t c summary opinion united_states tax_court michael d and suzan l storer petitioners v commissioner of internal revenue respondent docket no 16243-05s filed date michael d and suzan l storer pro sese edward l walter for respondent goldberg special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed 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 unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined deficiencies in and penalties to petitioners’ federal income taxes as follows year deficiency dollar_figure dollar_figure penalty sec_6662 dollar_figure dollar_figure the issues for decision are whether petitioners’ photography activity constituted an activity_not_engaged_in_for_profit within the meaning of sec_183 during the years at issue and whether petitioners are liable for the accuracy-related_penalties provided by sec_6662 for the years at issue background the stipulation of facts and the attached exhibits are incorporated herein by reference at the time the petition was filed petitioners resided in miamisburg ohio during the years in issue petitioners were both employed in full-time jobs petitioner-husband mr storer worked as a repairman for general motors inc and petitioner-wife mrs storer worked as a receptionist and bookkeeper for harding ese inc petitioners earned total wages of dollar_figure and dollar_figure respectively during the years in issue mr storer developed an affinity for photography as a young person however he first started habitually taking and developing his own photographs sometime in the early 1990s on his physician’s advice that he take up a hobby to help him cope with periodic episodes of depression at that time mr storer who holds a high school diploma was working in the repair shop at general motors mr storer purchased many books on photography and film developing as well as photography magazines some film cameras and film developing equipment mr storer had not taken any instruction in photography prior to and including the taxable years at issue mr storer did not have his skills as a photographer or the quality of his photographs analyzed or critiqued or have his work juried prior to or during the years at issue while he continued to take and develop his own pictures mr storer became interested in photographic restoration and he purchased the equipment and supplies necessary to restore old photographs sometime in the early 1990s mr storer first offered photographic restoration services to family members friends and co-workers around this time he decided to try selling some framed landscape photographs he had taken and developed from earlier trips to landmarks such as yosemite national park around this time petitioners set up a makeshift photography studio and darkroom in the basement of their home starting in the early 1990s mrs storer assisted her husband with his photographic pursuits by recording his expenses in journals with an educational background in accounting from the local community college mrs storer recorded these expenses using the cash_basis method_of_accounting mrs storer has also prepared state tax documents including sales_tax reports in petitioners engaged a management consultant to assist them in preparing a 5-year projection for turning their photography activity into a business the management consultant provided petitioners with a series of flexible budgets and projections spanning through the management company based its projections on the assumption that by the year petitioners would have dollar_figure in gross_sales and that by petitioners would have dollar_figure in gross_sales prior to mr storer had purchased a large amount of analog photography and darkroom equipment for the studio and darkroom in the basement of petitioners’ home between and petitioners began to replace their analog equipment with new digital cameras printers scanners and the supplies for printing digital photographs namely paper and ink cartridges petitioners completely dismantled their basement studio and darkroom in the early 2000s upon dismantling their basement studio petitioners set up a digital darkroom consisting of a large table desk computer and bureau in a spare room adjacent to their bedroom from through the years in issue mr storer suffered a series of health setbacks requiring him to take off substantial time from his job at general motors petitioners maintained neither a separate bank account for their photography activities nor a separate phone line for customers although petitioners had purchased a separate insurance_policy for their cameras and developing equipment in the early 1990s they combined this policy into their homeowners’ insurance in in petitioners made sales transactions these sales were made to friends and mr storer’s co-workers at general motors the nature of petitioners’ sales in is unknown in preparation for trial petitioner prepared a portfolio of photography brochures listing prices and packages none of the materials contained in the portfolio were created in or used as marketing during the years in issue this portfolio included examples of the types of landscape photographs that mr storer had taken from such places as yosemite national park north dakota washington puerto vallarta aruba and san juan the petitioners provided a summary of their invoices this 3-page summary lists of the buyers by first name only as jim hall steve al gm gary gm ‘lady’ gm bob gm portfolio also included wedding photographs and photographs of individuals and pets some of which are dated from the late 1970s and early 1980s and none of which were taken during the taxable years in issue petitioners attached a business card to the portfolio which reads michael storer photographs e lindsey ave miamisburg ohio photo restorations more the address and phone number listed on petitioners’ card are those of their personal_residence beginning with their federal_income_tax return petitioners included the photography activity on schedules c profit or loss from business of their returns petitioners reported gross_receipts and claimed losses from a 7-year period of the photography activity from through while maintaining full-time employment as follows year gross_receipts total expenses profit or loss dollar_figure big_number big_number big_number dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number totals dollar_figure dollar_figure dollar_figure for the years in issue petitioners claimed the following deductions on their schedules c item advertising car and truck depreciation dollar_figure big_number dollar_figure big_number legal and professional office2 rent or lease repairs and maintenance supplies taxes and licenses travel utilities other expenses for business use of home big_number big_number big_number big_number total expenses dollar_figure dollar_figure in the notice_of_deficiency respondent disallowed petitioners’ claimed schedule c deductions for expenses on the ground that petitioners were not engaged in a trade_or_business activity for profit however respondent allowed as additional itemized_deductions real_estate_taxes and mortgage interest included in the computation of expenses of business use of home in addition respondent allowed schedule c expenses to the extent of income reported from the activity discussion the parties disagree as to whether petitioners engaged in their schedule c activity with an objective of making a profit within the meaning of sec_183 sec_183 disallow sec_2 on their schedules a itemized_deductions petitioners claimed that percent of their home was used as office space they did not however upon request allow respondent’s agent into their home to survey this space claiming that such a visit would be unnecessary and unwise deductions attributable to an activity_not_engaged_in_for_profit sec_183 provides two exceptions to this general_rule the first provided by sec_183 permits deductions that otherwise would be allowable without regard to whether the activity is engaged in for profit the second provided by sec_183 permits deductions that would be allowable if the activity were engaged in for profit to the extent that the gross_income from the activity exceeds the deductions allowable pursuant to sec_183 sec_183 defines an activity_not_engaged_in_for_profit as any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 or under paragraph or of sec_212 in general the commissioner’s determination set forth in the notice_of_deficiency is presumed correct rule a 290_us_111 in certain circumstances the burden_of_proof shifts to respondent sec_7491 petitioners do not contend that sec_7491 is applicable in this case nor did they establish that the burden_of_proof should shift to respondent petitioners