department of the treasury internal_revenue_service washington d c date number release date u i l s 408a cc tege eb qp1 cavohs tl-n-1972-01 memorandum for associate area_counsel brooklyn small_business self-employed area attention patricia a riegger from chief qualified_plans employee_benefits office of the division counsel associate chief_counsel tax_exempt_and_government_entities_division subject ineligible roth conversions - significant service_center advice this significant service_center advice responds to your memorandum dated date regarding an inquiry you received from the brookhaven service_center issues issue whether the additional tax including the percent additional tax imposed under sec_72 of the internal_revenue_code irc for early distributions due for the taxable_year in which taxpayers took a distribution from a traditional_ira to convert the funds to a roth_ira may be assessed pursuant to the mathematical error procedures if the reason for the adjustment was that the taxpayer’s modified_adjusted_gross_income agi was above the threshold_amount permitted for making such a conversion issue whether penalties under sec_4973 ensuing as the result of a failed roth_ira_conversion may be assessed under mathematical error procedures brief answer issue no statutory deficiency procedures must be used issue no statutory deficiency procedures must be used facts taxpayers are permitted to convert traditional individual_retirement_accounts iras to roth iras if a taxpayer converts an amount from a traditional_ira to a roth_ira the amount distributed or transferred from the traditional_ira is treated as a distribution and is fully taxable in the year of the conversion ie distribution or transfer unless the conversion was made in if the conversion was made in the taxpayer may report the income from the distribution over four years in order to be eligible to convert an ira to a roth_ira the taxpayer’s modified agi must be dollar_figure or less in the year of the distribution or transfer married taxpayers are permitted to convert only if their modified agi on a joint_return is dollar_figure or less in the year of the distribution or transfer in many married taxpayers filing joint returns attempted to convert their iras to roth iras even though they were not eligible to do so because their joint income for the taxable_year was more than dollar_figure however these ineligible taxpayers were allowed to make corrections to their failed conversions until date applicable law the regulations implementing sec_408 provide that if there is a failed conversion a taxpayer may recharacterize amounts which he attempted to contribute to the roth_ira as contributions to the traditional_ira sec_1_408a-4 q a if the contribution is not recharacterized it will be treated as a roth contribution and thus an excess_contribution will be subject_to the excise_tax under sec_4973 to the extent it exceeds the individual’s regular contribution limit id sec_4973 provides that in the case of excess_contributions to an individual’s retirement account there is imposed for each taxable_year a tax in an amount equal to of the amount of the excess_contribution sec_2 to such individual’s accounts or annuities under sec_1_408a-5 a-6 b the election to recharacterize an ira contribution and the trustee-to-trustee transfer of such contribution including allocable net_income must occur on or before the due_date including extensions for filing the individual’s federal_income_tax return for the taxable_year for which the recharacterized contribution was made however under the provisions of sec_301_9100-2 an individual has an automatic 6_month extension from the return_due_date excluding extensions to recharacterize an ira contribution in addition under sec_301_9100-3 the commissioner may grant an additional extension of time to recharacterize an ira contribution pursuant to dollar_figure of revproc_2001_4 2001_1_irb_121 a request for an extension of time to recharacterize an ira contribution under sec_301_9100-3 is considered a letter_ruling request excess_contributions are defined in general as the excess amounts contributed to iras over the amount allowable as a deduction under sec_219 see sec_4973 sec_72 provides in general that if any taxpayer receives a distribution from a qualified_retirement_plan prior to attaining the age of ½ there shall be added to the tax an amount equal to of such distribution the penalty under this section is only applicable in certain specific circumstances for example if the taxpayer is under age ½ for recharacterizations that were untimely or were not made additional tax is due sec_408 the question is whether the deficiency procedures or the mathematical error procedures should be used in general sec_6212 prohibits the assessment and collection of a deficiency until a notice_of_deficiency has been mailed to the taxpayer and until certain statutory steps have been taken sec_6213 imposes certain restrictions on the assessment of deficiencies sec_6213 defines mathematical_or_clerical_error and enumerates exceptions to the general_rule where deficiency procedures need not be used before assessment of the tax two of the exceptions may be applicable in answering the above questions under sec_6213 a mathematical error includes an entry on a return of an item which is inconsistent with another entry of the same or another item on such return according to its legislative_history subsection g c is intended to encompass those cases where it is apparent which of the inconsistent entries is correct and which is incorrect summary_assessment procedures cannot be used where it is not clear which of the inconsistent entries is the correct one they are also not to be used where the service is merely resolving an uncertainty against the taxpayer see h_r rep no 94th cong 1st sess 1976_3_cb_695 under sec_6213 a math error may also be an entry on a return of a deduction or credit in an amount which exceeds a statutory limit imposed by subtitle a or b or chapter or if such limit is expressed - i as a specified monetary amount or ii as a percentage ratio or fraction and if the items entering into the application of such limit appear on such return an example of a math error under sec_6213 would be an entry claiming the medical_expense_deduction under sec_213 without meeting the -of-adjusted-gross-income floor analysi sec_3 subsection m the 13th applicable situation was added on date when president bush signed the economic_growth_and_tax_relief_reconciliation_act_of_2001 the act pub_l_no 115_stat_38 in order to analyze the issues it is helpful to look at specific examples of the exceptions in gcm dated date the conclusion was reached that the exception to the normal assessment procedures for mathematical or clerical errors in sec_6213 may not be used to correct deductions for contributions to individual_retirement_accounts claimed on the form_1040 and to summarily assess additional tax because the types of errors involved are not within the scope of the definition of mathematical or clerical errors in sec_6213 some of the examples of errors not eligible for the mathematical error procedures were a deduction was claimed on line form_1040 for contributions to iras but no code was entered to identify the type and number of iras a code was entered but the deduction claimed exceeded the monetary amount of the statutory limit for the type and number of iras indicated by the code an excess_contribution was made to the ira based on the deduction claimed but no excise_tax was reported on line 57-form and form_5329 was not attached to the return in example the gcm relied on the legislative_history and concluded there was no math error because the error did not meet the definition of sec_6213 g d subsection g d defines a mathematical_or_clerical_error as an omission of information which is required to be supplied on the return to substantiate an entry on the return the gcm reasoned that mathematical error procedures could not be used in example because omission of information was construed to mean the omission of an entire schedule the omission of a code is not the omission of an entire schedule in example the gcm reasoned that there was no math error because the code that was entered did not cover all the possible variations on the type and manner of ira an individual might have the gcm concluded that there was no math error under sec_6213 g e because the monetary amount of the statutory limit varies according to which code is entered although it could be argued that the g_c_m dated date used the analysis in g_c_m in reaching its conclusion that the math error procedures could not be used in assessing the amount of tax withheld on nonresident_aliens under sec_1441 g_c_m dated date used the analysis in g_c_m in reaching the conclusion that the mathematical error procedures were applicable because the failure to attach a form_8396 mortgage_interest_credit where a mortgage_interest_credit amount was claimed on the form_1040 is the precise situation in which sec_6213 was intended to apply there is no overall monetary amount statutory maximum that applies to contributions to iras and seps in general the maximum deduction that could be claimed based on sec_219 for contributions to individual iras would be dollar_figure however theoretically there is no limit on the number of employers who may contribute discrepancy could fall under an inconsistent entry as defined in g c the math error procedures still could not be used because the taxpayer may have entered the wrong code rather than claimed the wrong deduction see s rep no 94th cong 2d sess in example the gcm further concluded that math error procedures did not apply because the service could not determine that the deduction exceeds the amount of compensation without determining what was compensation thus it would not be possible to determine whether an excess_contribution was made even if it were possible to determine that an excess_contribution had been made the gcm concluded that the excise_taxes imposed by sec_4972 and sec_4973 could not be summarily assessed as math errors based on the form_1040 moreover the gcm concluded that there was no substantiation omission within the meaning of sec_6213 where a taxpayer does not attach form_5329 to report excess_contribution excise_taxes excess_contributions and the appropriate excise_tax are reported on form_5329 which must be attached to form_1040 however form_5329 calculates a tax not otherwise reported on form_1040 and form_1040 does not provide for reporting the excise_tax therefore the gcm concluded that math error procedures may not be used when form_5329 is not attached even if it were possible to determine from other information on the return that an excess_contribution had been made conclusion consistent with the legislative_history of sec_6213 the math error assessment procedures may only be employed if it is apparent from the face of the return which entry is incorrect in the situation you describe it is not apparent from the face of the return which return entry is incorrect eg whether the taxpayer’s agi or conversion amount is the incorrect entry nor can you determine the taxpayer’s modified agi the examples above show that even in cases where it would appear that the procedure could be used because the deduction claimed was inconsistent with the other information on the return the math error procedures still would not apply if there was some uncertainty about what the taxpayer intended the math error exception may only be utilized if it is absolutely clear what the taxpayer intended we do not believe that in the roth conversion situation you describe the taxpayer’s intention is absolutely clear since form_5329 is not attached to the return you cannot determine whether the amount distributed from the ira is subject_to the to seps on behalf of an individual and thus there is no limit on the amount of money an individual may deduct for employer contributions to his sep consequently because contributions to seps are included on line there is no specific statutory limit on the deduction claimed on line that may be determined without regard to the code entered percent additional tax on early distributions imposed under sec_72 because the taxpayer may qualify for an exception to the additional percent tax in addition you cannot determine from the face of the return whether the taxpayer made other roth_ira contributions for the taxable_year so you cannot determine whether the failed roth_ira_conversion is subject_to the excise_tax imposed on excess roth_ira contributions under sec_4973 nor is form_5329 attached accordingly since the internal_revenue_service is not permitted to make determinations about a taxpayer’s intention when making assessments pursuant to the math error procedures assessments made as a result of a failed roth_ira_conversion ie the additional tax under sec_72 and the excise_tax on excess_contributions under sec_4973 must be made pursuant to deficiency procedures


