans and advances were made to protect his increasing and substantial equity stake in the corporation based on our consideration of the entire record in the instant case we hold that petitioner’s loans and advances to color trick which became worthless in are nonbusiness bad_debts whipple v commissioner u s pincite united_states v byck f 2d pincite deely v commissioner t c pincite3 petitioner alternatively contends that he is entitled to claim pursuant to sec_1244 an ordinary_loss of dollar_figure due to the worthlessness of his stock in color trick sec_165 provides generally that the loss resulting from the worthlessness of a security including stock that is a capital_asset is capital in nature and the allowability of such a loss consequently is governed by the provisions of sec_1211 the allowable_amount of the loss is the adjusted_basis of the security provided in sec_1011 for purposes of determining the loss from the sale_or_other_disposition of property sec_165 sec_1244 however allows an individual taxpayer to treat a loss from sec_1244 stock as an ordinary_loss where it would otherwise be treated as a loss from the sale_or_exchange of a capital_asset as relevant to the instant case the aggregate amount of the loss that may be treated as an ordinary respondent contends that petitioner raised this issue too late in the course of the instant case for us to consider it respondent points out that the issue was not raised in the petition any amendment thereto or in petitioner’s trial memorandum and contends that it would be unfair and prejudicial to respondent for us to consider the issue which respondent asserts was raised for the first time at trial because we decide below that petitioner has not established his entitlement to claim a loss pursuant to sec_1244 we need not consider whether respondent was surprised and prejudiced by the raising of the issue at trial loss pursuant to sec_1244 cannot exceed dollar_figure sec_1244 the term sec_1244 stock is defined to mean stock of a domestic_corporation where at the time of the stock's issuance the corporation had not received money or other_property in excess of dollar_figure million for its stock as a contribution_to_capital or as paid-in_surplus the stock was issued for money or other_property other than stock_or_securities and the corporation during its most recent taxable years or if less the period during which the corporation has been in existence derived more than percent of its aggregate gross_income from sources other than royalties rents dividends interest annuities and sales or exchanges of stocks or securities the third test however does not apply where the amount_of_deductions allowed exceeds the amount of the corporation’s gross_income sec_1244 the commissioner is empowered to prescribe the regulations necessary to carry out the purposes of sec_1244 sec_1244 pursuant to that authority the commissioner has issued regulations requiring a taxpayer to have records sufficient to establish that the taxpayer is entitled to the loss and satisfies the requirements of sec_1244 sec_1_1244_e_-1 income_tax regs we have the commissioner’s regulations previously required taxpayers claiming a loss pursuant to sec_1244 to attach an information report to the return in which the loss was claimed showing the address of the corporation issuing the stock the manner in which continued held that strict compliance with the requirements of sec_1244 and the regulations issued pursuant to it is necessary to obtain the benefits of the section 70_tc_208 46_tc_878 petitioner contends that he received certain stock in color trick that previously had been held by each of leland prentice and his wife and or stanley prentice and his wife in exchange for repaying a dollar_figure debt of color trick petitioner bases his claim of a sec_1244 loss on that transaction petitioner however has not established his basis in his color trick stock for purposes of computing the amount of his loss pursuant to continued the stock was acquired the nature and amount of the consideration paid and if the stock was acquired in a nontaxable_transaction in exchange for property other than money the type of property transferred its fair_market_value on the date of transfer to the corporation and its adjusted_basis on that date sec_1_1244_e_-1 and income_tax regs amended by t d 1995_1_cb_146 petitioner did not file such an information report with his return in however the commissioner eliminated the requirement of an information report amending the regulation to require only that taxpayers maintain adequate_records to establish their entitlement to claim a loss pursuant to that section t d c b pincite see also notice_94_89 1994_2_cb_560 the amendment is effective for all open taxable years beginning after date t d c b pincite consequently petitioner’s failure_to_file an information report is not fatal to his claim of entitlement to a loss pursuant to sec_1244 in view of the circumstances discussed below and our holding that petitioner has not otherwise established his entitlement to the benefits of sec_1244 we need not address whether that stock was issued to petitioner in the manner required by sec_1244 sec_1244 petitioner testified that he did not receive additional stock in color trick for the money he advanced to it but that the shares were kickers elsewhere on brief petitioner treats only his dollar_figure payment for his initial purchase of color trick’s stock as the amount of his investment in its stock petitioner has not attempted to reconcile the inconsistency of his positions at trial and on brief with his sec_1244 claim furthermore color trick was an s_corporation and consequently the losses that were passed through to petitioner reduced his basis in its stock sec_1367 the basis- adjustment rules of sec_1367 are applied before application of sec_165 and sec_166 in a taxable_year of the