bear the burden of establishing that their photographic activity was engaged in for profit during the taxable years at issue rule a in satisfying this burden taxpayers must show that they had an actual and honest objective of making a profit from the activity 78_tc_642 affd without opinion 702_f2d_1205 d c cir the taxpayers’ expectation however need not be a reasonable one id pincite 72_tc_411 affd without published opinion 647_f2d_170 9th cir sec_1_183-2 income_tax regs whether there is present the requisite intention of engaging in an activity with the objective of making a profit is a question of fact that is to be resolved upon a consideration of all relevant circumstances with the greatest weight being given to the facts rather than the taxpayers’ expression of their intent dreicer v commissioner supra pincite golanty v commissioner supra pincite sec_1_183-2 and b income_tax regs therefore irrespective of how ardently petitioners have stressed that they always intended to make a profit from their photography activity whether or not their activity rose to a level that satisfies their burden rests upon a consideration of all of the relevant factors concerning their activity during the taxable years at issue sec_1_183-2 income_tax regs sets forth the following nonexclusive list of the relevant facts that we will now consider the manner is which the taxpayers carry on the activity the expertise of the taxpayers or their advisers the time and effort expended by the taxpayers in carrying on the activity the expectation that the assets used in the activity may appreciate in value the success of the taxpayers in carrying on similar or dissimilar activities the taxpayers’ history of income or loss with respect to the activity the amount of occasional profits the financial status of the taxpayers and whether elements of pleasure or recreation are involved golanty v commissioner supra pincite sec_1_183-2 income_tax regs based on our consideration of these factors and in the light of the copious record in this case we conclude that petitioners have not demonstrated that their photographic activity was carried on with an actual and honest objective of making a profit in the taxable years at issue in reaching our conclusion we view the following elements as being most persuasive manner in which the taxpayers carried on the activity we believe that the manner in which petitioners carried on their photography activity does not support a finding that it was engaged in for profit in petitioners only made sales and of these at least one-half were made to buyers identified on petitioners’ records by first name only several other entries were identified by only the buyer’s first name plus the words at gm petitioners testified that the sales in were not reflective of their manner of operations because they actually solicited to hundreds of potential customers at various craft and art shows during the years at issue we note however that in a detailed calendar for which was submitted as an exhibit and on which petitioners testified that they recorded all of the time spent on training marketing and sales there is not one entry of any craft or arts show there are also no entries showing preparation for any craft or arts shows although petitioners reported sales of dollar_figure in there is no evidence that petitioners actually made any sales in or to whom these sales were made petitioners did not use a separate bank account or telephone number for their activity and the insurance held on all of their photography equipment was incorporated into their homeowner’s policy mr storer testified that as one example of the highly professional nature in which he carried on his business he only used business cards printed by a commercial printer rather than the type printed on an ink-jet printer with those little perforations on the sides upon examination of the two business cards provided by petitioners with their exhibits however it is clear that the cards have both the visible dot-matrix quality akin to those printed on an ink-jet printer as well as perforated edges although petitioners kept very extensive and detailed records of their expenses we believe that these records were maintained solely for the purpose of substantiating their considerable losses and not as a means for tracking costs so as to reduce business-related expenses the extensiveness of the records would be more meaningful if these records illustrated that petitioners were tracking expenses while at the same time making a bona_fide effort to grow their photography enterprise these records primarily show us that petitioners were adept at acquiring the latest digital photography technology and supplies what is conspicuously missing however is a same level of extensive detail showing expenses and activities specifically geared at growing the business for example petitioners spent thousands of dollars on digital cameras and supplies yet believed that it was unnecessary to spend more than dollar_figure which included a dollar_figure ad placed in the back of the local high school yearbook on the basic staples of marketing a business such as advertisements a listing in the yellow pages or brochures although petitioners submitted an extensive portfolio of flyers as an exhibit they admitted that the portfolio was not created until shortly before time of trial petitioners continually cite activities such as additional sales made in storefronts which purportedly occurred in and not only did petitioners not provide any evidence of these activities but these years are not in issue the court is concerned only with petitioners’ activities in and and not with what petitioners have or have not done in subsequent years time and effort expended by the taxpayers the numbers of hours spent cultivating his activity as testified to by mr storer is not only dubious but if accurate is grossly inverse to the sales resulting from his efforts mr storer claimed that he spent nearly big_number hours working on his activity in in addition to his full-time position at general motors if this claim was accurate mr storer would have had to spend an average of more than hours a day every day on his photography in addition to his full-time work commuting to and from his workplace and eating and sleeping as evidence of his daily activities mr storer submitted as an exhibit a pocket calendar for in which he purportedly handwrote the time he spent on his photography activity each day our examination of this calendar has led us to conclude that petitioners’ claims as to the time spent on the activity are not accurate first we believe neither that the calendar was made contemporaneous to the dates as recorded nor that it was an accurate accounting of petitioners’ time for support of this conclusion we look to several instances where the calendar contains entries for dates that simply do not exist big_number dollar_figure hours specifically the first week of september beginning with saturday september 1st has entries starting on tuesday of that week which would have actually been tuesday august 28th the entry for wednesday of this ‘added’ week reads in focus bk - hrs to reconcile the possibility that this added day was not the same as the corresponding last wednesday in august we turned to the entry for wednesday august 28th which reads exposure bk - hrs we further note additional added days and entries to the first week of the november calendar page that do not correspond to the actual days and entries recorded on the october calendar because there is more than one instance of these added days we do not believe that the calendar is an accurate and truthful account of the time spent by petitioners in cultivation of a business mr storer stressed that he did not take any vacation and that for religious reasons observed neither any religious nor federal holidays which allowed him those days to work on his photography mr storer testified that he used all holidays to market his business process orders and make sales the calendar however shows no activity recorded on april on the november calendar page petitioners inserted days at the beginning of the month a tuesday and a wednesday that did not actually exist again the entries recorded on these added days also do not correspond with the entries listed for the last days of october easter may memorial day september labor day or november thanksgiving day our examination of the entire year’s worth of daily entries moreover shows that almost percent of mr storer’s time was spent either reading the monthly installments of a limited number of photography magazine sec_5 and books or shopping at retail stores finally were we to believe that the entries accurately reflect the time petitioners spent cultivating photography into a viable business the time spent is grossly inverse to the actual sales made in the years at issue the taxpayers’ history of losses and financial status first since petitioners’ claimed schedule c business_losses have exceeded dollar_figure in each year while their gross_receipts from that same time never exceeded dollar_figure petitioners have never earned a profit petitioners cite our decision in 68_tc_696 to support their contention that the years of losses which preceded the years in issue should not dictate our determination of whether their activity in and was conducted with the objective of making a profit as further support petitioners argue that their losses were offset for example in date petitioner spent hours reading shutterbug magazine hours reading outdoor photography magazine and hours shopping at circuit city and compusa in the years in issue because they sold a considerable portion of their analog equipment while upgrading to newer digital technology petitioners claim that their losses are further justified by the difficult economic conditions which plagued large analog photography businesses such as eastman-kodak as more consumers switched from analog to digital photography we do not find credence in petitioners’ arguments first petitioners do not claim to be engaged in the business of selling photography equipment but rather taking photographs second although we acknowledge the phenomenal growth in digital photography throughout the past decade petitioners were not in the business of developing other people’s photographs petitioners purported to be professional photographers the effect of the digital photography boom on businesses such as eastman-kodak resulted from consumers’ choosing to develop their photographs at home rather than use traditional film developing services it did not affect the demand for quality professional photography services for the very types of portraiture and event coverage which petitioners claimed was their focus namely weddings corporate prints and senior portraits similarly the boom in home developing did not affect the specialized services that are often the hallmark of professional photographers such as portrait sittings albums restorations dvds and videos again while the phenomenon of digital photography has made home developing more accessible to amateur consumers this newfound ability for recreational photogs to take and develop their own pictures has not changed the demand for quality professional photography if anything the availability of high-quality digital cameras has made the consumer more astute regarding both resolution and composition aesthetic when selecting a professional photographer to this end had petitioners invested more resources into education and training or sought professional evaluation of their skills we would be more convinced that their activity was engaged in with the objective of making a profit petitioners argue that the income they earned in their respective full-time jobs in and is irrelevant because petitioners could not use their wages to pay for any of their photography-related expenses but instead used credit and gifts from friends and family petitioners claim that their wages were almost completely exhausted by their household bills mortgage and taxes with expenses totaling dollar_figure in the years in issue we are doubtful that petitioners did not apply any of their wages to this amount moreover we note that if petitioners indeed incurred debt of dollar_figure the fact that they only took in dollar_figure in sales supports our conclusion that petitioners’ activity in these years was not engaged in with the objective of making a profit elements of recreation in sum we believe that petitioners engaged in their photography activity for the principal purpose of providing mr storer with the opportunity to take up a pleasurable hobby to reduce his stress and anxiety it is evident from the photographs showing the areas in their home used for this activity that petitioners took great care and expense in setting up a pleasant and well-stocked workspace photography however is highly subjective and in great part the success of a photography business is dependent on both the skill and talent of the photographer and the marketing and reputation cultivated therefrom we are perhaps ultimately persuaded by petitioners’ decision to forgo any formal training or education in photography in lieu of reading photography and trade magazines and picture books featuring works by famed landscape photographer ansel adams while it is beyond our purview to comment on mr storer’s ability or potential we think it unlikely barring an extraordinary talent to become ansel adams through self-study moreover we believe that mr storer through educating himself primarily with trade magazines that feature the most current technologies was compelled to purchase and ultimately gratified by his acquisition of extremely expensive equipment finally we note that at the end of petitioners’ presentation prepared for the court mr storer lamented that he had to perform many menial chores and has had to do many forms of marketing including cold calls that can be unpleasant at times while petitioners claim that they should not be required to suffer as a prerequisite to deductibility we cannot help wondering how petitioners engaged in their activity with a profit objective if they were opposed to performing the tasks essential to business success namely marketing and sales calls finally although we concede that on its face petitioners’ photography activity did have some of the characteristics of a business we find these characteristics insufficient to demonstrate that their activity was carried on for profit therefore on the basis of all of the evidence in the record we conclude and hold that petitioners did not conduct their photography-related activity in either or with a profit objective within the meaning of sec_183 accordingly petitioners are not entitled to the deductions claimed on their schedules c for the years in issue sec_6662 penalty respondent determined that petitioners are liable for the accuracy-related_penalty provided by sec_6662 for each year in issue sec_6662 imposes a 20-percent penalty on the portion of an underpayment_of_tax that is attributable to inter alia negligence or disregard of rules or regulations the term negligence includes any failure to make a reasonable attempt to comply with the provision of the internal_revenue_code including failure to exercise due care or failure to do what a reasonable person would do in the circumstances sec_6662 sec_1_6662-3 income_tax regs the term disregard includes any careless reckless or intentional disregard of the code or the temporary or final regulations issued pursuant to the code sec_6662 sec_1_6662-3 income_tax regs sec_7491 places on the commissioner the burden of producing evidence showing that it is appropriate to impose any penalty or addition_to_tax once the commissioner meets that burden as in the instant case the taxpayer must produce evidence sufficient to show that the commissioner’s determination is incorrect 116_tc_438 petitoners have not produced evidence sufficient to prove that respondent’s determination in this case was incorrect the accuracy-related_penalty does not apply to any portion of an underpayment with respect to which it is shown that there was a reasonable_cause and that the taxpayer acted in good_faith sec_6664 the decision as to whether the taxpayers acted with reasonable_cause and in good_faith depends upon all pertinent facts and circumstances sec_1_6664-4 income_tax regs generally the most important factor is the extent of the taxpayers’ efforts to assess the proper tax_liability id petitioners contend that they believed in good_faith that the expenses they claimed were allowable good_faith on the part of taxpayers however does not always negate negligence taxpayers are required to take reasonable steps to determine the law and to comply with it 99_tc_202 in this case petitioners have not shown that their claimed deductions for expenses were made with any significant regard to whether they were personal in nature and the record supports the inference that petitioners’ photography activity was used to deduct personal expenses for the foregoing reasons moreover we do not consider mr storer to have acted reasonably with respect to the deduction of those expenses claimed for his photography activity based on our consideration of the entire record we sustain respondent’s determinations with respect to the accuracy- related penalties for negligence for the years in issue to reflect the foregoing decision will be entered for respondent


office_of_chief_counsel internal_revenue_service memorandum number release date cc psi rkahane jgoldberg postf-111193-10 uilc date date to associate area_counsel large business international from associate chief_counsel passthroughs special industries subject treatment of leveraged_partnership_transaction this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend plan x select assets line_of_business qsub-x y sub-y1 sub-y2 y affiliates partnership contributed assets y notes sub-p bank company a a b ----------------------------------------------- ----------------------------------------------------------------------- -------------------------------------- ----------------------------- -------------------- --------------------------------------------------------------------------------------------- -------------------------- -------------------------- ----------------------------- ---------------------------------- ---------------------------------------------------------- ------------------------------------------------------------------------------------------ --------------------- ------------------------------------- -------------- -------------- ---- ------------------ postf-111193-10 ---------------- -- ---------------- -------------- ---------------- ---------------- -------------- -------------- ---- ---- ------- ------- ------- ------- ------- ------- ------- ------- ---------------------- ------------------- -------------------------- -------------------------- ------------------- ------------------- ----------------------- --------------------------- c d e f g h i j k l year year year year year year year year date date date date date date date date issue sec_1 whether the indemnity by x in connection with its disposition of the contributed assets should be disregarded pursuant to sec_1_752-2 whether if the indemnity is disregarded pursuant to sec_1_752-2 the contribution of the contributed assets and the ensuing distribution should be recharacterized as a disguised sale by x to the partnership pursuant to sec_707 and the regulations thereunder alternatively whether the transaction should be recast under sec_1_701-2 as y borrowing from bank to purchase a of the contributed assets followed by the formation of a partnership alternatively whether under the judicial doctrine_of substance over form the form of the transaction should be disregarded and the transaction should be recharacterized as a sale postf-111193-10 conclusion sec_1 x’s indemnity should be disregarded pursuant to sec_1_752-2 because the indemnity is disregarded the related contribution and distribution will be treated as a disguised sale under sec_707 alternatively the transaction should be recast under sec_1_701-2 as y borrowing from bank to purchase a of the contributed assets followed by the formation of a partnership alternatively the form of the transaction contribution and distribution should be disregarded and treated in accordance with the underlying substance sale facts in year a purchased x using a plan x converted from a c_corporation to an s_corporation effective date a had originally planned for x to hold on to select assets while selling other assets however a changed his mind following a rapid deterioration in x’s line_of_business x began discussions with at least three bidders for the sale of the contributed assets ultimately x selected y as the purchaser y outbid several others y was willing to accept x’s desired structure although they generally face no corporate-level tax s_corporations are potentially subject_to tax under sec_1374 sec_1374 as it applies to x provides that if for any_tax year during a ten-year recognition_period x has a net_recognized_built-in_gain a corporate-level tax is imposed on the gain for that tax_year other sec_1374 rules would apply as well the recognition_period begins on the first day of the first tax_year for which the corporation operated as an s_corporation or date in this case according to x the contributed assets had a built-in_gain of dollar_figureb x structured the transaction with y as a leveraged partnership to try to prevent gain recognition for ten years and one day thereby avoiding the sec_1374 tax the parties consummated the transaction on date less than -----------------prior to x’s filing for chapter bankruptcy relief formation of the partnership when x engaged in the transaction it is likely x’s goal was permanent income exclusion by deferring recognition of gain until after the end of the recognition_period post-bankruptcy x will not continue to be an s_corporation and will in fact be a c_corporation therefore accepting x’s characterization of the transaction would result in tax_deferral of ten years subject_to possible gain recognition as the bank loan is amortized postf-111193-10 on date qsub-x a qualified_subchapter_s_subsidiary of x and sub-y2 a subsidiary of sub-y1 formed the partnership sub-y1 is a wholly-owned subsidiary of y qsub-x contributed the contributed assets with a fair_market_value of dollar_figurec in exchange for a d partnership_interest sub-y2 contributed the y notes with a fair_market_value of dollar_figuree plus dollar_figuref in cash in exchange for an a partnership_interest the partnership may not cause or allow the taxable sale of the contributed assets for ten years x has the right to designate one member of a five member board_of the partnership subject_to y’s approval the x member is not required to be present for a quorum y notes the y notes matured in year the y notes were newly issued at the time of the transaction they have terms identical to and were issued under the same indenture as y notes that were issued to the public in year the y notes are actually intercompany debt the y notes were issued by y and contributed down so that y owes the partnership dollar_figuree the credit agreement states that the partnership may not dispose_of the y notes except to the extent provided by section -------of that agreement section -------provides that the partnership may not subordinate the y notes except to the extent that any proceeds are received and those proceeds are used to refinance the y notes or to invest in cash or cash equivalents such cash proceeds would be subject_to restrictions on disposition to the extent of outstanding debt similarly section -----of the llc agreement for the partnership states that any distribution of the proceeds of the y notes ----------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------- in an email dated date an attorney for y expressed concern about the language of section -----of the llc agreement he wanted the partnership to be able to distribute some of the cash from the proceeds of the y notes an attorney for x responded ------ -------------------------------------------------------------------------- ---------------------------------------- -------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- likely referring to section --------of the credit agreement the form 8-k on this transaction filed with the sec explains ------------------------------------------------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ postf-111193-10 in a meeting with x and its representatives on date x stated that in year the partnership refinanced the y notes for y notes due in year and year loan and special distribution also on date a subsidiary of the newly formed partnership sub-p borrowed dollar_figuree million from bank the bank debt matured in year sub-p used the funds to finance a special distribution to qsub-x in the amount of dollar_figureg million dollar_figureh million plus dollar_figurei million in prepaid rent for_the_use_of company facilities the partnership is required to maintain dollar_figuree million of debt for k years subject_to an agreed amortization schedule in the meeting with x and its representatives on date x stated that it has refinanced the loan until year collateral according to an internal x memorandum on accounting for the transaction dated date bank has a perfected first priority security_interest in collateral collateral consisting of i all the assets of the partnership ii sub-y1’s equity_interest in the partnership iii the capital stock of the partnership’s subsidiaries and iv the y notes guarantees and indemnity the partnership sub-y1 and sub-y2 guaranteed the partnership’s borrowing the guarantees are guarantees of payment which means that the lender has the right to seek payment from the guarantors of any unpaid due amounts without having to exhaust other remedies first x indemnified sub-y1 and sub-y2 together the y affiliates on their guarantees the y affiliates may only proceed against x for amounts they actually have to pay on their guarantees the indemnity agreement does not impose a net_worth maintenance requirement or financial reporting obligations on x under gaap x disclosed the indemnity but did not record it as a liability or contingent_liability the indemnity agreement provides that if called upon to reimburse one of the guarantors x could obtain remaining rights in the collateral including the y notes on a second priority basis in the meeting with x and its representatives on date x’s representative confirmed that x could obtain rights-subordinate to bank’s rights-to the partnership assets bank required an amortization schedule for the loan the maximum principal_amount that could be indemnified by x decreases by the amount of the required amortization on the debt moreover the internal memorandum on accounting for this transaction from date stated postf-111193-10 -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------- put and call options beginning on the tenth and ending on the thirteenth anniversary of closing sub-y2 has a call option with respect to x’s interest in the partnership beginning after the thirteenth anniversary of closing x has a put option with respect to that interest the first of these rights is timed to coincide with the running of the ten-year recognition_period and is exercisable at fair_market_value sub-y2 also has a right_of_first_refusal should x decide to sell its interest once it is permitted to do so x’s petition for chapter bankruptcy relief x filed a petition for chapter bankruptcy on date just --------------after executing the indemnity the bankruptcy court entered an order confirming a plan_of_reorganization for x on date the plan_of_reorganization became effective on date as stated in article ---of x’s plan_of_reorganization the indemnity was to remain in full force and effect against the reorganized x x’s treatment of the transaction x reported the contribution of the contributed assets as a nontaxable contribution of property under sec_721 and almost all of the special distribution as a nontaxable distribution_of_property under sec_731 under gaap x reported the transaction as a sale law and analysi sec_1 the indemnity by x of the indebtedness of the partnership should be disregarded pursuant to sec_1_752-2 sec_1_707-5 provides that sec_752 and the regulations thereunder apply in determining a partner’s share of a partnership_liability a partner’s share of recourse_liability equals the portion of that liability if any for which the partner bears the economic risk of loss sec_1_752-2 a partner bears the economic risk of loss for a partnership_liability to the extent that if the partnership constructively liquidated the partner would be obligated to make a payment to any person or a contribution to the partnership because that liability becomes due and payable and the partner would not be entitled to reimbursement from another partner sec_1_752-2 only the amount that was attributed to rent prepayment dollar_figurel million was taxed the rest of the special distribution was treated as nontaxable under sec_731 postf-111193-10 for purposes of determining whether a partner is obligated to make a payment contractual obligations such as guarantees are taken into account sec_1 b i furthermore for purposes of determining the extent to which a partner has a payment obligation and economic risk of loss it is assumed that all partners who have obligations to make payments actually perform those obligations irrespective of their actual net_worth unless the facts and circumstances indicate a plan to circumvent or avoid the obligation sec_1_752-2 sec_1_752-2 provides additional guidance on circumstances that indicate a plan to circumvent or avoid the obligation under sec_1_752-2 an obligation of a partner to make a payment may be disregarded or treated as an obligation of another person if the facts and circumstances indicate that a principal purpose of the arrangement between the parties is to eliminate the partner’s economic risk of loss with respect to that obligation or create the appearance of the partner bearing the economic risk of loss when in fact the substance of the arrangement is otherwise sec_1 j provides that an obligation of a partner to make a payment is not recognized if the facts and circumstances indicate a plan to circumvent or avoid the obligation if x’s indemnity were respected under the sec_752 regulations x probably would bear the economic risk of loss for the partnership_liability and be allocated the full amount of that liability however the facts strongly indicate that x’s indemnity should be disregarded under sec_1_752-2 it is appropriate to disregard an indemnity if the indemnity is nothing more than a guise to cloak a partner with an obligation for which it bore no actual economic risk of loss 135_tc_199 in canal corp the tax_court considered the application of sec_1_752-2 to an indemnity agreement wisco a wholly-owned subsidiary of chesapeake the predecessor of canal corporation transferred assets worth dollar_figure million to a new partnership prs in exchange for a partnership_interest chesapeake wanted to sell a portion of its business but had a low basis in the assets general_partner gp transferred property worth dollar_figure million to prs in exchange for a partnership_interest gp had no interest in chesapeake’s tax_deferral but was willing to buy at a lower price because of the deferral benefit subsequently prs borrowed dollar_figure million from a third party lender all of which was immediately distributed to wisco in a special distribution gp served as the guarantor on the note and wisco agreed to indemnify gp neither gp nor the third party lender required the indemnity the indemnity agreement was significant in several respects the indemnification only covered the principal of the debt it required gp to proceed against the assets of prs before demanding indemnification and it provided that wisco’s interest in prs would increase should wisco make an indemnification payment in addition wisco was not required to maintain a certain net_worth wisco’s net_worth of dollar_figure million represented approximately of the indemnification exposure and the economic risk of loss of chesapeake was limited to wisco’s assets the most valuable postf-111193-10 of which was an intercompany note that chesapeake could cancel at any time importantly gp knew that wisco’s assets were limited at the time of the transfers in its analysis the court considered the purpose of the indemnity agreement and whether wisco had sufficient assets to cover the indemnity agreement the court found that the purpose of the agreement was to limit any potential liability of wisco’s assets in so finding the court took into account the following facts none of which were dispositive gp did not require the indemnification the indemnification did not require wisco to maintain a certain net_worth wisco provided the indemnification purposely to achieve tax_deferral the indemnification only covered the principal of the loan and wisco stood to receive an increased interest in prs if required to make indemnification payments the court found that wisco’s agreement to indemnify gp lacked economic_substance and provided gp no real protection because wisco’s primary asset was an intercompany note that could be cancelled at any time and the indemnity did not require wisco to retain this note or any other asset ie wisco was severely undercapitalized vis-à-vis the indemnification exposure x’s indemnity has several similarities with the indemnity that the tax_court disregarded in canal corp as in canal corp the lenders imposed no net_worth maintenance requirement on x the lack of such a requirement provided x and wisco an exit strategy in both cases neither the lender nor the guarantors required the indemnity both x and chesapeake insisted on the obligations as a prerequisite to the transaction in canal corp the indemnitor stood to receive an increased interest in the partnership if required to make indemnification payments in this case x stands to receive the remaining collateral if required to make indemnification payments one difference is that in canal corp wisco an undercapitalized subsidiary of chesapeake provided the indemnity whereas in this case x the parent_corporation provided the indemnity however this difference may be insignificant due to the absence of a net_worth maintenance requirement and financial reporting obligations imposed on x x may be able to either sell off assets and make distributions to shareholders or move assets to related entities in order to insulate its assets from its obligation before receiving claims under its indemnity x may argue that local law prohibiting such transfers in derogation of a creditor’s rights such as fraudulent conveyance laws restrict its ability to insulate its assets the absence of net_worth maintenance requirements etc suggest however that the creditor is not concerned about x doing so and in any case as the court in canal corp noted the possibility of creditor causes of action for fraudulent_conveyances may be too speculative to take into account in conducting a sec_752 analysis id pincite there are three compelling arguments for applying sec_1_752-2 to disregard the indemnity these arguments are not mutually-exclusive first the indemnity lacks important features typical of an indemnity in a commercially- driven transaction a typical indemnity expressly includes features such as net_worth maintenance requirements an arms-length fee an obligation to provide annual financial postf-111193-10 statements and evidence that the parties engaged in genuine negotiations over the indemnity the lack of such features in this case suggests a lack of concern on the part of the lenders and guarantors over x’s ability to pay on the indemnity it also allows x to strategically sell off assets and make distributions to shareholders or shift assets to related entities in order to insulate its assets if x expects the indemnity to be enforced at the meeting on date x stated that it did not have plans to sell significant assets however -------- reports just --------------later contradict these statements the -------- reports indicate that x is preparing to sell assets second the indemnity is specious because there is no practical or commercial risk of it being enforced as mentioned previously the partnership assets include the y notes the y notes are also serving as collateral on the loan due to the y notes y owes the partnership dollar_figuree in substance the y affiliates are guaranteeing y’s own debt the reason for this is that if y cannot pay on the y notes then it follows that neither y affiliate will be able to pay on its guaranty this is because y and its affiliates are all part of a single economic unit if neither of the y affiliates is able to pay on its guaranty then x will not have to pay on its indemnity this is because x’s indemnity to the y affiliates is only for payments actually made on their guarantees if the y affiliates default on their guarantees then x has no obligation under its indemnity even if bank has yet to be repaid x has no obligation to bank under its indemnity third y merely used the partnership as a conduit to borrow dollar_figuree million from bank in order to accommodate x’s structure the y notes and bank loan are similar to back-to- back loans the principal amounts of the y notes and bank loan were equal the y notes were issued and contributed at the same time that the partnership took out the loan the maturity_date of the y notes was year while the maturity_date of the loan was year x’s own internal memo on accounting for the transaction states ------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------- this arrangement is another indication that x planned to avoid any realistic possibility that it would have to make any payment on its indemnity and as discussed below that the bank debt is not even partnership debt to be allocated for tax basis purposes among the partners the date email exchange between attorneys for x and y reinforces this notion it demonstrates that x intended and acted to ensure that the partnership maintained sufficient ------------------------------------------------------------------------------------------------------------------------------------------ ------------ available at -------------------------------------------------------------------------------------------------------------- ---------------------------- y has no operations outside of sub-y1 postf-111193-10 collateral the y notes or the proceeds thereof to repay the bank without exposing x to meaningful liability on the indemnity indeed the motivation for the debt-financed distribution exception to the disguised sale rules is absent in this case the conference committee report on sec_707 describes a set of facts that congress intended to exempt from disguised sale treatment the case in which a partner contributes property to a partnership the partnership borrows against that property the proceeds of the loan are distributed to the contributing_partner and the contributing_partner retains liability for the repayment of the borrowed amounts congress intended equivalent treatment for such a situation and a situation where a partner borrows against the property outside of the partnership and contributes the encumbered property to a partnership we believe that congress assumed in the example in the legislative_history that the partner would economically bear the liability and that the debt was economically a partnership level debt that is not the case here here x neither borrowed against the contributed assets before they were contributed to the partnership nor afterward the contributed assets are not the property that was borrowed against instead the y notes that y contributed to the partnership were borrowed against moreover normally in a leveraged partnership that is effective for tax purposes the cash_flow of the business is used to service the debt while in this case the debt is being serviced by the partner y through back-to-back loans in short it is y not x that is exposed to the economic burden of the liability on the debt although we have identified what we believe are persuasive arguments for disregarding the indemnity under sec_1_752-2 we expect x to make at least three arguments in response first we anticipate that x will argue that the survival of the indemnity post-bankruptcy combined with x’s anticipated net_worth of dollar_figurej upon emerging from bankruptcy demonstrate that x in contrast to the undercapitalized wisco has the ability to pay on its indemnity however we believe this argument is a red herring unlike in canal corp the indemnitor’s ability to pay is not relevant in this case as explained above x has carefully structured the transaction to eliminate any commercial or practical risk that its indemnity will be called in addition as explained above this transaction should be the conferees wish to note that when a partner of a partnership contributes property to a partnership and that property is borrowed against pledged as collateral for a loan or otherwise refinanced and the proceeds of the loan are distributed to the contributing_partner there will be no disguised sale under the provisions to the extent the contributing_partner in substance retains liability for repayment of the borrowed amounts ie to the extent the other partners have no direct or indirect risk of loss with respect to such amounts since in effect the partner has simply borrowed through the partnership h_r conf_rep no pincite emphasis added postf-111193-10 viewed as y using the partnership as a conduit to borrow from the bank the partnership must hold y notes or the proceeds thereof at least equal to its own borrowings these circumstances were not present in canal corp second we expect x to argue it faces some practical risk on its indemnity due to the partnership’s purported refinancing risk according to x’s representative the partnership is required by the transaction documents to reinvest the proceeds of the y notes in other y notes as a result according to x’s representative in the event that x had been unable to refinance the year bank loan the cash proceeds of the year y notes would not have been available for repayment of the bank loan in year therefore the partnership would have defaulted however we do not agree that the transaction documents require the partnership to refinance the y notes at all instead refinancing of the y notes appears to be one of several permitted actions the partnership can take with respect to the y notes furthermore this argument minimizes the role of bank the loan agreement contains restrictions on what the partnership may do with the y notes and the proceeds thereof if the y notes were not refinanced in year the partnership would have had dollar_figuree in cash from the proceeds of the y notes to fully repay bank in year when the bank debt matured if the y notes were refinanced then bank would need to approve of the terms of the refinancing bank would have been unlikely to approve the refinancing of the y notes if it believed there was a refinancing risk on its own loan therefore we do not see any real refinancing risk in this case third x will likely argue that because the y affiliates’ guarantees are guarantees of payment and not of collection it means that bank can and will seek payment on the guarantees as a first step in the event of a partnership default before taking possession of the collateral-thus triggering x’s indemnity obligation x will further argue that the y affiliates actually have an incentive to repay the bank debt through their guarantees since those payments are reimbursable by x however these arguments overlook the fact that the partnership would not default unless y defaults on the y notes in that case neither of the y affiliates would be able to pay on its guaranty and x’s indemnity obligation would not be triggered furthermore even if the partnership somehow did default without a default by y on the y notes bank likely would take possession of the collateral including the y notes before bothering to seek payment from the guarantors taking possession of the collateral would be convenient for bank because it would not have to resort to judicial action in addition it is not true that the y affiliates have an incentive to pay on their guarantees x stands to acquire the remaining y notes in the event payments are required on its indemnity the y affiliates would end up in the same place whether they pay on their guarantees in which case x would reimburse them and stand to acquire the remaining y notes or bank takes possession of the y notes directly in either situation the y affiliates would be out the y notes at the end of the day postf-111193-10 if y defaults on the y notes neither of the y affiliates will be able to pay on its guaranty therefore x faces no practical or commercial risk on its indemnity for the many reasons stated above the facts and circumstances indicate a plan by x to circumvent or avoid its indemnity and thus its indemnity should be disregarded under sec_1_752-2 because the indemnity is disregarded the related contribution and distribution will be treated as a disguised sale under sec_707 sec_721 and sec_731 generally provide for nonrecognition treatment of contributions to and distributions from respectively a partnership however nonrecognition treatment does not apply in the case of a disguised sale under sec_707 if a partner transfers property to a partnership and receives a related transfer of money the transfers may be treated as a sale sec_1 a such transfers constitute a sale only if based on all the facts and circumstances i the transfer of money would not have been made but for the transfer of property and ii in cases in which the transfers are not made simultaneously the subsequent transfer is not dependent on the entrepreneurial risks of partnership operations sec_1_707-3 however transfers that occur within a two-year period are presumed to be a sale of the property to the partnership unless the facts and circumstances clearly establish that the transfers do not constitute a sale sec_1_707-3 sec_1_707-5 provides that if a partner transfers property to a partnership and the partnership incurs a liability and all or a portion of the proceeds of that liability are allocable to a transfer of money to the partner made within days of incurring the liability the transfer of money is taken into account only to the extent that the amount of money transferred exceeds that partner’s allocable share of the partnership_liability in the present case x’s transfer of the contributed assets treated by the parties as worth approximately dollar_figurec to the partnership and its receipt of an dollar_figureh distribution within a two-year period meets the literal definition of a disguised sale under sec_707 and sec_1_707-3 however the parties purposefully designed the transaction to fall within the debt-financed distribution exception in sec_1_707-5 x’s indemnity is an obligation for purposes of sec_1_752-2 and if respected would result in allocating the entire amount of the liability under sec_1_752-2 to x accordingly if the transaction is respected x would qualify for non-recognition treatment under sec_731 for almost all of the distribution however if the service disregards x’s indemnity based on the anti-abuse provisions in sec_1_752-2 the service would not consider x as the partner who bears the economic risk of loss for the underlying debt for purposes of sec_1_752-2 and x’s basis would not reflect the allocation of that liability none of the facts indicate that postf-111193-10 x could rebut the two-year presumption in sec_1_707-3 therefore the disguised sale provisions would apply as a result all or a portion of x’s distribution would be taxable under sec_731 because the distribution would exceed its basis in the partnership alternatively the transaction should be recast under sec_1_701-2 under the partnership anti-abuse rule in sec_1_701-2 the irs can recast part or all of a transaction where a partnership is used or availed of with a principal purpose of reducing the partners’ federal tax_liability in a manner that is inconsistent with the intent of subchapter_k subchapter_k is intended to permit taxpayers to conduct joint business activity through a flexible economic arrangement without incurring an entity level tax implicit in this intent are three requirements the partnership must be bona_fide and used for a substantial business_purpose the transaction must be respected under a substance over form analysis and the resulting tax consequences must clearly reflect income or else the distortion must be clearly contemplated by the applicable_provision sec_1_701-2 whether there is a principal purpose of reducing the partners’ federal tax_liability is determined under all facts and circumstances sec_1_701-2 several aspects of the transaction are unusual and were designed for tax rather than business purposes the absence of common features of a commercial indemnity and the potential unwinding of the transaction after the end of the sec_1374 recognition_period indicate that this transaction was entered into with the principal purpose of reducing a partners’ federal tax_liability the contribution of the y notes with a value equal to the amount of the bank debt compel us to conclude that the bank debt was not partnership debt for purposes of sec_752 the bank debt is in substance the obligation of y and the partnership is a mere conduit through which the debt service flows the unusual fact that the bank loan is secured_by sub-y1’s equity interests in the partnership but not by x’s partnership_interest buttresses the argument that the bank debt is in substance y’s debt in addition as explained previously x’s indemnity is specious x does not have a substantial business_purpose in forming the partnership the partnership form was adopted primarily as a way to avoid or defer a significant tax_liability in substance this transaction is a sale of a of the contributed assets on a tax-free basis x monetized its equity in the contributed assets while transferring a of the benefits and burdens of those assets to y the memo on accounting for the transaction makes a determination that the incidents_of_ownership have in substance been transferred to the buyer x’s treatment of the transaction as a sale under gaap is consistent with this view postf-111193-10 x’s treatment of this transaction for tax purposes as a contribution and distribution do not clearly reflect income and the distortion is not clearly contemplated by the applicable provisions the sec_707 and sec_752 regulations especially the debt-financed distribution exception do not clearly contemplate nonrecognition treatment for a distribution from a partnership to a partner who has a payment obligation that lacks substance or in situations in which notes contributed by the other partner are providing liquidity for repayment of the debt as mentioned above we read the legislative_history of the disguised sale rules to support sale treatment in this case we recommend that the transaction be recast under sec_1_701-2 as y borrowing from bank to purchase a of the contributed assets followed by the formation of a partnership alternatively the form of the transaction contribution should be disregarded and treated in accordance with the underlying substance sale under the doctrine_of substance over form the courts may look through the form of a transaction to determine its substance in light of economic realities as explained by the supreme court in 435_us_561 in applying this doctrine_of substance over form the court has looked to the objective economic realities of a transaction rather than to the particular form the parties employed the court has never regarded the simple expedient of drawing up papers as controlling for tax purposes when the objective economic realities are to the contrary in the field of taxation administrators of the laws and the courts are concerned with substance and realities and formal written documents are not rigidly binding nor is the parties' desire to achieve a particular tax result necessarily relevant see also eg 324_us_331 to permit the true nature of a transaction to be disguised by mere formalisms which exists solely to alter tax_liabilities would seriously impair the effective administration of the tax policies of congress 293_us_465 refusing to give effect to transactions that complied with formal requirements for nontaxable corporate_reorganization the question for determination is whether what was done apart from the tax motive was the thing which the statute intended subchapter_k was adopted in part to increase flexibility among partners in allocating partnership tax burdens see generally 41_tc_535 aff'd 352_f2d_466 3d cir this flexibility however is limited by the overarching principle that the substance of the transaction is controlling for tax purposes 200_f3d_1268 10th cir aff'g in part and appeal dismissed in part tcmemo_1996_283 thus there is ample precedent applying the substance_over_form_doctrine to partnership transactions see eg 66_tc_295 acq 1976_2_cb_1 miller v u s ct_cl both involving a substance over form analysis to determine whether a partner has in substance sold a partnership postf-111193-10 interest or received a liquidating_distribution cases involving the issue of substance over form are inherently factual and the reluctance of some courts to look beyond the form of the transaction prompted congress to add sec_707 see 91_tc_793 the circumstances that motivated congress to act should not be interpreted as a deficiency with the doctrine there is precedent for the application of the doctrine to transactions that were structured as contributions and distributions but were more appropriately treated as sales see id 96_tc_577 aff'd 963_f2d_218 8th cir x has effectively parted with a of the benefits and burdens of the contributed assets while receiving cash equal to the value of a of the contributed assets the restriction on the partnership from transferring its assets prior to the end of the recognition_period and the put and call options are features that allowed the parties to achieve the tax_benefit associated with a non-sale and immediately thereafter create the effects of a sale we recommend that the form of this transaction be ignored and that the transaction be treated as a sale of a of the contributed assets under the judicial doctrine_of substance over form case development hazards and other considerations to the extent time permits we recommend ----------------------------------------------------------- -------------------------------------------------------------------------------------- from x we recommend ------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------- more generally we recommend -------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------- finally we recommend ----------------------------------------------------------- ----------------------- from bank we recommend ------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------- from the partnership we recommend ----------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------- postf-111193-10 from y we recommend ------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- 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tcmemo_2007_335 united_states tax_court robin t hardie petitioner v commissioner of internal revenue respondent docket no 9713-06l filed date robin t hardie pro_se karen a rennie for respondent memorandum opinion halpern judge this case is before the court to review a determination the determination by respondent’s appeals_office appeals to proceed with the collection by levy of petitioner’s federal_income_tax liability for we review the determination pursuant to sec_6330 unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as amended and as applicable to this case and all rule references are to the tax_court rules_of_practice and procedure background this case was submitted for decision without trial pursuant to rule facts stipulated by the parties are so found the stipulation of facts filed by the parties with attached exhibits the stipulation of facts is included herein by this reference in their joint motion asking leave to submit this case under rule the parties agreed that the case may be submitted on the basis of the pleadings and the stipulated facts by the petition petitioner assigns error to the determination as follows i believe the determination is incorrect and have already provided written evidence including from third parties which contradicts key factual statements in the irs’s determination this evidence has been ignored by the irs attached to the petition is a copy of a two-page document entitled notice_of_determination concerning collection action s while petitioner checked the box on the petition indicating that he is seeking a redetermination of a deficiency clearly this action concerns a collection action and we shall treat it as such under sec_6320 and or in pertinent part the document states we have determined that the notice_of_intent_to_levy issued on the period listed above is valid and appropriate all legal and procedural requirements were met in its issuance the information you provided concerning the check the service shows was returned for insufficient funds was not adequate to prove that a valid payment was ever received you raised no other issues and did not request a collection alternative by the answer respondent denies petitioner’s assignment of error the facts stipulated by the parties are set forth in four numbered paragraphs in the stipulation of facts the first paragraph states petitioner’s address in london england at the time the petition was filed the second paragraph states his social_security_number the third paragraph states the date on which the determination was issued that it relates to petitioner’s taxable_year and that a copy of it is attached the fourth paragraph states that a literal transcript of account the transcript of account for petitioner’s taxable_year is attached the copy of the determination attached to the stipulation of facts is identical to the document attached to the petition the transcript of account is dated date it shows an account balance of dollar_figure and has sequential entries showing a payment in the amount of dollar_figure and a dishonored_check in the same amount the parties have stipulated that the attachments to the stipulation of facts are authentic on brief petitioner raises two issues first although he concedes that it appears that he did not pay dollar_figure for and therefore he owes the irs this amount together with accrued penalties and interest he does not accept that his check was returned for insufficient funds second he states that he does not agree with respondent’s computation of his liability presumably dollar_figure as of date the computational issue in his answering brief respondent argues that petitioner has failed to present sufficient evidence to show that appeals abused its discretion in making the determination respondent claims that no evidence supports petitioner’s claim that the check he submitted to pay his income_tax_liability was not returned for insufficient funds respondent further claims that petitioner may not raise the computational issue because he did not raise it with appeals during his sec_6330 hearing discussion petitioner bears the burden_of_proof see rule a the transcript of account shows a dishonored_check in the amount of dollar_figure and there is no evidence contradicting the inference to be drawn from that entry that the check was returned for insufficient funds we cannot conclude that appeals wrongfully concluded that the check was returned for insufficient funds moreover there is no evidence that petitioner raised the computational issue during the sec_6330 hearing we agree with respondent that for failure to raise the computational issue during the sec_6330 hearing petitioner is precluded from raising it with us see giamelli v commissioner t c slip op pincite we do not have authority to consider sec_6330 issues that were not raised before the appeals_office 118_tc_488 in our review for an abuse_of_discretion under sec_6330 generally we consider only arguments issues and other matter that were raised at the collection hearing sec_301_6330-1 q a-f5 proced admin regs petitioner has failed to prove that appeals erred in making the determination to reflect the foregoing decision will be entered for respondent