t c summary opinion united_states tax_court juliet hess petitioner v commissioner of internal revenue respondent docket no 14444-06s filed date juliet hess pro_se frederic j fernandez for respondent gerber judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case in this collection case respondent determined that he was entitled to proceed with collection of an assessed tax_liability and petitioner by filing a petition with this court contested that determination petitioner’s only allegation of error questioned the merits of the underlying tax_liability respondent relying on sec_6330 moved for summary_judgment on the ground that petitioner is precluded from contesting the merits of the underlying tax_liability because she received a notice_of_deficiency and failed to contest respondent’s determination background petitioner filed a federal_income_tax return with an address in wisconsin reported as her address respondent sent by certified mail a statutory_notice_of_deficiency to petitioner at the above address determining an income_tax deficiency for petitioner failed to petition this court within the prescribed time and respondent assessed the income_tax deficiency respondent sent petitioner a form letter final notice- -notice of intent to levy and notice of your right to a hearing dated date on date respondent received petitioner’s form request for a collection_due_process_hearing after additional correspondence petitioner and the unless otherwise indicated all section references are to the internal_revenue_code in effect for the period under consideration and rule references are to the tax court’s rules_of_practice and procedure unless otherwise indicated appeals officer engaged in a discussion wherein petitioner sought to contest the underlying tax_liability the appeals officer advised petitioner that she was not entitled to contest the underlying tax_liability because she had received a notice_of_deficiency for subsequently petitioner was provided with a letter explaining her collection alternatives and she thereafter submitted an offer-in-compromise raising doubt as to the underlying tax_liability respondent mailed petitioner a notice_of_determination concerning collection action under sec_6330 dated date advising that he intended to proceed with collection because petitioner was not entitled to contest the underlying tax_liability in the context of a collection_due_process proceeding under sec_6320 or sec_6330 discussion the only question we consider in the context of this collection case is whether petitioner is entitled to challenge the underlying tax_liability respondent moved for summary_judgment contending that as a matter of law petitioner is not entitled to challenge the underlying tax_liability petitioner has challenged only the merits of the underlying tax we note that respondent used the address shown on petitioner’ sec_2002 return on all correspondence and notices sent to petitioner liability although she raised one collection alternative an offer-in-compromise it was with respect to doubt as to liability ie questioning the underlying tax_liability and not doubt as to collectibility summary_judgment is intended to expedite litigation and to avoid unnecessary and expensive trials fla peach corp v commissioner 90_tc_678 summary_judgment may be granted with respect to a legal issue if there is no genuine issue as to any material fact and a decision may be rendered as a matter of law rule a and b 119_tc_252 98_tc_518 affd 17_f3d_965 7th cir there is no disagreement as to any material fact and therefore this matter is ripe for summary_judgment sec_6330 prescribes the issues that may be raised by a taxpayer before the appeals_office including spousal defenses to collection challenges to the appropriateness of the commissioner’s intended collection action and offers of alternative means of collection sec_6330 provides that the appeals hearing is not a forum for a taxpayer to contest the existence or amount of the underlying tax unless the taxpayer did not receive a notice_of_deficiency for the tax in question or did not otherwise have an earlier opportunity to dispute the tax_liability respondent has adduced sufficient documentation showing that the notice_of_deficiency for petitioner’ sec_2002 tax_year was mailed by certified mail to her correct address petitioner has not argued or shown that she did not receive or was unaware of the notice_of_deficiency under the circumstances petitioner is statutorily precluded from challenging the merits of her tax_liability in the context of this collection proceeding respondent’s motion for summary_judgment will be granted to reflect the foregoing an appropriate order and decision will be entered the court inquired about whether respondent and petitioner were precluded from considering an offer_in_compromise or some other remedial approach to resolve petitioner’s underlying tax_liability outside of the sec_6320 and sec_6330 collection proceeding the court was advised that no such prohibition existed and that the parties were attempting to resolve this matter


t c memo united_states tax_court b joe rosa jr an accountancy corporation petitioner v commissioner of internal revenue respondent docket no filed date b joe rosa jr pro_se peter reilly and thomas m rohall for respondent memorandum opinion dawson judge this case was assigned to chief special_trial_judge peter j panuthos pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_183 the court all section references are to the internal_revenue_code in effect for the year in issue unless otherwise indicated all rule references are to the tax_court rules_of_practice and continued agrees with and adopts the opinion of the special_trial_judge which is set forth below opinion of the special_trial_judge panuthos chief special_trial_judge this matter is before the court on respondent's motion to dismiss for lack of jurisdiction the issue for decision is whether petitioner has the capacity to file a petition for redetermination with this court background on date respondent issued three separate notices of deficiency to b joe rosa jr an accountancy corporation petitioner determining deficiencies in additions to and penalties in respect of its federal income taxes as follows tax additions to tax and penalties year sec sec sec sec ended deficiency b a b b b a dollar_figure dollar_figure of the in- --- --- terest due on the deficiency big_number --- --- dollar_figure --- big_number --- --- big_number --- big_number --- --- --- dollar_figure big_number --- --- --- big_number big_number --- --- --- big_number on date b joe rosa jr filed a petition on behalf of petitioner contesting the notices of deficiency described above the first paragraph of the petition states that petitioner is a defunct professional_corporation continued procedure in response to the petition respondent filed a motion to dismiss for lack of jurisdiction asserting that the petition should be dismissed on the ground that the petition was not filed within the 90-day period prescribed in sec_6213 petitioner filed an objection to respondent's motion to dismiss asserting that the petition was timely filed pursuant to sec_6213 which suspends the period for filing a petition with this court for the period during which a taxpayer debtor is prohibited by reason of bankruptcy from filing a petition and for days thereafter petitioner's objection includes a statement that petitioner was dissolved under california state law prior to filing for bankruptcy respondent filed a reply to petitioner's objection asserting that petitioner did not file a bankruptcy petition and thus is not entitled to rely on sec_6213 and petitioner's purported dissolution under california state law would not preclude petitioner from filing a petition with this court a hearing was conducted in this case in washington d c counsel for respondent appeared at the hearing and presented a new_theory in support of respondent's motion to dismiss in particular respondent offered evidence indicating that rather than being dissolved petitioner's corporate charter was suspended by the state of california as of date for failure to pay state franchise_taxes relying on cal rev tax code sec b west and 69_tc_149 respondent now contends that this case should be dismissed on the ground that petitioner lacks the requisite capacity to file a petition with this court see rule c the evidence submitted by respondent at the hearing regarding the suspension of petitioner's corporate powers was characterized by counsel for respondent as a computer printout of westlaw the document in question includes the following statement this data is for informational purposes only certification can only be obtained through the sacramento office of the california secretary of state following the hearing we directed respondent to file a report with the court attaching thereto a certification from the california secretary of state as described in cal rev tax code sec c west establishing the date of petitioner's corporate suspension under california state law respondent complied with our order and filed a report with the court with attached exhibits exhibit a to respondent's report is a certificate of filing and suspension issued by the california secretary of state on date stating that petitioner's corporate powers rights and privileges were suspended on date exhibit b to respondent's report is a bankruptcy discharge order issued by the united_states bankruptcy court for the eastern district of california on date in regard to the bankruptcy petition of b joe rosa jr and osanna m rosa respondent offered the latter exhibit in support of her earlier contention that petitioner did not file a bankruptcy petition and therefore petitioner cannot rely on sec_6213 as a basis for its assertion that its petition was timely filed although the record tends to show that petitioner did not file a bankruptcy petition and that the petition was not timely filed under sec_6213 we will decide respondent's motion to dismiss by focusing on the question of petitioner's capacity to invoke this court's jurisdiction discussion rule c states that the capacity of a corporation to engage in litigation in this court shall be determined by the law under which the corporation was organized 71_tc_108 condo v commissioner supra pincite 63_tc_304 because petitioner was organized in the state of california we look to the law of that state to determine whether petitioner possesses the requisite capacity