shareholder in which a security or debt becomes worthless petitioner does not dispute that on its and returns color trick reported losses of dollar_figure dollar_figure and dollar_figure respectively on his returns for through petitioner claimed losses in connection with color trick totaling dollar_figure petitioner has not shown that there was any basis remaining in his color trick stock after taking into account the foregoing losses claimed on his returns that would enable him to claim a loss with respect to its worthlessness additionally petitioner contends that many records pertaining to color trick were dispersed after color trick ceased operations we note however that the loss of records does not alter petitioner’s burden_of_proof but in such a case we shall consider credible secondary evidence 71_tc_1120 petitioner relies on certain documents of color trick viz its articles of incorporation and minutes of shareholders’ meetings certain testimony and certain of his federal_income_tax returns to establish his entitlement to a sec_1244 loss certain other records however have not been offered by petitioner such as his stock certificates or the stock transfer records of color trick we do not accept the statements in petitioner’s federal_income_tax returns as proof of the facts asserted by petitioner a tax_return is merely a statement of the taxpayer’s claim and does not establish the truth of the matters set forth therein 71_tc_633 62_tc_834 7_tc_245 affd 175_f2d_500 2d cir accordingly we hold that the evidence on which petitioner relies is insufficient to establish his entitlement to the benefits of sec_1244 moreover petitioner has failed to maintain records sufficient to establish that he is entitled to the loss claimed with respect to his stock in color trick and that he satisfies the requirements of sec_1244 sec_1_1244_e_-1 income_tax regs accordingly we hold that petitioner is not entitled to claim an ordinary_loss pursuant to sec_1244 in connection with the worthlessness of his stock in color trick to reflect the foregoing and concessions decision will be entered for respondent


department of the treasury int ernal revenue service washington d c o f f i c e o f c h i e f c o u n s e l number release date date cc corp postf-150620-01 uilc 1012-dollar_figure internal_revenue_service national_office legal advice memorandum for cc lm fs li from associate chief_counsel corp cc corp subject application of step_transaction_doctrine to lease_strip this chief_counsel_advice responds to your memorandum dated date and supplements the chief_counsel_advice issued to you on date which responded to your memorandum dated date the prior chief_counsel_advice is hereby incorporated by reference in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent legend taxpayer subsidiary partnership year issue whether the step_transaction_doctrine may be applied to the lease_stripping transaction at issue discussion we have reviewed your memorandum dated date regarding application of the step_transaction_doctrine to taxpayer’s lease_stripping transaction we agree that this argument is viable and that application of the step_transaction_doctrine would bring income into year postf-150620-01 we would point out one error in your submission sentence of the final paragraph on page should read as follows partnership takes a cost_basis in the subsidiary preferred_stock this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views please call if you have any further questions associate chief_counsel corporate by chief branch


department of the treasury internal_revenue_service washington d c number release date date cc pa cbs br3 gl-121095-00 uil memorandum for willard n timm associate area_counsel sbse - atlanta cc sb atl from subject lawrence h schattner chief branch collection bankruptcy summonses claims for refund abatement of trust fund recovery penalty - handling by collection technical support groups this responds to your request of date for our review of your proposed advice to your local collection technical support group ctsg on a number of issues regarding their future handling of taxpayer claims for refund abatement of trust fund recovery penalty tfrp assessments pursuant to sec_6672 as a preliminary matter we note that your proposed advice is directed primarily at the local ctsg’s future handling of taxpayer claims for refunds of previously paid tfrp amounts pursuant to the procedures and limitations described in sec_6511 sec_6532 sec_6672 and sec_7422 and of any requests for abatement of uncollected tfrp amounts for periods that are related to these pending claims for refunds rather than to taxpayer requests for abatement of uncollected tfrp amounts that are entirely unrelated to any pending claim for a refund under parts of sec_6404 accordingly we suggest that you revise the subject heading of your proposed memorandum as we have our own response to refer to claims for refund abatement of trust fund recovery penalties early in the introduction of your proposed memorandum we also suggest that you highlight for your local ctsg that your discussion is limited to the service’s procedures for handling taxpayer claims for refund of paid tfrp we understand that the policies and procedures for the service’s handling of taxpayer requests for abatement that are unrelated to a pending claim_for_refund may be quite different than the procedures for considering a claim_for_refund in particular a taxpayer’s opportunity to obtain judicial review of the service’s denial of a request for abatement appears to be more limited and to lie with a different court pursuant to sec_6404 than the opportunities for judicial review and the courts which may consider the service’s denial of a claim_for_refund if you require advice regarding the service’s procedures and policies with regards to sec_6404 you should contact branch of assistant chief_counsel administrative provisions judicial practice gl-121095-00 amounts and that it only addresses taxpayer requests for abatement of unpaid tfrp amounts which are related to the service’s consideration of pending tfrp refund claims as described below we also suggest the inclusion of similar issue limiting clarifications in other part of your proposed advice memorandum we now consider the issues in your memorandum slightly out of order issue sec_2 - responding to the loss destruction of the service’s administrative files recommending assertion of tfrp the bulk of your proposed advice memorandum is devoted to a discussion of the issue described above with the minor refinements to your discussion listed further below we agree with your proposed manner of handling this issue locally in the past two years our office has previously opined at some length in two other advice memoranda about how the service could respond appropriately to the loss destruction of the service’s administrative files recommending assertion of the tfrp in procedural contexts that are different from the refund claim circumstances described in your present proposed advice memorandum in an advice memorandum dated date now reproduced pincite irs cca lexi sec_172 our office previously considered how the service’s customer service function should conduct its general project to clean-up the service’s outstanding aged non-master file accounts including many unpaid tfrp assessments where the service knows or has reason to suspect that the service’s original supporting administrative files have now already been destroyed as part of the service’s ordinary document retention policy in that prior advice memorandum we suggested that it would not be appropriate for the service on its own initiative apart from any particular taxpayer request for relief and as part of an effort to address the accuracy of the service’s statement of its overall accounts_receivable to investigate whether the service’s administrative file recommending assertion of the tfrp in each case had been destroyed or abate the unpaid portion of every tfrp assessment on the service’s books where the service’s tfrp file recommending assessment should have or has been destroyed pursuant to the service’s ordinary document retention policy we gave this advice because many of a taxpayer’s potential grounds for or procedural means of challenging a tfrp assessment do not require the service’s original administrative file or a reconstruction thereof in order to assert a proper defense for the government and because many taxpayers presumably have no issue with the merits of the service’s aged tfrp assessments even though they may not have had the means or the desire to pay these outstanding tax_liabilities to date in our second prior advice memorandum described below we indicated that we stood by the advice memorandum of date in its context in a second advice memorandum dated date now reproduced pincite irs cca lexi sec_134 our office considered how the appeals function and the gl-121095-00 collection function may appropriately respond to the loss destruction of the service’s original administrative file recommending assessment of the tfrp in the context of a collection_due_process cdp hearing or equivalent_hearing under the collection_due_process regulation temp sec_301_6330-1t in this second advice memorandum we indicated that the appeals function did not need the service’s tfrp assessment file in order to verify the service’s compliance with the requirements of applicable law and administrative procedures for purposes of sec_6330 - that an irs form_4340 could be relied upon by appeals for this purpose we also predicted that many taxpayers would not be eligible to receive a cdp hearing or equivalent_hearing regarding the existence or amount of their unpaid tfrp liabilities because these taxpayers should already have received a prior opportunity for a conference with appeals to dispute their liability for the tfrp issue sec_4 and of this second advice memorandum consider how the appeals and collection functions may respond to the loss destruction of the service’s original tfrp recommendation files when a taxpayer is eligible to contest and has in fact chosen to contest the existence or amount of the taxpayer’s unpaid tfrp liabilities in a cdp hearing or equivalent_hearing after considering and relying upon many of the same cases discussed in your present advice memorandum we concluded that the service’s loss destruction of its original administrative file recommending the tfrp is not fatal to the service’s case that the absence of this file may affect the service’s hazards_of_litigation in defending the merits of its tfrp assessment and that the service may nevertheless often successfully reconstruct its lost destroyed file or an adequate alternative factual legal basis for its old tfrp assessment at issue we further concluded that in a cdp hearing or equivalent_hearing context the initial responsibility for deciding whether to attempt to reconstruct the service’s lost destroyed tfrp recommendation file and how much time and resources to expend in the effort should lie with the collection function and that the affected service functions through coordination within the new sbse structure could also develop selection tolerances to guide them in making these future resource allocation decisions we regard your present proposed advice to your local ctsg in the different context of considering a taxpayer’s claim_for_refund with respect to the tfrp as fully consistent with our two prior advice memoranda discussed above in your in footnote to this second memorandum we acknowledged that going forward with a levy to collect a tfrp liability which a taxpayer hoped to contest as to existence or amount in a cdp or equivalent_hearing but was ineligible to do so because of a prior opportunity