to invoke this court's jurisdiction cal rev tax code sec b west provides with exceptions not applicable here that the corporate powers rights and privileges of a domestic taxpayer may be suspended if any_tax due and payable upon notice_and_demand from the franchise there is some evidence that b joe rosa jr and osanna m rosa individually were in bankruptcy but there is no evidence that petitioner corporation was in bankruptcy tax board is not paid cal rev tax code sec c west provides that the franchise tax board shall transmit the names of suspended taxpayers to the california secretary of state and the certificate of the secretary of state shall be prima facie evidence of a taxpayer's suspension or forfeiture in condo v commissioner supra a case involving facts virtually identical to those presented here we analyzed california state law including the statutory provisions cited above and concluded that because the corporate taxpayer lacked the capacity to both sue and defend against a suit in a state court it likewise did not possess the capacity to litigate in this court under rule c for similar holdings see 97_tc_428 petition filed by corporation suspended pursuant to texas state law dismissed for lack of jurisdiction 72_tc_391 petition filed by corporation suspended pursuant to illinois state law dismissed for lack of jurisdiction the record in this case establishes that petitioner's powers rights and privileges as a california corporation were suspended by the california secretary of state pursuant to cal rev tax code secs b and c west as of date petitioner has offered no evidence that its corporate powers have been reinstated consistent with condo v commissioner supra we will grant respondent's motion to dismiss for lack of jurisdiction on the ground that petitioner lacks the capacity under rule c to invoke this court's jurisdiction to reflect the foregoing an order granting respondent's motion to dismiss for lack of jurisdiction will be entered we note that petitioner's tax_liabilities may still be litigated on the merits in this court in the event respondent later issues notice of transferee_liability to the appropriate persons sec_6901 63_tc_304


internal_revenue_service number release date index number ------------------------------- ------------------------------ -------------------------- --------------------------------- in re ------------------------------ ----------------------------------------- ----------------------- -------------------------- department of the treasury washington dc person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b04 - plr-129966-03 date july legend - - -------------------------------------------------------- -------------------------------------------------------------- revocable_trust ----------------------------------------------------------- irrevocable_trust ----------------------------------------------------------- ----------------------------- trustee a ------------------------------------------- decedent ---------------- brother -------------------- sister --------------------- niece -------------------- grandniece ---------------- date ------------------ date ------------------- date ----------------------- date ------------------- m dollars ----------------- p dollars --------------- q dollars -------------- r dollars --------------- s dollars ----------------- t dollars ----------------- u dollars ----------------- v dollars real_property -------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------- dear -------------- - - - - - - - - - - - - - - - - - - - plr-129966-03 this is in response to your letter dated date and prior correspondence requesting a ruling regarding the automatic allocation rules for generation-skipping transfers gst this letter responds to your request the facts and representations submitted are summarized as follows revocable_trust on date decedent created revocable_trust a revocable inter_vivos_trust article second of revocable_trust provides that during decedent’s life decedent would receive as much of the net_income and principal as he requested and any undistributed_income would be added to principal article third provides that upon decedent’s death the trust principal will be augmented by all property transferred to the trust as a result of decedent’s death and the net_income will be paid to sister during her life with the principal payable in the trustee’s discretion to or for the benefit of sister for her medical_expenses and necessities of life upon sister’s death two-thirds of the trust principal is to be distributed outright to niece the remaining one-third is to be distributed to grandniece who is niece’s daughter and decedent’s grandniece however if niece was not living at that time the entire principal is to be distributed to or for the benefit of grandniece and likewise if grandniece was not then living the entire principal is to be distributed outright to niece if either beneficiary is under the age of at the time of distribution the principal is to be held in trust for the benefit of that beneficiary and distributed outright when that beneficiary attains age further if either beneficiary dies before reaching age any principal and accrued income of that beneficiary’s trust is to be distributed to that beneficiary’s estate if not terminated earlier each beneficiary’s trust would terminate twenty years after the last to die of the decedent and his issue living on the date of his death irrevocable_trust on date decedent established irrevocable_trust article third of irrevocable_trust authorizes the trustee to make discretionary distributions of income and or principal to specified beneficiaries during decedent’s life the named beneficiaries of the discretionary distributions include sister niece grandniece and other nephews and grandnieces and grandnephews upon decedent’s death and after payment of certain pecuniary bequests provided for in decedent’s will that are not paid_by decedent’s personal representative the principal of irrevocable_trust is to be divided into two equal shares one share is to be distributed outright to brother and the other share is to be held in a separate trust administered under the terms of article fourth for the benefit of sister and others plr-129966-03 article fourth sets forth the terms of a separate trust for the benefit of sister and upon her death for the benefit of niece and grandniece the dispositive provisions in article fourth of irrevocable_trust for the benefit of sister niece and grandniece are identical to the dispositive provisions set forth above in article third of the revocable_trust article seventh provides that the trustee may divide any trust into two or more separate trusts so that the federal generation-skipping_transfer_tax inclusion_ratio for each trust shall be either zero or one you represent that prior to decedent’s death decedent had not allocated any gst_exemption during decedent’s lifetime with respect to any transfer decedent died testate on date survived by sister brother niece grandniece and other family members articles second and third of decedent’s will provide for bequests of real and personal_property to sister brother and niece in particular real_property is to pass to sister for life and then on sister’s death to niece if living if niece is not the living the property is to pass to revocable_trust article fourth provides for pecuniary bequests to niece decedent’s nephew and several of decedent’s grandnieces in particular the will provides for a pecuniary_bequest of s dollars to decedent’s grandnieces under article fifth of decedent’s will one-half of the residue of decedent’s estate is to pass to brother and the remaining one-half to revocable_trust if sister survived decedent by thirty days sister died on date more than thirty days after decedent’s date of death you have represented that there have been no additions constructive or otherwise to the revocable_trust the irrevocable_trust or to any trust created under the terms of those two trusts since decedent’s date of death you have also represented that during decedent’s life there were no transfers from irrevocable_trust to any grandniece or any other person who was a skip_person for purposes of the gst tax decedent’s estate filed a united_states estate and generation-skipping_transfer_tax return form_706 the value of decedent’s gross_estate as reported on decedent’s estate_tax_return was m dollars it is represented that the executor reported the irrevocable_trust as includible in decedent’s gross_estate for estate_tax purposes at a date of death value of p dollars real_property was reported as having a date of death value of q dollars personal_property to be distributed at the executor’s discretion to the estate beneficiaries was valued at r dollars revocable_trust was apparently unfunded at the time of death as noted above s dollars in pecuniary bequests passed to decedent’s grandnieces based on the submitted information the residue of decedent’s estate was t dollars one-half of which passed plr-129966-03 outright to brother and the remaining one-half u dollars passed to revocable_trust which amount constituted the only contribution to the trust decedent’s executor did not allocate any of decedent’s available gst_exemption on the form_706 it is represented that decedent’s entire gst_exemption was available for allocation at the time of his death you have requested that we rule that as a result of the automatic allocation of decedent’s gst_exemption as of the date of decedent’s death and based on the value of the assets included in decedent’s gross_estate as reported on decedent’s estate_tax_return none of the property included in decedent’s gross_estate for federal estate_tax purposes specifically the irrevocable_trust and the revocable_trust is subject_to the generation-skipping_transfer_tax law and analysis sec_2601 imposes a tax on every generation-skipping_transfer a generation- skipping transfer is defined under ' a as a taxable_distribution a taxable_termination and a direct_skip sec_2612 provides that the term taxable_termination means a termination by death lapse of time release of a power or otherwise of an interest_in_property_held_in_trust where the property passes to a skip_person with respect to the transferor of the property sec_2612 provides that the term taxable_distribution means any distribution from a_trust to a skip_person other than a taxable_termination or a direct_skip under ' c a direct_skip is a transfer subject_to federal estate or gift_tax made by a transferor to a skip_person a skip_person is defined in sec_2613 as a natural_person assigned to a generation which is two or more generations below the generation assignment of the transferor or a_trust if either all the interests in such trust are held by skip persons or there is no person holding an interest in the trust and at no time after such transfer may a distribution including distributions on termination be made from such trust to a non-skip_person sec_2602 provides that the amount of the gst tax is determined by multiplying the taxable_amount by the applicable_rate sec_2641 provides that the term applicable_rate means with respect to any gst transfer the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer under ' a the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer is generally defined as the excess of over the aapplicable fraction the applicable_fraction as defined in ' a is a fraction the numerator of which is the amount of the gst_exemption allocated to the trust or to plr-129966-03 property transferred in a direct_skip and the denominator is the value of the property transferred to the trust or involved in the direct_skip sec_2631 as in effect on date provided