for an appeals hearing could result in the taxpayer obtaining an opportunity to file a claim_for_refund and thereby obtain a hearing with regards to the existence or amount of a disputed tfrp liability notwithstanding this refund claim possibility which is the subject covered by your present proposed discussion we concluded that it would not be appropriate for the appeals function to consider the merits of the tfrp in these issue preclusion circumstances in a cdp hearing or equivalent_hearing context gl-121095-00 present context of a taxpayer’s claim_for_refund a taxpayer who has filed a timely claim will frequently have put the existence and amount of the recently paid within the last two years tfrp liabilities at issue in this context there are clearly some hazards_of_litigation to the service in defending its tfrp assessments when the service’s original tfrp recommendation file has been lost destroyed however as you note the service may expend its time and resources in efforts to reconstruct the file or to develop an alternative adequate factual legal basis for the tfrp liability and the service may ordinarily do so without any change in the applicable burden_of_proof allocation rules for the refund case it is appropriate as you have done for your office to make itself available to advise your local ctsg about the tfrp hazards_of_litigation and the collection function’s lost file reconstruction efforts on a case by case basis if your local ctsg considers a system of local selection tolerances to guide them in making future resource allocation decisions about the types of tfrp missing file cases where it is not likely to be cost effective to pursue file reconstruction development efforts then we assume your office would also be involved in assisting your local ctsg in that task as well the minor refinements that we suggest you consider with regards to your discussion of issue sec_2 and in your proposed memorandum are as follows on page at the end of the first line of your restatement of issue we suggest that you add the words in refund claim situations so that it is clear that you are only addressing the service’s tfrp file reconstruction efforts that are appropriate in this particular context on page at the end of the last line of your statement of the conclusion with respect to issue sec_2 and we suggest that you add the words in connection with refund claims the service intends to deny on page on line of the first paragraph discussing issue sec_2 and we believe you intended to cite the discussion at page of the michaud opinion on page on line of the first full paragraph we believe you intended to say burden of proving on page regarding your willingness to defend statement at the end of the second full paragraph we suggest that you first consult with the tax division’s civil trial section serving your area in order to determine whether it distinguishes between defense of tfrp cases with lost destroyed files on the one hand and situations where the service makes an affirmative request to pursue a suit to reduce its tax claims to judgment or to foreclose its tax_liens if the original tfrp recommendation files no longer exist if the files have not already been reconstructed or alternatively recreated by the service and if the taxpayer would not be precluded by res_judicata from gl-121095-00 attempting to contest the existence or amount of the tfrp in an affirmative action of this type then the civil trial section serving your area may believe the service would be inappropriately shifting the onus of developing the facts to the tax_division if the civil trial section serving your area requires the service to recreate the lost tfrp files before making a request for the tax_division to bring an independent suit requesting affirmative relief of this type then you may wish to add a footnote to this effect along with an explanation of the tax division’s reasons for such an approach also on page on the second line of the final paragraph we suggest the line end with the words in the refund abatement request cases issue - time limit for filing claims for refund for tfrp we agree with your answer - that sec_6511 requires that a claim_for_refund for a tfrp liability be filed within two years of payment - and the cases you have cited for this principle 17_f3d_1029 7th cir clark v united_states a f t r 2d 11th cir as you have indicated a taxpayer responsible_person does not file a return that establishes his liability for the tfrp so any claim for a refund of an overpayment of the tfrp must be filed by the taxpayer within two years from the time the tax was paid as described at the end of the first sentence of sec_6511 and in treas reg a -1 a however we do suggest that you consider the minor modifications described below to your discussion of this issue in framing the issue initially you apparently relied upon and repeated the client’s wording to describe the issue however we find this statement of the issue a little confusing in light of the wording and structure of sec_6511 in place of your proposed statement of the issue on page and your statement of the conclusion on page we suggest you consider something along the following lines issues issue what is the time limit for a taxpayer responsible_person to file a claim_for_refund of the trust fund recovery penalty pursuant to sec_6511 conclusion issue the trust fund recovery penalty tfrp is not a tax for which the taxpayer responsible_person files a return to establish his liability accordingly under sec_6511 a claim_for_refund of an overpayment of the tfrp must be filed by the taxpayer no later than two years from the time the payment was made against the tfrp liability taxpayer claims for gl-121095-00 refund of overpayments of the tfrp are limited to those amounts paid no earlier than two years before the claim_for_refund is filed a narrow exception to these limitations may exist when a taxpayer shows he was financially disabled during the applicable two year period within the meaning of sec_6511 see irm in addition to considering the revision described above we also believe that you were referring to sec_6511 on page line sec_5 and and on page lines and issue - an appropriate ctsg form letter to advise taxpayers the irs has denied their refund abatement claims for the tfrp first consistent with our introductory comments we suggest that you revise the proposed statement of issue on page of your memorandum to indicate that the form letter being considered is to notify a taxpayer that the taxpayer’s claim_for_refund abatement has been disallowed second thank you again for calling to our attention several of the mistakes you found in irm and for also providing us with an opportunity to review your proposed form letter from ctsg to advise taxpayers that the service has denied their refund abatement claims with respect to the tfrp coincidentally it happens that the service is now in the process of updating revising chapter sec_3 through of irm and our office has been asked by the service to comment on the new proposed drafts of these chapters of the manual in the course of our review we will try to correct the errors you have pointed out in the manual and we intend to suggest that the service include a form letter as a new exhibit to chapter of irm along the lines of that you provided to us for review with the revisions discussed further below third you make a good point on the last lines of page of your memorandum that the service should send its letters disallowing a taxpayer’s claim_for_refund via certified or registered mail to the taxpayer as authority for this advice you may want to add a citation at the end of the sentence to sec_6532 fourth we have made a few changes to the revised form letter described in the body of your proposed memorandum to provide taxpayers with notice that the service has denied their claims for refund abatement of the tfrp our revised proposed form letter for this purpose is attached hereto at the end of this memorandum as exhibit in keeping with the instruction in irm that the service should modify its usual letter p in tfrp refund disallowance cases in order to explain taxpayer rights related to sec_6672 tax_liabilities our two offices have added to the typical letter p some further paragraphs which are intended to provide the taxpayer with a plain english notice of the taxpayer’s rights and obligations to request a conference with the local office of appeals gl-121095-00 continue the protections of sec_6672 after claim disallowance by filing suit within days of the letter disallowing the claim and cause the service pursuant to new sec_6331 to suspend most of its otherwise allowable collection activities with respect to unpaid tfrp liabilities for periods beginning or transaction occurring after date by filing a proper lawsuit seeking a refund of the tfrp paid for such periods you will note that our proposed exhibit strikes the following sentence that was suggested by your local ctsg for this new letter to describe the information a taxpayer should submit in order to obtain a conference with the office of appeals your request must contain new or additional facts that were not previously considered and a statement explaining why you believe the claim should be reconsidered we believe that this proposed description of what is required of a taxpayer to obtain an appeals_conference with respect to a disallowed tfrp refund claim is not consistent with the independent review role the office of appeals serves in these cases see irm irs policy statement p-8-50 prop proc rule b ii the third paragraph of our attached exhibit contains a revised description of what we understand the taxpayer should provide to request a conference with the office of appeals to discuss a disallowed tfrp refund claim we hope that the reasons for the remainder of our suggested revisions to this proposed letter will be self-explanatory from our earlier comments this revised proposed letter should be suitable for your local ctsg to use for its tfrp refund cases where claims for refund are denied until the service prescribes a national form letter for this purpose eg as an exhibit to revised chapter of irm if you have any questions regarding this advice please call the attorney assigned to this case pincite-3630 gl-121095-00 certified mail salutation exhibit person to contact name contact telephone number number we have considered your request for a refund of dollar_figure amount and abatement of dollar_figure amount assessed against you for the tax period s ended date s we assessed this amount under sec_6672 because taxpayer name primarily responsible for the tax eg the employer did not pay the federal type of tax eg employment excise_tax es due for the tax period s ended dates this is your legal notice that your claim_for_refund and abatement is disallowed if you do not accept our conclusion you may request reconsideration with the internal revenue service’s local office of appeals you should make the request for an appeals_conference within days of the date of this letter a request for an appeals_conference should describe the reasons why you do not agree with our determination and should contain identifying information regarding the tax_liability you wish to discuss along the lines contained in this letter you should provide a statement containing your view of the facts please mail your request for an appeals_conference to the appropriate address if you wish to bring suit or proceedings for the recovery_of any_tax penalties or other moneys that were paid and for which this notice of disallowance is issued you may do so by filing such a suit with the united_states district_court having jurisdiction or the united_states court of federal claims the