that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under ' a once made shall be irrevocable sec_2632 provides that if any individual makes a direct_skip during his sec_2632 provides that any allocation by an individual of his or her gst_exemption under ' a may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual s estate determined with regard to extensions regardless of whether such a return is required to be filed lifetime any unused portion of such individual’s gst_exemption shall be allocated to the property transferred to the extent necessary to make the inclusion_ratio for such property zero sec_2632 provides that the unused portion of an individual’s gst_exemption is that portion of such exemption that had not previously been allocated or treated as allocated by the individual which has not been allocated within the time prescribed by sec_2632 shall be deemed to be allocated as follows- sec_2632 provides that any portion of an individual’s gst_exemption a first to property which is the subject of a direct_skip occurring at such individual’s death and b second to trusts with respect to which such individual is the transferor and from which a taxable_distribution or a taxable_termination might occur at or after such individual’s death sec_2642 provides that except as provided in ' f if property is transferred as a result of the death of the transferor the value of such property for purposes of sec_2642 shall be its value as finally determined for estate_tax purposes except that if the requirements prescribed by the secretary respecting allocation of post-death changes in value are not met the value of such property shall be determined as of the time of the distribution concerned any allocation to property transferred as a result of the death of the transferor shall be effective on and after the date of the death of the transferor sec_26_2632-1 provides that a decedent’s unused gst_exemption is automatically allocated on the due_date for filing form_706 or form 706na to the extent plr-129966-03 not otherwise allocated by the decedent’s executor on or before that date unused gst_exemption is allocated pro_rata subject_to the rules of sec_26_2642-2 on the basis of the value of the property as finally determined for estate_tax purposes first to direct skips treated as occurring at the transferor’s death the balance if any of unused gst_exemption is allocated pro_rata subject_to the rules of sec_26_2642-2 on the basis of the estate_tax_value of the nonexempt_portion of the trust property or in the case of trusts that are not included in the gross_estate on the basis of the date of death value of the trust to trusts with respect to which a taxable_termination may occur or from which a taxable_distribution may be made the automatic allocation of gst_exemption is irrevocable and an allocation made by the executor after the automatic allocation is made is ineffective sec_2654 provides that for gst purposes substantially separate and sec_26_2654-1 provides that if a single trust consists solely of sec_26_2654-1 provides that with respect to a separate share treated independent shares of different beneficiaries in a_trust shall be treated as separate trusts substantially separate and independent shares for different beneficiaries the share attributable to each beneficiary or group of beneficiaries is treated as a separate trust for gst purposes a portion of a_trust is not a separate share unless such share exists from and at all times after the creation of the trust for purposes of this paragraph a_trust is treated as created at the date of death of the grantor if the trust is includible in its entirety in the grantor’s gross_estate for estate_tax purposes see sec_26_2654-1 example sec_3 and regarding the treatment of trust distributions as separate shares as a separate trust under sec_26_2654-1 or an individual’s gst_exemption is allocated to the separate trust allocate any gst_exemption to any inter_vivos transfers and that at the time of decedent’s death his available gst_exemption was dollar_figure it is also represented that prior to decedent’s death no distributions had been made from irrevocable_trust to any grandniece of decedent or any other person who was a skip_person for gst tax purposes with respect to decedent based on the representations regarding the fair_market_value as of the date of decedent’s death of irrevocable_trust and the other assets reported as includible in decedent’s gross_estate for federal estate_tax purposes we conclude that pursuant to the automatic allocation rules contained in sec_2632 gst_exemption was automatically allocated as follows s dollars was automatically allocated to pecuniary bequests passing to decedent’s grandnieces q dollars was automatically allocated to real_property u dollars was allocated to property passing to revocable_trust one- as discussed above it is represented that prior to his death decedent did not plr-129966-03 half the residuary_estate and finally v dollars one half the date of death value of irrevocable_trust was automatically allocated to irrevocable_trust reflecting that the other one-half of the value of the irrevocable_trust passed to decedent’s brother on decedent’s death based on the representations the aggregate of these amounts did not exceed dollar_figure accordingly we conclude that sufficient gst_exemption was allocated pursuant to the automatic allocation rules contained in sec_2632 such that revocable_trust and irrevocable_trust will have inclusion ratios of zero for purposes of sec_2642 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 tax consequences of the transaction under the cited provisions or under any other provisions of the code except as specifically ruled herein we express or imply no opinion on the federal the rulings contained in this letter are based upon information and this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely george masnik chief branch passthroughs and special industries enclosures cc copy for sec_6110 purposes copy of this letter


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-143090-10 date date x a ----------------------------------------------------------------------------------------------------- ----------------------- -------------------------------------------------------------- state ------------- date date year year n1 n2 n3 n4 ------------------------- ---------------------- ------- ------- --------------- --------------- --------------- --------------- dear ----------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representatives requesting a ruling that rental income received by x from certain rental real_estate is not passive_investment_income within the meaning of sec_1362 of the internal_revenue_code plr-143090-10 the information submitted states that x was incorporated under the laws of state on date and elected under sec_1362 to be an s_corporation effective date x owns leases and manages a certain commercial real_estate property a the property x has accumulated_earnings_and_profits x through its shareholders provides certain services with respect to the leasing of property these services involve inspecting maintaining and repairing the building including the roofs external walls windows floors foundations guttering and downspouts plumbing sidewalks curbs drainage ditches air conditioning and heating units security and fire alarm systems providing waste disposal and performing safety inspections x negotiates leases collects rents monitors compliance with lease terms and addresses tenant complaints and requests for the tax years ending in year and year x collected approximately dollar_figuren1 and dollar_figuren2 respectively in gross rents and paid_or_incurred approximately dollar_figuren3 and dollar_figuren4 respectively in relevant operating_expenses excluding depreciation sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect for the taxable_year sec_1362 provides that an s_corporation_election shall be terminated whenever the corporation i has accumulated_earnings_and_profits at the close of each of consecutive taxable years and ii has gross_receipts for each of such taxable years more than percent of which are passive_investment_income the termination is effective on and after the first date of the first taxable_year beginning after the third consecutive taxable_year referred to in sec_1362 sec_1362 except as otherwise provided in sec_1362 sec_1362 provides that the term passive_investment_income means gross_receipts derived from royalties rents dividends interest annuities and sales or exchanges of stock_or_securities sec_1375 imposes a tax on the income of an s_corporation if the s_corporation has accumulated_earnings_and_profits at the close of such taxable_year and gross_receipts more than percent of which are passive_investment_income sec_1_1362-2 defines rent as amounts received for_the_use_of or right to use property whether real or personal of the corporation sec_1_1362-2 provides that the term rents does not include rents derived in the active trade_or_business of renting property rents are derived in an active trade_or_business of renting property only if based on all the facts and plr-143090-10 circumstances the corporation provides significant services or incurs substantial costs in the rental business generally significant services are not rendered and substantial costs are not incurred in connection with net leases whether significant services are performed or substantial costs are incurred in the rental business is determined based upon all the facts and circumstances including but not limited to the number of persons employed to provide the services and types and amounts of costs and expenses_incurred other than depreciation based solely on the facts and representations submitted we conclude that the rental income x receives from its operations describe above is not passive_investment_income under sec_1362 except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion on whether x is a small_business_corporation under sec_1361 further the passive_investment_income rules of sec_1362 are independent of the passive_activity rules of sec_469 unless an exception under sec_469 applies the rental_activity remains passive for purposes of sec_469 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the powers of attorney on file with this office we are sending copies of this letter to your authorized representatives sincerely bradford r poston senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


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 cc psi b06 conex-117175-12 number release date uil 25d the honorable john cornyn united_states senator providence tower sec_5001 spring valley road suite 1125e dallas texas attention ------------------ dear senator cornyn i am responding to your inquiry dated date on behalf of your constituent ------- --------------------------- -------------------------------------------------------- he requested information about a private_letter_ruling request submitted by someone else under sec_25d of the internal_revenue_code the code unfortunately sec_6103 of the code prevents me from disclosing any return or return_information including information about a private_letter_ruling request to anyone other than the taxpayer without proper written disclosure authorization therefore i cannot discuss any private_letter_ruling requests or even confirm whether our office has received a private_letter_ruling request from a particular taxpayer without his or her consent additionally if an individual taxpayer had requested a private_letter_ruling the private_letter_ruling would apply to only that individual we do not ordinarily issue letter rulings or determination letters on the tax consequences of a transaction for taxpayers who are not directly involved in the request for example a taxpayer cannot request a letter_ruling on the tax consequences of a transaction to a customer or client if the ruling does not address the taxpayer’s own tax status liability or reporting obligations because the customer or client is not directly involved in the letter_ruling request section dollar_figure of revproc_2012_1 i r b taxpayers generally cannot use or cite as precedent a written_determination such as a private_letter_ruling sec_6110 of the code so a company selling solar electric property cannot rely on a ruling we issue to a customer conex-117175-12 although i cannot discuss a different taxpayer’s tax treatment i can provide information about the issue raised by ------------- that i think will be helpful in general sec_25d of the code allows a taxpayer to take a personal tax_credit for purchasing and installing certain qualified residential energy efficient property including qualified solar electric property qualified solar electric property is property that uses solar_energy to generate electricity for use in a dwelling_unit located in the united_states and used as a residence by the taxpayer ------------- has described a situation in which solar units are used to generate electricity that is fed into the local utility grid rather than used directly in the taxpayer’s residence we are considering whether congress intended that a taxpayer that purchases solar electric property that connects to the local utility grid rather than directly to the taxpayer’s home should qualify for a sec_25d tax_credit the outcome of our decision will impact many taxpayers and we want to exercise care in making this decision we are committed to a comprehensive review and a prompt resolution of this issue at the conclusion of that review i am sorry that i cannot provide a more definitive response for ------------- but i hope this information is helpful if you have any questions about this matter please contact ------- ----------------------- at -------------------- or me at -------------------- for further assistance sincerely curt g wilson associate chief_counsel passthroughs special industries


tcmemo_1997_279 united_states tax_court don c and judy montgomery petitioners v commissioner of internal revenue respondent docket no filed date don c montgomery and judy montgomery pro sese cathleen a jones for respondent memorandum findings_of_fact and opinion whalen judge respondent determined the following deficiencies in additions to and penalty on petitioners' income_tax for the years in issue additions to tax penalty year deficiency sec_6653 sec_6661 sec_6662 dollar_figure dollar_figure dollar_figure -- unless stated otherwise all section references are to the -- -- big_number dollar_figure -- -- -- internal_revenue_code as in effect for the years in issue after concessions the issues remaining for decision are whether petitioners realized unreported income from their activities in connection with their son-in-law's wholly owned corporation whether petitioners are liable for the addition_to_tax for negligence prescribed by sec_6653 with respect to their return whether petitioners are liable for the addition_to_tax for substantial_understatement of liability prescribed by sec_6661 with respect to their return and whether petitioners are liable for the accuracy-related_penalty prescribed by sec_6662 with respect to their return findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts supplemental stipulation of facts and exhibits attached to each are incorporated herein by this reference petitioners are husband and wife who filed a joint federal_income_tax return for each of the years in issue at the time they filed their joint petition in this case petitioners resided in oklahoma city oklahoma all references to petitioner in this opinion are to mr don c montgomery background in petitioners' son-in-law mr tom petty was engaged in the fuel transportation business mr petty owned a tractor-trailer suitable for hauling fuel which he leased to an organization in houston texas referred to as petroleum wholesale in mr petty and petitioner decided to enter the fuel transportation business together they formed a company called pet-don to facilitate that activity pet-don's original capital consisted of one tractor-trailer which was contributed by petitioner when mr petty terminated his lease agreement with petroleum wholesale he also contributed his tractor- trailer to pet-don in date mr petty purchased all of the outstanding capital stock of a going concern called h b transport inc h b h b's primary business activity consisted of transporting fuel for unrelated parties mr petty hired a former employee of h b to manage the company's operations in oklahoma city ill feelings soon developed between mr petty and h b's previous owner who mr petty felt had failed to honor an agreement to hire h b to transport freight mr petty also grew distrustful of h b's manager who he felt was closely associated with the previous owner because of this mr petty asked petitioner to oversee the disbursement of h b's funds petitioner agreed and in date he began to perform administrative and supervisory services for h b including writing and signing checks drawn on h b's bank accounts petitioner never formally received a salary or other compensation_for the services he provided to h b h b's primary checking account was with the first interstate bank of oklahoma first interstate both petitioner and mr petty were authorized to sign checks drawn on this account there was a second checking account in h b's name at community bank petitioner was the only person authorized to withdraw funds from this account petitioner judy montgomery was an officer of community bank during the years in issue petitioner's former sister-in-law ms ann mackall also performed services for h b during the years in issue ms mackall worked in h b's office performing basic bookkeeping and administrative functions ms mackall never formally received a salary or other compensation_for her services to h b h b's bookkeeping system involved the use of a pegboard ledger a sheet of checks held in place over a permanent ledger by means of pegs along the left side of a board information written on a check was transferred to the ledger by means of carbon paper attached to the back of the check the ledger contained a column in which to enter deposits a column in which to enter the current balance in the account and a column in which ms mackall or petitioner would sometimes enter comments about the purposes for which checks were issued during the period in issue the dollar amounts of checks drawn on the first interstate account are often greater than the current balance shown in the ledger in addition there is no current balance shown for some periods thus checks would often be drawn despite an apparent balance of zero in the account only to have a sufficient balance entered later without explanation approximately once every month mr petty or his mother ms melba petty would travel to oklahoma city to collect the bank statements and canceled checks h b's drivers sometimes obtained fuel for their tractors from a tank located on the site where the tractors were parked on other occasions the drivers would purchase fuel from unrelated third parties using cash provided by h b h b's drivers also needed to keep cash on hand in case a tractor-trailer required repairs while away from h b's shop h b required considerable quantities of cash to pur- chase fuel on behalf of its customers fuel distributors generally do not accept checks in payment for fuel unless the purchaser is well known to the distributor therefore h b was required to pay for the fuel it transported with cash or cashier's checks h b would often use its own funds to purchase the fuel it transported on behalf of its customers h b would then receive reimbursement when it delivered the fuel to the customer on several occasions during the years in issue h b transported fuel for a company called trans state pavers inc trans state trans state was an unrelated corpora- tion apparently owned by mr bob white h b typically purchased the fuel that it transported for trans state from jordan distributors h b generally used cashier's checks to pay for the fuel it purchased from jordan distributors trans state would then pay h b's driver for the fuel by giving the driver either cash or a cashier's check at the time the driver delivered the fuel the driver would give the cash or cashier's check received from trans state to petitioner in total the amount of money petitioner received from trans state was equal to or exceeded the amount of the cashier's checks he gave to jordan distributors from h b's funds there were no deposits of cash or cashier's checks from trans state into h b's first interstate account during the years in issue sometime during the period in issue petitioner learned that the federal government was soliciting bids for a contract to haul fuel for the u s department of defense petitioner caused h b to submit a bid for the contract h b was awarded the contract and began hauling fuel for the department of defense after h b completed the contract on or about date the u s government issued a check payable to h b in the amount of dollar_figure for h b's work under the contract in date mr petty moved to oklahoma city and assumed control of h b's operations at that time petitioner and ms mackall stopped providing services to the company and neither of them has had any involvement with h b since then lincoln mark vii automobile from to the time of trial petitioner was in possession of a lincoln mark vii automobile although the title to the automobile lists pet-don as owner it lists petitioners' residence as the owner's address both petitioner and mr petty were present at the time the automobile was purchased mr petty made a cash downpayment and the remainder of the purchase_price was financed by the proceeds of a loan from community bank because pet-don did not have sufficient credit to support the loan petitioners cosigned the financing agreement in their individual capacities petitioner used the lincoln mark vii as his personal vehicle at all times between the date of purchase and the date of trial during petitioner signed six checks totaling dollar_figure that were drawn on h b's first interstate account and made payable to community bank these checks are as follows date check no amount payee n a1 n a total 1not available dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure community bank community bank community bank community bank community bank community bank each of these checks bears a notation stating that it was issued as payment for petitioner's company car a notation on the pegboard ledger for check no also states car payment these checks represent monthly payments on the loan used to finance the purchase of the lincoln mark vii petitioner signed three additional checks during that were drawn on h b's first interstate account in payment of miscellaneous expenses relating to the lincoln mark vii these checks are as follows date total check no amount payee dollar_figure don montgomery don montgomery first interstate these checks were used to purchase such items as fuel tires maintenance service and repairs for the lincoln mark vii during petitioner signed four checks totaling dollar_figure that were drawn on h b's first interstate account and made payable to community bank these checks are as follows date total check no n a amount dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure payee community bank community bank community bank community bank notations on all but one of these checks state that they were issued as payment for petitioner's company car h b's pegboard ledger also bears a notation for each of these checks stating car payment these checks also represent monthly payments on the loan used to finance the purchase of the lincoln mark vii on date petitioner signed check no in the amount of dollar_figure that was drawn on h b's first interstate account and made payable to alexander strunk this check bears the notation insurance - co cars this check was used to purchase insurance for petitioner's lincoln mark vii sometime in date petitioner signed check no in the amount of dollar_figure that was drawn on h b's first interstate account and made payable to first interstate a notation on the front of the check states tires repairs company vehicle this check was also used to pay expenses relating to the lincoln mark vii sometime after date petitioner endorsed the check issued by the u s government to h b in the amount of dollar_figure for the work done by h b under its contract to transport fuel for the department of defense petitioner deposited the check into h b's checking account at community bank petitioner then used the proceeds of the check to pay the outstanding balance of the loan used to purchase the lincoln mark vii petitioner had no authority to deposit this check into the community bank account or to apply the proceeds to the automobile loan converted payments from trans state pavers during petitioner signed four checks in the aggregate amount of dollar_figure that were drawn on h b's first interstate account and made payable to first interstate petitioner used the proceeds of each of these checks to purchase a cashier's check these checks and the cashier's checks that were purchased are as follows date total check no amount amount of cashier's check n a n a dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure each of the cashier's checks was made payable to jordan distributor and lists trans state as remitter petitioner purchased three additional cashier's checks payable to jordan distributors during with checks totaling dollar_figure that petitioner drew on h b's first interstate account and made payable to cash the amount of these checks and the cashier's checks that were purchased are as follows date check no n a total n a amount dollar_figure big_number big_number big_number amount of cashier's check dollar_figure big_number big_number big_number none of the cashier's checks purchased in the manner described above bears any notation indicating the purpose for which it was issued the back of each check bears the statement cashier's check issued in lieu of the check payable to the same payee we find that each of these cashier's checks was used to pay jordan distributors for the cost of fuel that h b transported for trans state the difference if any between the amount of each check and the amount of the corresponding cashier's check represents a fee charged by first interstate for issuing the cashier's check each time trans state received a shipment of fuel from h b its representative would pay h b's driver for the fuel with either cash or a cashier's check the h b driver receiving the cash or cashier's check would then deliver the funds to petitioner in total the amount of money petitioner received from trans state was equal to or exceeded the amount of money h b paid to jordan distributors for the fuel as reflected by the cashier's checks summarized above petitioner did not deposit any of the money he received from trans state into h b's account at first interstate wholesale fuels inc in petitioner and several other individuals formed a corporation called wholesale fuels inc wholesale fuels petitioner intended wholesale fuels to operate as a jobber for pet-don mr petty and mr james jordan each contributed dollar_figure as capital to the corporation the original shareholders were petitioner mr jordan h t jordan and mr frank g mcguire there is no evidence in the record that mr petty held any stock in wholesale fuels at any time during the years in issue on date a bank account was opened in the name of wholesale fuels at founders bank in oklahoma city oklahoma both petitioner and mr petty were authorized to sign checks drawn on this account on date petitioner filed with respondent on behalf of wholesale fuels form_637 registration for tax-free transactions under chapter sec_31 sec_32 and sec_38 of the internal_revenue_code petitioner signed the form as president of wholesale fuels stating that the company was a wholesale_distributor in the business of purchasing and selling heating oil the form bears a handwritten notation stating that it was revoked on date sometime prior to date mr jordan h t jordan and mr mcguire decided to withdraw from wholesale fuels mr petty thereafter repaid mr jordan the dollar_figure he had contributed to the corporation the record does not disclose whether mr mcguire or h t jordan had contributed any capital to the corporation or whether they were repaid for any such contribution on date petitioner prepared but did not send a letter to the internal_revenue_service stating that he was the sole shareholder of wholesale fuels that mr jordan h t jordan and mr mcguire were no longer shareholders and that the corporation was electing small_business_corporation status under subchapter_s of the internal_revenue_code wholesale fuels never conducted any business activity and never filed a federal_income_tax return however the company did maintain its checking account at founders bank mr petty periodically used the funds in this account to pay expenses_incurred on behalf of h b on date petitioner signed check no drawn on h b's first interstate account and made payable to wholesale fuels inc in the amount of dollar_figure neither the check nor h b's pegboard ledger bears any notation of the purpose for this check the proceeds of the check were deposited into the wholesale fuels account at founders bank deposit into h b's community bank account on date petitioner signed check no in the amount of dollar_figure that was drawn on h b's first interstate account and made payable to community bank the proceeds of this check were later deposited into h b's account at community bank although there is no notation on the check itself a note attached to the check written by ms melba petty states don says travel expense repairs note deposited in h b acct 1st com bank miscellaneous items on date petitioner signed check no in the amount of dollar_figure that was drawn on h b's first interstate account and made payable to first interstate a notation on the back of the check states that a cashier's check was issued in lieu of the check the front of the check also bears a notation stating insurance a nota- tion in the space on the pegboard ledger corresponding to this check states rockport oil insurance on date first interstate issued a cashier's check payable to the oklahoma automobile insurance plan for dollar_figure petitioner purchased this cashier's check with a portion of the proceeds of check no the record does not disclose the reason for the dollar_figure difference between check no and the cashier's check the record is also silent as to the nature of the insurance purchased on date petitioner signed check no in the amount of dollar_figure that was drawn on h b's first interstate account and made payable to cash petitioner used the proceeds of this check to purchase a cashier's check the record does not disclose to whom this cashier's check was payable to whom it was remitted or the purpose for which the proceeds were used also during petitioner signed checks in the aggregate amount of dollar_figure that were drawn on h b's first interstate account and made payable to cash these checks are as follows date check no amount payee n a n a total n a n a n a n a n a n a n a n a dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure cash cash cash cash cash cash cash cash cash cash cash cash cash cash cash cash cash some of the above checks bear notations stating that they were used to pay travel or other expenses the pegboard ledger sheet also contains notations for some of these checks stating that they were used to pay travel and other expenses_incurred on behalf of h b during six checks were drawn on h b's first interstate account and made payable to petitioner these checks total dollar_figure and are as follows date total check no amount dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure payee don montgomery don montgomery don montgomery don montgomery don montgomery don montgomery check nos and bear notations stating that they were issued to pay for travel_expenses check nos and bear notations stating that they were issued to pay for expenses check no was signed by both petitioner and a mr moore check no was signed by mr petty during petitioner signed two additional checks in the total amount of dollar_figure that were drawn on h b's first interstate account and made payable to cash these checks are as follows date total check no amount dollar_figure big_number big_number payee cash cash check no bears a notation stating that it was issued as repayment to ms mackall for a previous cash deposit a notation on the pegboard ledger for this check states repay money dep for sw comm check no bears a notation stating that it was issued as repayment to wholesale fuels there is no entry on the pegboard ledger for check no also during petitioner signed two checks in the total amount of dollar_figure that were drawn on h b's first interstate account and made payable to first interstate these checks are as follows date total check no amount dollar_figure big_number big_number payee 1st interstate 1st interstate neither of these checks bears any notation and the peg board ledger sheet on which these checks should appear was not introduced into evidence opinion at the outset we note that respondent concedes part or all of four of the adjustments determined in the notice_of_deficiency first with respect to the adjustment increasing petitioners' income on the ground that petitioner realized unreported income from h b of dollar_figure in and dollar_figure in respondent concedes dollar_figure of the unreported income in and dollar_figure in second respondent concedes the full amount of the adjustment charging petitioner with unreported rental income of dollar_figure in and dollar_figure in third respondent concedes as incorrect the adjustment disallowing petitioners' capital_loss deductions of dollar_figure per year in and and dollar_figure in finally respondent concedes the additions to tax and penalties attributable to each of these conceded items as a result of respondent's concessions there is no deficiency for in their post-trial briefs petitioners argue that respondent's determination that petitioner received unreported income from h b is inherently arbitrary and excessive on its face petitioners argue that respondent's determination is therefore not entitled to the presumption of correctness and respondent bears the burden of proving that the petitioners had unreported income generally a taxpayer bears the burden of proving that the commissioner's determination_of_a_deficiency is erroneous see rule a all rule references are to the tax_court rules_of_practice and procedure however in a case such as this in which the commissioner determines that a taxpayer realized unreported income the commissioner must provide a minimal evidentiary foundation for the deficiency determination before the presumption of correctness attaches to it see 937_f2d_1548 10th cir affg tcmemo_1989_552 596_f2d_358 9th cir revg 67_tc_672 377_f2d_65 9th cir revg tcmemo_1964_223 estate of dickerson v commissioner tcmemo_1997_165 siebert v commissioner tcmemo_1997_6 senter v commissioner tcmemo_1995_ on rare occasions when such a minimal evidentiary foundation for the deficiency determination is not present this and other courts have not given effect to the presumption of correctness and have shifted the burden of going forward with the evidence from the taxpayer to the commissioner on the ground that the notice_of_deficiency is arbitrary ie without rational foundation in fact or excessive see 649_f2d_152 2d cir affg in part revg in part and remanding 74_tc_260 weimerskirch v commissioner supra 83_tc_269 73_tc_394 this is not such a case in this case there is ample evidence linking petitioner to the funds which form the basis of the deficiency petitioner controlled and signed checks drawn on h b's bank accounts at first interstate and community bank and h b's drivers gave petitioner the cash and cashier's checks they received from trans state thus we find no basis to conclude that the notice_of_deficiency is arbitrary or without foundation accordingly petitioners bear the burden of proving that respondent's determinations are erroneous see rule a the principal issue in this case is whether petitioner realized unreported income from his activities in connection with h b a taxpayer does not realize income by acting as a mere conduit for the transfer of funds on behalf of another see 44_tc_96 38_tc_1003 5_tc_691 drew v commissioner tcmemo_1972_40 however when a tax- payer acquires earnings lawfully or unlawfully without the consensual recognition express or implied of an obligation to repay and without restriction as to their disposition then he has realized income 366_us_213 see also 91_tc_273 thus we must determine whether petitioner used the funds he withdrew from h b's bank accounts for h b's benefit or whether he converted those funds to his personal_use lincoln mark vii automobile during and petitioner signed checks drawn on h b's first interstate account and made payable to community bank totaling dollar_figure and dollar_figure respec- tively these checks represent payments on the loan used to purchase the lincoln mark vii in petitioner signed two additional checks drawn on h b's first interstate account and made payable to himself in the total amount of dollar_figure and one made payable to first interstate in the amount of dollar_figure during respondent's examination petitioner told the revenue_agent that the proceeds of these checks were used to pay expenses relating to the lincoln mark vii on date petitioner signed a check drawn on h b's first interstate account and made payable to alexander strunk in the amount of dollar_figure the proceeds of this check were used to purchase insurance for the lincoln mark vii sometime in date petitioner signed a check drawn on h b's first interstate account and made payable to first interstate in the amount of dollar_figure the proceeds of this check were also used to pay expenses relating to the lincoln mark vii on or about date the u s government issued a check payable to h b in the amount of dollar_figure as compensation_for work h b performed under a contract to haul fuel for the department of defense petitioner endorsed this check and deposited the proceeds into h b's account at community bank the proceeds of this check were then used to satisfy the outstanding balance of the loan used to purchase the lincoln in this case therefore a total of dollar_figure in and dollar_figure in of h b's funds was used to pay expenses related to the lincoln mark vii respondent determined that these amounts constitute income to petitioners because the lincoln at all relevant times was used by petitioner as his personal vehicle petitioners bear the burden of proving that respondent's determination in this regard is erroneous see rule a we find that petitioners have failed to satisfy this burden petitioners argue that these payments do not con- stitute income to them because the lincoln was a company car presumably petitioners argue that the automobile was used for h b's business purposes or that the payments constitute nontaxable fringe_benefits we find this argument unpersuasive first the title to the automobile lists pet-don not h b as owner second petitioners have not shown that petitioner used the automobile for any purpose benefiting the title holder of the car pet-don or the payor of the subject payments h b petitioner did not maintain any record of the purposes for which the automobile was used nor did he testify that it was used primarily to further h b's business purposes to the contrary petitioner testified that he used a second automobile a buick to make business trips on behalf of h b petitioners also appear to argue that petitioner received the lincoln in a like-kind_exchange under sec_1031 we find petitioners' argument without merit petitioner failed to introduce documentary_evidence that he received the lincoln mark vii in exchange for a tractor- trailer and there is no documentary_evidence that petitioner owned a tractor-trailer other than the one he testified that he contributed to pet-don moreover pet- don and not petitioner was the record_owner of the lincoln mark vii at all relevant times essentially petitioners argue that they exchanged a tractor-trailer which they did not own for an automobile which they did not own this is clearly beyond the scope of sec_1031 furthermore sec_1031 requires that both the property transferred and the property received in a like- kind exchange be held primarily for productive use in a trade_or_business or for investment sec_1031 petitioners have not shown that they held the lincoln mark vii for productive use in a trade_or_business or for investment thus even if we accepted petitioner's characterization of the transaction sec_1031 would not apply in this case accordingly we reject petitioners' argument and sustain respondent's determination that all of h b's payments toward the purchase of the lincoln mark vii and its payments for insurance tires and other expenses related to the automobile constitute income to petitioners converted payments from trans state pavers during petitioner signed four checks drawn on h b's first interstate account and made payable to first interstate in the total amount of dollar_figure the proceeds of these checks were used to purchase cashier's checks totaling dollar_figure each of which was payable to jordan distributors also in petitioner signed three checks drawn on h b's first interstate account and made payable to cash in the total amount of dollar_figure the proceeds of these checks were also used to purchase cashier's checks payable to jordan distributors the above cashier's checks were used to purchase fuel from jordan distributors for delivery and sale to trans state there is no evidence that petitioner ever deposited the funds he received from trans state into any of h b's bank accounts or otherwise paid the funds to h b respondent determined that petitioner converted the money he received from trans state to his own personal_use respondent determined that the amount of money so converted as measured by the amount of h b's funds used to purchase the fuel constitutes taxable_income to petitioners petitioners have failed to present any documentary_evidence that petitioner paid the money he received from trans state to h b although there appear to have been some unexplained deposits into h b's first interstate account during the years at issue petitioners have failed to prove that the money petitioner received from trans state was deposited into the account it is also clear that the source of funds used to purchase each of the cashier's checks made payable to jordan distributors consisted of checks drawn on h b's first interstate account thus we are unable to find that petitioner used the money he received from trans state to pay jordan distributors for the fuel h b transported between the two we note ms mackall's testimony that petitioner either cashed the checks he received from trans state and used the proceeds to purchase cashier's checks or deposited cash received from trans state into h b's first interstate account and then issued separate checks to purchase cashier's checks however we do not credit ms mackall's vague testimony on this point moreover there are no notations on the pegboard ledger evidencing deposits corresponding to the cashier's checks purchased thus there is no basis in the record to reject respondent's determination that petitioner converted the funds he received from trans state to his own personal_use petitioners attached to their reply brief a copy of an alleged cashier's check payable to h b for dollar_figure this check was issued by community bank on date and names mr bob white the owner of trans state as remitter petitioners argue that this check proves that the cashier's checks in question were purchased for business purposes and that trans state had reimbursed h b for the fuel transported on its behalf however items included in briefs are not evidence see rule b 48_tc_704 affd 413_f2d_1047 9th cir further the cashier's check was not delivered to respondent prior to trial and respondent was not afforded an opportunity to question petitioners about the check accordingly we will disregard this check considering the facts and circumstances in the record we find that petitioners have not met their burden of proving that petitioner did not convert the money he received from trans state to his own personal_use we therefore sustain respondent's determination that the amount petitioner received from trans state as measured by the amount of h b funds used to purchase cashier's checks payable to jordan distributors constitutes income to petitioners wholesale fuels inc on date petitioner signed check no drawn on h b's first interstate account and made payable to wholesale fuels in the amount of dollar_figure this check was later deposited into the wholesale fuels account at founders bank respondent determined that because petitioner was the sole shareholder of wholesale fuels at the time the check was deposited into its bank account the proceeds of this check constitute income to petitioners we agree with respondent's premise that a taxpayer realizes taxable_income by diverting the funds of another to a corporation wholly owned by the taxpayer see eg davis v commissioner tcmemo_1991_333 however petitioner did not have sole dominion and control_over the funds in the wholesale fuels account at founders bank as found above mr petty periodically used the money in this account to satisfy expenses_incurred on behalf of h b thus we find that the money deposited into the wholesale fuels account at founders bank does not constitute income to petitioners deposit into h b's community bank account on date petitioner signed check no drawn on h b's first interstate account and made payable to community bank in the amount of dollar_figure a note attached to the check in ms melba petty's handwriting states don says travel expense repairs note deposited in h b acct 1st com bank the proceeds of this check were deposited into h b's account at community bank respondent determined that amounts deposited into h b's account at community bank constitute income to petitioners because petitioner was the only person authorized to withdraw funds from the account see generally 52_tc_115 affd 420_f2d_777 5th cir petitioners argue that the money deposited into this account does not constitute income to them because the account was established and used for h b's business purposes however petitioners have not shown that money in the community bank account was ever used to satisfy expenses_incurred on behalf of h b or that the money deposited into the account belonged to h b at trial petitioners introduced a document purporting to authorize mr petty to sign checks drawn on the community bank account however this document does not appear to have been filed with or in any way accepted by community bank petitioner himself was unable to recall how he obtained the document moreover mr petty testified that he never signed anything at community bank petitioners have offered no evidence that mr petty was ever authorized to withdraw funds from the account accordingly we find that petitioner had exclusive dominion and control_over the funds in the community bank account and we sustain respondent's determination that all h b funds deposited into the account constitute income to petitioners miscellaneous transactions on date petitioner signed check no drawn on h b's first interstate account and made payable to first interstate in the amount of dollar_figure in return first interstate issued a cashier's check payable to the oklahoma automobile insurance plan in the amount of dollar_figure an entry in the space corresponding to check no on h b's pegboard ledger states rockport oil insurance respondent determined that the entire amount of the h b check constitutes income to petitioners we find that dollar_figure of the amount of check no was used to purchase insurance for h b and thus was used for h b's benefit in this regard we note that h b issued a separate check to purchase insurance for the lincoln mark vii on date thus the entire amount of the cashier's check is not income to petitioners however petitioners have offered no explanation of the additional dollar_figure withdrawn from h b's account and there is no basis in the record on which we can reject respondent's determination that this additional dollar_figure constitutes income to petitioners accordingly we find that dollar_figure of the proceeds of check no constitutes income to petitioners on date petitioner signed check no drawn on h b's first interstate account and made payable to cash in the amount of dollar_figure petitioner used the proceeds of this check to purchase a cashier's check however petitioners have provided no explanation of how the proceeds of this cashier's check were used consequently petitioners have failed to satisfy their burden of proving that the proceeds of check no do not constitute income to them as determined by respondent during petitioner signed additional checks drawn on h b's first interstate account and made payable to cash in the aggregate amount of dollar_figure some of these checks bear notations stating the purposes for which they were drawn h b's pegboard ledger sheet also contains notations of the purposes for some of these checks respondent argues that petitioners have not met their burden of proving that these checks do not constitute income because they did not introduce any receipts or other evidence to show how the proceeds were spent thus respondent maintains that we must sustain her determination that the proceeds of these checks constitute income to petitioners considering all of the facts and circumstances we find that these additional checks payable to cash do not constitute income to petitioners ms mackall testified that petitioner often withdrew cash from h b's first interstate account to obtain funds necessary for h b's daily operations although h b's record keeping was to say the least informal and sloppy we are nonetheless convinced that the proceeds of these checks were used to pay actual expenses_incurred on h b's behalf and were not converted to petitioner's personal_use ms mackall provided summaries of the checks in question and testified as to how the proceeds were spent we find ms mackall's testimony credible in this regard and find that the proceeds of these checks do not constitute taxable_income to petitioners also during six checks were drawn on h b's first interstate account and made payable to petitioner in the total amount of dollar_figure one of these checks was signed by both petitioner and a mr moore one of the checks was signed by mr petty some of the checks bear notations stating that they were issued to pay for travel or other expenses respondent determined that the entire amount of these checks constitutes income to petitioners we find that petitioners have not met their burden of proving that respondent's determination is erroneous insofar as the six checks payable to petitioner are concerned these checks were issued contemporaneously with the checks payable to cash however petitioners have provided no explanation why some of the checks were payable to cash and others were payable to petitioner if all of the proceeds were used to pay expenses_incurred on h b's behalf furthermore petitioners introduced into evidence a summary which states that check no which was signed by mr petty was actually given to mr petty petitioners claim that this check represents part of the proceeds of another check which was deposited into h b's first interstate account days earlier petitioners' summary states that this deposit was made from mr petty's personal funds and that mr petty used the proceeds of check no to pay business_expenses however petitioners do not explain why mr petty who was away from oklahoma city at the time would write a check payable to petitioner to withdraw money from h b's account for his own business purposes we find petitioners' explanation in this regard both implausible and incredible during petitioner signed two checks nos and drawn on h b's first interstate account and made payable to cash in the aggregate amount of dollar_figure check no bears a notation stating that it was issued to repay ms mackall for a previous cash deposit the pegboard ledger entry for this check states repay money dep for sw comm the pegboard ledger entry for check no states that it was issued to repay wholesale fuels for a cash deposit we find that neither of these checks constitutes income to petitioners ms mackall testified that she made a wire transfer of her own personal funds to southwest commercial bank on h b's behalf several days before check no was issued ms mackall testified that she made this transfer to prevent h b from incurring a fee for late payment we find ms mackall's testimony credible in this regard and find that check no was issued to repay her for this advance accordingly check no does not constitute income to petitioners petitioners argue that check no dated date in the amount of dollar_figure was issued to repay wholesale fuels for cash advanced by wholesale fuels to support this claim petitioners introduced a check drawn on the wholesale fuels account for dollar_figure dated date this check is payable to first interstate and was endorsed by h b we have already found that mr petty periodically used money in the wholesale fuels account to pay expenses_incurred on behalf of h b we therefore find that check no represents a transfer of money between two accounts used by h b accordingly we find that the proceeds of check no do not constitute income to petitioners also during petitioner signed two checks drawn on h b's first interstate account and made payable to first interstate in the aggregate amount of dollar_figure neither check bears any notation of its purpose and the pegboard ledger sheet on which these checks should appear was not introduced into evidence petitioners have not provided any explanation of these checks there is therefore no basis in the record on which to reject respondent's determination that this amount constitutes income to petitioners additions to tax and penalty respondent determined that petitioners are liable for the addition_to_tax for negligence in as prescribed by sec_6653 during sec_6653 imposed an addition_to_tax equal to percent of an underpayment if any part of the underpayment is attributable to negligence or disregard of rules or regulations sec_6653 for this purpose negligence is defined as any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code sec_6653 negligence includes any lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances 85_tc_934 quoting marcello v commissioner 380_f2d_499 5th cir affg in part and remanding in part 43_tc_168 and t c memo see also 103_tc_711 the term disregard includes any careless reckless or intentional disregard sec_6653 petitioners bear the burden of proving that respondent's determination of negligence is erroneous see rule a hitchins v commissioner supra petitioners have not introduced any evidence or made any argument that they acted with reasonable care in reporting their income for consequently we find that petitioners have failed to satisfy their burden of proving that respondent's determination of negligence is erroneous in addition to negligence respondent determined that petitioners are liable for the addition_to_tax for sub- stantial understatement of income_tax as prescribed by sec_6661 with respect to their return as in effect during sec_6661 imposed an addition_to_tax equal to percent of any underpayment of income_tax attributable to a substantial_understatement of liability sec_6661 respondent also determined that petitioners are liable for the accuracy-related_penalty prescribed by sec_6662 with respect to their return sec_6662 imposes a penalty equal to percent of any under- payment of income_tax attributable to a substantial_understatement of liability sec_6662 both sec_6661 and sec_6662 define a substantial_understatement as an understatement_of_tax liability equal to the greater of percent of the tax required to be shown for the taxable_year or dollar_figure sec_6661 sec_6662 in determining whether there is a substantial_understatement of liability the amount of an understatement is reduced by any portion attributable to the tax treatment of an item for which the taxpayer had substantial_authority and by any item with respect to which the relevant facts affecting the taxpayer's treat- ment are adequately disclosed in the return or in a statement attached to the return sec_6661 sec_6662 petitioners bear the burden of proving that respondent's imposition of an addition_to_tax under sec_6661 or penalty under sec_6662 is erroneous see rule a 79_tc_846 petitioners also bear the burden of proving that they had substantial_authority for omitting an item from their return see 104_tc_518 we find that petitioners have failed to satisfy their burden of proving that respondent's imposition of the addition_to_tax under sec_6661 and penalty under sec_6662 is erroneous in this case petitioners offered no authority for their position that the items in question did not constitute gross_income and did not disclose the facts relating to these items in their returns or statements attached to their returns accordingly we sustain respondent's determination that petitioners are liable for the addition_to_tax for substantial under- statement of liability as prescribed by sec_6661 with respect to their return and the accuracy-related_penalty as prescribed by sec_6662 with respect to their return insofar as they have understated their income_tax_liability however because respondent has conceded a portion of the deficiency and because we have found for petitioners on others the amounts of the addition_to_tax and penalty shall be determined as part of the rule computation in light of the foregoing and reflecting concessions decision will be entered under rule


number release date id office uilc cca_2009071320311747 ---------------------------- from --------------------- sent monday date pm to ---------------- cc subject re another possibility -------- - the amendment to sec_6211 that added sec_35 became effective on date it is our opinion that this means any deficiency determined after that date is determined by including sec_35 as part of b therefore any notice_of_deficiency issued after can treat the excess_credit as a deficiency let me know if you need anything further ----------