law permits you to do this within two years of the mailing date of this letter please note however that even if you have previously complied with the requirements of sec_6672 up to this point the internal_revenue_service may initiate collection action for the remaining unpaid portion of this liability if you now fail to file suit in the appropriate court within days from the date of this letter for any part of your unpaid sec_6672 liability that arises from periods beginning or transactions occurring after date the internal_revenue_service is also required to suspend most of its otherwise allowable collection activities if you file a proper lawsuit seeking a refund with respect to your disallowed refund claim for the liability while the internal_revenue_service is prohibited from collecting the unpaid portion of your liability by levy the limitation period for the internal_revenue_service to collect this liability is also suspended pursuant to sec_6331 and sec_6672 if you have any questions please contact the person whose name and telephone number are shown above appropriate signature block


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date number release date conex-106018-16 ------------------ uil the honorable susan davis u s house of representatives washington dc attention dear representative davis i am responding to your letter dated date about the proper tax treatment of certain payments made to providers of specifically you requested information on a pending private_letter_ruling request under sec_131 of the internal_revenue_code code our rules under sec_6103 of the code prohibit disclosure of taxpayer information without consent from the taxpayer authorizing disclosure see also sec_301 c - c of the regulations on procedure and administration the information that you submitted does not include such consent from the taxpayer therefore we cannot comment on this matter ------------------------------------------------ i am sorry i cannot provide more information please contact me or -------------------------- identification_number if you have questions -------------------- ---------------- at sincerely michael j montemurro chief branch office of associate chief_counsel income_tax and accounting


internal_revenue_service number release date index numbers ------------------------------- ------------------------- ----------------------- ------------------------------ 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-115187-18 date date x ---------------------------------------------------------------------------------------------- -------------------------- legend country --------------- date ----------------- y individual ---------------------------------------------------------------------------------------------- ---------------------------- ---------------------------------------------------------------------------------------------- ------------------------------- dear ------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to treat x as a disregarded_entity for federal tax purposes facts x was formed under the laws of country on date x is wholly owned by y a foreign_entity that is wholly owned by individual individual is a u s citizen x represents that it is a foreign_entity eligible to elect to be classified as a disregarded_entity for federal tax purposes however x failed to timely file form_8832 entity plr-115187-18 classification election to be treated as a disregarded_entity for federal tax purposes effective date law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that unless it elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides that a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code code except subtitles e g h and i sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin plr-115187-18 sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the information submitted and the representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 as a result x is granted an extension of time of days from the date of this letter to file a properly executed form_8832 with the appropriate service_center electing to be treated as a disregarded_entity effective date a copy of this letter should be attached to the form_8832 this ruling is contingent on x and its owner filing accurately and completely within days from the date of this letter all required federal_income_tax and information returns including amended returns for all years consistent with the requested relief these returns must include but are not limited to form_8858 return of u s persons with respect to foreign disregarded entities such that these forms reflect the consequences of the relief granted in this letter a copy of this letter should be attached to any such returns except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition sec_301_9100-1 provides that the granting of an extension of time for making an election is not a determination that the taxpayer is otherwise eligible to make the election further we express no opinion concerning the assessment of any interest additions to tax additional_amounts or penalties for failure_to_file a timely income_tax or information_return with respect to any taxable_year that may be affected by this ruling for example we express no opinion as to whether a taxpayer is entitled to relief from any penalty on the basis that the taxpayer had reasonable_cause for failure_to_file timely any income_tax or information returns plr-115187-18 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 a power_of_attorney on file with this office we are sending a copy of this letter to x’s 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 ruling_request it is subject_to verification on examination sincerely associate chief_counsel passthroughs special industries by ___________________________________ james a quinn senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes