department of the treasury int ernal revenue service washington d c o f f i c e o f c h i e f c o u n s e l date number release date uilc postn-119491-02 cc tege eoeg-et1 internal_revenue_service national_office legal advice memorandum for area_counsel small_business self-employed area from marie cashman senior technician reviewer employment_tax branch office of the assistant chief_counsel exempt_organizations employment_tax government entities cc tege eoeg et2 subject notice_of_determination of worker classification period of limitations on assessment this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 of the internal_revenue_code this chief_counsel_advice should not be cited as precedent legend x a year year year date postn-119491-02 issue sec_1 whether a tax_court petition filed when no notice_of_determination of worker classification notice_of_determination has been issued operates to suspend the period of limitations on assessment whether the internal_revenue_service service can mail x a notice_of_determination if the x case is dismissed from the tax_court conclusions the mailing of a notice_of_determination is required to trigger the suspension provisions of sec_6503 in a sec_7436 proceeding because no notice_of_determination was mailed to x the filing of a tax_court petition did not have any effect on the period of limitations on assessment the period of limitations for assessment of federal_insurance_contributions_act fica_taxes is now expired thus the service cannot send x a notice_of_determination for the tax periods ending march 31st june 30th september 30th and december 31st of year if the x case is dismissed from the tax_court facts x and the service executed a form ss-10 consent to extend the time to assess employment_taxes to extend the time to assess fica_taxes until date for the tax periods ending march 31st june 30th september 30th and december 31st of year upon determining that a was an employee of x the service erroneously assessed fica_taxes without first issuing a notice_of_determination pursuant to sec_7436 x filed a petition with the tax_court for a redetermination of employment_taxes it is not clear if x received correspondence from the service which x mistakenly believed constituted a notice_of_determination but no notice_of_determination has been issued to date law and analysis sec_7436 provides that for purposes of subtitle c of the code the tax_court has jurisdiction to review the service's determination that one or more individuals performing services for the taxpayer are employees postn-119491-02 review the service’s determination that the taxpayer is not entitled to treatment under sec_530 of the revenue act of with respect to those individuals and determine the proper amount of employment_tax under the above determinations the employment_taxes imposed by subtitle c of the code include fica_taxes under after sec_7436 was enacted the service developed a new notice originally called a notice_of_determination concerning worker classification under sec_7436 see notice_98_43 c b but now called a notice_of_determination of worker classification see notice_2002_5 i r b to provide to taxpayers the necessary notice of its sec_7436 determinations the service will provide taxpayers with notice of a determination described in sec_7436 by sending the taxpayer a notice_of_determination by certified or registered mail the service will issue a notice_of_determination only after the service has determined both that the taxpayer is not entitled to sec_530 treatment and that one or more individuals performing services for the taxpayer are employees for purposes of subtitle c the amount of employment_tax under those determinations will also be determined and set forth in the notice_of_determination sec_7436 which sets out the restrictions on assessment with respect to proceedings brought pursuant to sec_7436 provides that the principles of subsections a b c d and f of sec_6213 sec_6214 sec_6215 sec_6503 sec_6512 and sec_7481 shall apply to proceedings brought under sec_7436 in the same manner as if the secretary’s determination described in subsection a of sec_7436 were a notice_of_deficiency thus with respect to certain procedural matters that in deficiency proceedings are tied to a notice_of_deficiency those matters will be tied to the notice described in subsection a of sec_7436 in the same manner as if that notice were a notice_of_deficiency sec_6501 provides that except as otherwise provided tax shall be assessed within years after the return was filed whether or not such return was filed on or after the date prescribed as an exception sec_6501 states that the service and a taxpayer may enter into a written_agreement to extend the limitations_period provided the agreement is executed before the expiration of the period of limitations prescribed by sec_6501 postn-119491-02 sec_6213 states that within day sec_1 after the notice_of_deficiency is mailed the taxpayer may file a petition with the tax_court for a redetermination of the deficiency sec_6503 suspends the running of the period of limitations on assessment in sec_6501 from the time of the mailing of a notice_of_deficiency to a taxpayer until days after the decision of the tax_court becomes final thus the mailing of a notice_of_deficiency gives the tax_court jurisdiction to redetermine the proposed deficiency and suspends the period of limitations on assessment see 275_f3d_912 10th cir stating that the mailing of a notice_of_deficiency tolls the 3-year limitations_period pursuant to sec_6503 235_f3d_886 4th cir articulating that the mailing of the notice_of_deficiency tolls of the three year statute_of_limitations 967_f2d_1448 10th cir cert_denied 506_us_1033 recognizing that the date of mailing of a notice_of_deficiency tolls the limitations_period moreover when no notice_of_deficiency is issued to trigger any of the restrictions on assessment contained in sec_6213 there is no suspension of the running of the limitations_period in kirch v united_states ustc big_number the question of whether a tax_court petition filed before a notice_of_deficiency had been issued effectively suspended the limitations_period for assessment was raised the taxpayer petitioned the tax_court after a form_4549 thirty day letter had been issued but before the notice_of_deficiency had been issued the court held that on the facts of the instant case sec_6213 did not restrict the secretary from making an assessment because the taxpayer did not file a petition with the tax_court for a redetermination of the deficiency no notice_of_deficiency had been issued to trigger any of the restrictions on assessment contained in sec_6213 it follows that none of the provisions for suspending the running of the limitations_period in sec_6503 could be invoked by the secretary because no proceeding in respect of the deficiency had been placed on the docket of the tax_court there could be no proceeding in respect of the deficiency because no notice_of_deficiency had been issued kirch v united_states ustc big_number at big_number s d ohio see also strong v commissioner ustc big_number 9th cir in the context of a sec_7436 proceeding sec_7436 provides that the notice_of_determination is treated like a notice_of_deficiency for purposes of sec_6213 and sec_6503 see notice_2002_5 the tax_court has described each provision listed in sec_7436 and made clear that each of those deficiency procedures applies in a if the notice_of_deficiency is addressed to the taxpayer outside the united_states the taxpayer ha sec_150 days after the mailing in which to file a petition with the tax_court postn-119491-02 sec_7436 proceeding as if the notice_of_determination is a notice_of_deficiency see 112_tc_1 moreover the service in notice_2002_5 has provided the following guidelines for taxpayers seeking tax_court review of a determination under sec_7436 t he notice_of_determination is a jurisdictional prerequisite for seeking tax_court review of the service’s determinations regarding worker classification sec_530 treatment and the proper amount of employment_tax under those determinations tax_court proceedings seeking review of these determinations may not be commenced prior to the time the service sends the notice_of_determination by certified or registered mail therefore while the principles of sec_6213 and sec_6503 apply in a sec_7436 proceeding the period of limitations on assessment is not suspended until the mailing of a notice_of_determination to the taxpayer in the present situation the service has not mailed a notice_of_determination to x thus the jurisdictional prerequisite for seeking tax_court review has not been met consequently the petition filed by x has no effect on the period of limitations on assessment with regard to whether the service can mail a notice_of_determination to x after the case is dismissed from the tax_court such action is not proper because the period of limitations on assessment has already expired pursuant to sec_6501 the time for assessing fica_taxes was extended until date for the tax periods ending march 31st june 30th september 30th and december 31st of year although x petitioned the tax_court and the case was docketed on date there was no suspension of the period of limitations on assessment the service did not mail a notice_of_determination to x thus the period of limitations on assessment expired on date consequently a notice_of_determination cannot now be issued for the tax periods ending march 31st june 30th september 30th and december 31st of year this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views please call if you have any further questions


department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------------ telephone number ---------------------- refer reply to cc intl b02 plr-110824-17 date date internal_revenue_service number release date index number --------------------------- ------------------------- ------------------------------ ty ------- legend taxpayer --------------------------- tin ------------------ year ------- year ------- year ------- year ------- country a ------------ country b ------------- dear -------------------------------- this is in response to a letter dated date in which a ruling is requested to permit taxpayer to reelect the foreign_earned_income_exclusion under sec_911 of the internal_revenue_code the code the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination taxpayer was employed in a job based in country a and elected to exclude his foreign_earned_income under sec_911 of the code for year and year in year taxpayer’s tax_return_preparer advised him that his u s tax_liability would be lower if he claimed foreign tax_credits rather than the sec_911 foreign_earned_income_exclusion plr-110824-17 in year taxpayer accepted a job offer from a new employer in country b requiring him to move from country a to country b to begin work in april of year taxpayer’s income earned in country b will be subject_to a significantly lower rate_of_tax than it was in country a taxpayer requests permission to reelect the foreign_earned_income_exclusion pursuant to sec_911 of the code for year and subsequent taxable years sec_911 of the code permits certain taxpayers to elect to exclude from gross_income their foreign_earned_income and housing cost amounts under sec_1_911-7 the election applies to the taxable_year for which it is made and for all subsequent taxable years unless revoked by the taxpayer sec_1_911-7 prescribes a method by which a taxpayer may revoke an election to exclude foreign_earned_income ie filing a statement revoking any previously made elections it does not however purport to provide the exclusive method for revoking such an election sec_911 provides that once revoked the election may not be made again by the taxpayer until the sixth taxable_year after the year in which the revocation was made unless the commissioner consents to the reelection sec_1_911-7 provides that if an individual revokes an election under sec_1_911-7 and desires to reelect the same exclusion within the next five years the individual must obtain permission by requesting a ruling the service may permit the taxpayer to reelect the foreign_earned_income_exclusion before the sixth year after considering any facts and circumstances that may be relevant to the determination sec_1_911-7 provides that relevant facts and circumstances may include a period of united_states residence a move from one foreign_country to another foreign_country with differing tax_rates a substantial change in tax laws of the foreign_country of residence or physical presence and a change_of employer taxpayer effectively revoked the foreign_earned_income_exclusion for year by claiming the foreign_tax_credit see revrul_90_77 1990_2_cb_183 taxpayer desires to reelect the exclusion for year which is within five years of year therefore taxpayer is requesting permission to reelect the foreign_earned_income_exclusion taxpayer has represented that he changed employers and moved from country a to country b in year also he represented that the tax_rates with respect to his income differ between country b and country a accordingly based solely on the information and representations set forth above it is held that taxpayer may reelect the sec_911 exclusion for year and subsequent taxable years except as otherwise provided herein no opinion is expressed as to whether taxpayer otherwise satisfies the requirements of sec_911 for excluding foreign_earned_income and housing cost amounts from gross_income except as expressly provided herein no plr-110824-17 opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this private_letter_ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely jeffery g mitchell chief branch international cc


t c memo united_states tax_court john allen hatling and kathleen ann hatling petitioners v commissioner of internal revenue respondent docket no filed date john allen hatling and kathleen ann hatling pro sese christina l cook and john schmittdiel for respondent memorandum findings_of_fact and opinion marvel judge in a notice_of_deficiency dated date respondent determined deficiencies in petitioners’ federal_income_tax of dollar_figure dollar_figure dollar_figure and dollar_figure for and respectively respondent also determined civil_fraud penalties under sec_6663 a of dollar_figure dollar_figure dollar_figure and dollar_figure for and respectively with respect to john allen hatling after concessions the sole issue for decision is whether mr hatling is liable for civil_fraud penalties for findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts is incorporated herein by this reference petitioners resided in minnesota when they filed their petition i background mr hatling a licensed attorney has been practicing law in minnesota for approximately years during the years at issue mr hatling operated his own 1unless otherwise indicated section references are to the internal_revenue_code code in effect for the years at issue and rule references are to the tax_court rules_of_practice and procedure some monetary amounts have been rounded to the nearest dollar 2petitioners concede the deficiencies for as determined by respondent in the notice_of_deficiency petitioners also concede the sec_6663 civil_fraud penalty for 3mr hatling was suspended from the practice of law for a period of days as a result of his conviction for willfully failing to pay minnesota state_income_tax for see infra p 4mr hatling’s work includes estate_planning and he has attended at least one seminar covering the representation of clients before the internal_revenue_service continued law practice kathleen hatling was not employed outside the home during the years at issue in mr hatling pleaded guilty to a felony charge for willfully failing to pay minnesota state_income_tax for in violation of minnesota law in his guilty plea mr hatling admitted that his state_income_tax return included a claim of right deduction and that because of this claimed deduction he reported no income_tax owed on his state return ii petitioners’ tax reporting mr hatling prepared petitioners’ federal_income_tax return for each of the years at issue petitioners filed form sec_1040 u s individual_income_tax_return for on each of their form sec_1040 they reported zero taxable_income for each year petitioners’ return included a schedule c profit or loss from business with respect to mr hatling’s law practice on those schedules c mr hatling reported gross_receipts of dollar_figure dollar_figure and dollar_figure for continued irs and the use of alternative payment options such as offers-in-compromise 5minn stat ann sec 289a b west supp provides that a person required to pay or to collect and remit a tax who willfully attempts to evade or defeat a tax law by failing to do so when required is guilty of a felony and respectively mr hatling deducted various business_expenses totaling dollar_figure dollar_figure and dollar_figure for and respectively the business_expense deductions included other expenses of dollar_figure dollar_figure and dollar_figure for and respectively mr hatling reported schedule c net profits of dollar_figure dollar_figure and dollar_figure for and respectively mr hatling attached to each of petitioners’ returns a disclosure form--form disclosure statement for and forms 8275-r regulation disclosure statement for on those forms and 8275-r mr hatling explained that he deducted on his schedules c expenses of dollar_figure dollar_figure and dollar_figure for and respectively as claim of right deductions for white citizens he further explained that the amounts deducted represented compensation_for_personal_services actually rendered pursuant to sec_1341 that he claimed the deductions on the basis of a common-law immunity that renders any money earned from the right of accession immune from taxation and that the code defined this immunity as a ‘white citizen’ right although mr hatling testified he did not believe that there were any available favorable tax 6in preparing petitioners’ tax returns mr hatling claimed a claim of right deduction for each year in the amount of gross_income that was not offset by business_expense deductions deductions that were based on race he claimed these deductions on petitioners’ returns to delay the assessment and payment of petitioners’ correct federal_income_tax liabilities iii notice_of_deficiency on date respondent issued to petitioners the notice_of_deficiency for using the bank_deposits method of reconstructing income respondent determined that mr hatling failed to report schedule c gross_receipts of dollar_figure and dollar_figure for and respectively respondent also determined that mr hatling overreported his gross_receipts by dollar_figure for respondent disallowed dollar_figure dollar_figure and dollar_figure of mr hatling’s claimed business_expense deductions for and respectively 7for in addition to disallowing a claimed business_expense deduction of dollar_figure respondent also disallowed dollar_figure of claimed cost_of_goods_sold 8on hi sec_2001 schedule c mr hatling reported the following as other expenses education professional expenses of dollar_figure contributions of dollar_figure dues subscriptions of dollar_figure banking credit charges of dollar_figure legal library expenses of dollar_figure interest_expenses of dollar_figure postage expenses of dollar_figure telephone expenses of dollar_figure and expenses of dollar_figure under an entry entitled see line other expenses for total other expenses of dollar_figure on the form_8275 however mr hatling purported to claim a claim of right deduction of dollar_figure in the notice_of_deficiency respondent determined that only dollar_figure of mr hatling’s claimed other business_expenses deduction rather than the entire amount was attributable to his claim of right deduction respondent continued accordingly respondent determined that mr hatling had schedule c net profits of dollar_figure dollar_figure and dollar_figure for and respectively respondent also determined that mr hatling was liable for civil_fraud penalties under sec_6663 and that underpayments of dollar_figure dollar_figure and dollar_figure for and respectively were due to fraud continued categorized the remainder dollar_figure as other business_expenses and disallowed dollar_figure of this amount on hi sec_2002 schedule c mr hatling reported the following as other expenses education professional expenses of dollar_figure contributions of dollar_figure dues subscriptions of dollar_figure banking credit charges of dollar_figure legal library expenses of dollar_figure interest_expenses of dollar_figure postage expenses of dollar_figure telephone expenses of dollar_figure and expenses of dollar_figure under an entry entitled claim of right pursuant to sec_1341 see form_8275 attached for total other expenses of dollar_figure in the notice_of_deficiency respondent determined that mr hatling deducted dollar_figure as a claim of right deduction respondent categorized the remainder dollar_figure as other business_expenses and disallowed dollar_figure of this amount on his schedule c mr hatling reported other expenses of dollar_figure under an entry entitled claim of right pursuant to sec_1341 see form_8275 attached respondent disallowed the entire amount of the claimed other expenses mr hatling deducted 9for respondent also determined that petitioners failed to report dollar_figure in gross_profits from rents and dollar_figure of dividend income for respondent also determined that petitioners failed to report dollar_figure in gross_profits from rents dollar_figure of dividend income and dollar_figure of capital_gain for respondent also determined that petitioners failed to report dollar_figure in gross_profits from rents dollar_figure of dividend income and dollar_figure of capital_gain opinion if any part of an underpayment on a return is due to fraud sec_6663 imposes on the taxpayer filing the return a penalty equal to of the part of the underpayment attributable to fraud to prove that a taxpayer is liable for the penalty the commissioner must prove by clear_and_convincing evidence that an underpayment_of_tax exists and some part of the underpayment is attributable to fraud see sec_6663 sec_7454 rule b 96_tc_858 aff’d 959_f2d_16 2d cir if the commissioner proves that any part of an underpayment is attributable to fraud then the entire underpayment shall be treated as attributable to fraud unless the taxpayer shows by a preponderance_of_the_evidence that a part was not so attributabledollar_figure see sec_6663 i underpayment_of_tax in the notice_of_deficiency respondent determined deficiencies in petitioners’ joint and federal_income_tax of dollar_figure dollar_figure and dollar_figure respectively petitioners have conceded that they underpaid their tax by these amounts and we so find see norris v commissioner t c memo 10in the case of a joint_return the sec_6663 penalty does not apply with respect to a spouse unless some portion of the underpayment is due to the fraud of that spouse see sec_6663 slip op pincite payne v commissioner tcmemo_2005_130 slip op pincite aff’d 211_fedappx_541 8th cir ii fraudulent intent a introduction if fraud is determined for multiple taxable years the commissioner’s burden applies separately for each of the years temple v commissioner tcmemo_2000_337 slip op pincite aff’d 62_fedappx_605 6th cir the commissioner satisfies this burden by showing that the taxpayer intended to evade taxes known to be owing by conduct intended to conceal mislead or otherwise prevent the collection_of_taxes dileo v commissioner t c pincite see also 419_f3d_829 8th cir aff’g tcmemo_2003_332 fraud does not include negligence carelessness misunderstanding or unintentional understatement of income 236_f2d_844 3d cir the existence of fraud is a question of fact to be resolved upon consideration of the entire record see dileo v commissioner t c pincite fraud is never presumed and must be established by independent evidence of fraudulent intent see 251_f2d_311 9th cir aff’g tcmemo_1956_112 fraud may be shown by circumstantial evidence because direct evidence of the taxpayer’s fraudulent intent is seldom available see 92_tc_661 67_tc_181 aff’d without published opinion 578_f2d_1383 8th cir the taxpayer’s entire course of conduct may establish the requisite fraudulent intent see 56_tc_213 any conduct likely to mislead or conceal may constitute an affirmative act of evasion see 317_us_492 and an intent to mislead may be inferred from a pattern of such conduct see 394_f2d_366 5th cir aff’g tcmemo_1966_81 however fraud is not proven when a court is left with only a suspicion of fraud and even a strong suspicion is not sufficient to establish a taxpayer’s liability for the fraud_penalty see 234_f2d_823 5th cir aff’g in part rev’g in part on another ground tcmemo_1955_9 184_f2d_86 10th cir 66_tc_538 b badges_of_fraud because it is difficult to prove fraudulent intent by direct evidence the commissioner may establish fraud by circumstantial evidence which includes various badges_of_fraud hereinafter factors on which the courts often rely see 796_f2d_303 9th cir aff’g tcmemo_1984_601 dileo v commissioner t c pincite these factors focus on whether the taxpayer engaged in certain conduct that is indicative of fraudulent intent such as understating income failing to maintain adequate_records offering implausible or inconsistent explanations concealing income or assets failing to cooperate with tax authorities engaging in illegal activities providing incomplete or misleading information to the taxpayer’s tax_return_preparer offering false or incredible testimony filing false documents including filing false income_tax returns failing to file tax returns and engaging in extensive dealings in cashdollar_figure see bradford v commissioner f 2d pincite 94_tc_654 91_tc_874 21_tc_917 aff’d 220_f2d_871 4th cir see also morse v commissioner tcmemo_2003_332 slip op pincite the existence of any one factor is not dispositive but the existence of several factors is persuasive circumstantial evidence of fraud see 99_tc_202 petzoldt v commissioner t c pincite we may also consider 11these factors are not exclusive see 99_tc_202 a taxpayer’s intelligence education and tax expertise in deciding whether the taxpayer acted with fraudulent intent 19_tc_631 respondent determined that mr hatling’s underpayments of dollar_figure dollar_figure and dollar_figure for and respectively were due to fraud respondent contends that mr hatling has admitted his fraudulent intent with respect to these underpayments by virtue of petitioners’ stipulation that mr hatling claimed the claim of right deductions on petitioners’ joint returns to delay the assessment and payment of federal_income_tax despite his knowledge that no claim of right deduction was available mr hatling’s testimony corroborated petitioners’ stipulation while we give some weight to mr hatling’s stipulation in our analysis we do not rely exclusively on the stipulation in deciding whether the fraud_penalty should apply respondent also contends that the following factors are present in this case mr hatling underreported petitioners’ income for mr hatling failed to maintain adequate_records for and mr hatling filed false return documents for additionally respondent contends that mr hatling’s conviction for willfully failing to pay minnesota income_tax provides evidence of fraud because we decide the existence of fraudulent intent on the basis of the entire record we analyze each factor below understating income a pattern of substantially underreporting income for several years is strong evidence of fraud particularly if the understatement is not satisfactorily explained or is not due to innocent mistake see 348_us_121 spies u s pincite webb v commissioner f 2d pincite 232_f2d_678 6th cir aff’g tcmemo_1955_31 morse v commissioner slip op pincite as this court has stated i t is well settled that a fraudulent understatement of income can be accomplished by means of an overstatement of deductions 86_tc_1326 aff’d 113_f3d_670 7th cir see also foxworthy inc v commissioner tcmemo_2009_203 slip op pincite on petitioners’ tax returns for mr hatling reported zero taxable_income respondent also introduced into evidence petitioners’ federal_income_tax return on which mr hatling reported zero taxable_income mr hatling underreported petitioners’ taxable_income by dollar_figure dollar_figure dollar_figure and dollar_figure for and respectively petitioners contend that mr hatling did not understate petitioners’ income for the years at issue because he accurately reported gross_receipts with respect to his law practice on the relevant schedules c petitioners correctly contend that mr hatling reported a substantial portion of the gross_receipts reflected on the law practice’s profit and loss statements for the years at issuedollar_figure however mr hatling also claimed significant business_expense deductions including the claim of right deductions mr hatling has admitted that he knew he was not entitled to the deductions he claimed under his claim of right theory and that he claimed the deductions to delay payment of federal_income_tax thus the record not only establishes that mr hatling did not incur expenses to the extent claimed but also that mr hatling deliberately claimed false deductions to delay payment of hi sec_12for each of the years at issue the record contains two versions of profit and loss statements with respect to mr hatling’s law practice a copy petitioners provided during the audit process audit p l statement and a copy they provided during formal discovery discovery p l statement petitioners reported gross_receipts with respect to mr hatling’s law practice on the documents as follows year audit p l statement discovery p l statement return dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number taxdollar_figure in claiming substantial deductions that he knew to be false mr hatling deliberately understated petitioners’ income for the years at issue compare ochs v commissioner tcmemo_1986_595 finding fraudulent intent where a taxpayer claimed dependency_exemptions for his nonexistent children with porter v commissioner tcmemo_1986_70 finding no fraudulent intent 13petitioners also appear to contend the claim of right deductions were not fraudulent because the deductions clearly were impermissible and therefore mr hatling could not have been attempting to conceal his income we reject petitioners’ contention for several reasons first the code provides that taxpayers may deduct from income an amount received under a claim of right see sec_1341 petitioners have failed to convince us that simply by including the claim of right deductions on their returns they disclosed that the deductions they were claiming were clearly improper second while the u s court_of_appeals for the eighth circuit to which an appeal in this case would lie absent a stipulation to the contrary see sec_7482 has not addressed the issue of whether a taxpayer’s disclosure may preclude a finding of fraudulent intent at least two other courts of appeals as well as this court have held that disclosure does not preclude a finding of fraudulent intent see 829_f2d_828 9th cir aff’g tcmemo_1986_223 792_f2d_91 7th cir aff’g tcmemo_1985_237 price v commissioner tcmemo_1996_204 cloutier v commissioner tcmemo_1994_558 but see 763_f2d_1139 10th cir clearly where the taxpayer has informed the irs of his refusal to file or to pay and of the reasons for that refusal the government has not been deceived in addition the disclosure clearly negates any intent to deceive aff’g tcmemo_1984_152 676_f2d_980 3d cir holding that a taxpayer did not act with fraudulent intent because he went out of his way to inform every person involved in the collection process that he was not going to pay any federal income taxes rev’g tcmemo_1980_571 third petitioners deducted the claim of right deductions with the intent of underreporting their taxable_income and evading their obligation to pay their proper income_tax liabilities when due where a taxpayer overstated his deductions but introduced sufficient evidence to show that he incurred substantial deductible expenses accordingly we find that mr hatling substantially underreported petitioners’ income for given the substantial amounts underreported mr hatling’s pattern of underreporting income and the lack of any credible explanation for the underreporting mr hatling’s understatements are persuasive evidence of fraudulent intent see eg morse v commissioner f 3d pincite failing to maintain adequate_records the failure to maintain adequate business records supports a finding of fraud see 89_tc_1280 see also 75_tc_1 inadequate or non-existent records are also a badge of fraud 595_f2d_1189 9th cir aff’g tcmemo_1976_15 mrs hatling testified that mr hatling and his office manager prepared annual profit and loss statements for mr hatling’s law practice the record contains copies of profit and loss statements with respect to mr hatling’s law practice for the audit p l statements bear the following dates in the upper left-hand corner for date for date and for date for the amounts of gross_receipts shown on the profit and loss statements closely correspond with the amounts of gross_receipts mr hatling reported on his schedules c see supra note dollar_figure additionally the amounts of expenses shown on the profit and loss statements closely correspond with the amounts of other business_expenses other than the claim of right deductions that mr hatling reported on his schedules c see supra note respondent allowed a significant amount of mr hatling’s other business_expenses the record supports a finding that in the course of operating his law practice mr hatling maintained records of his business income and expenses respondent has failed to produce sufficient evidence to convince us that mr hatling’s business records were inadequate accordingly we decline to find that mr hatling failed to maintain adequate_records 14with respect to the gross_receipts shown on the audit p l statement dollar_figure equal the gross_receipts mr hatling reported on the schedule c however the gross_receipts shown on the discovery p l statement for are dollar_figure the difference is attributed to the fact that on the audit p l statement mr halting reported fee income of dollar_figure but on the discovery p l statement he reported fee income of only dollar_figure petitioners have not introduced any evidence to explain this discrepancy while this discrepancy is suspect we note that the audit p l statement appears accurate and the expense amounts on the discovery p l statement are generally consistent with the expense amounts shown on the audit p l statement and mr hatling’s schedule c accordingly this discrepancy does not compel us to find that petitioners failed to maintain adequate books_and_records filing false documents fraudulent intent may be inferred when a taxpayer files a tax_return intending to conceal mislead or prevent the collection of tax see spies u s pincite filing false documents with the irs constitutes an ‘affirmative act’ of misrepresentation sufficient to justify the fraud_penalty 763_f2d_1139 10th cir aff’g tcmemo_1984_152 see also ernle v commissioner tcmemo_2010_237 slip op pincite mr hatling prepared and filed petitioners’ tax returns for on each of the schedules c attached to petitioners returns he claimed a substantial claim of right deduction he has admitted that he knew he was not entitled to the claim of right deductions and that he claimed them to delay the assessment and collection of petitioners’ federal_income_tax accordingly mr hatling’s filing of false income_tax returns supports a finding of fraud mr hatling’s state tax conviction while a taxpayer’s conviction of a state_income_tax violation does not by itself establish fraudulent intent such a conviction provides evidence of a propensity to defraud lee v commissioner tcmemo_1995_597 see also petzoldt v commissioner t c pincite mr hatling pleaded guilty to willfully attempting to evade or defeat payment of his state_income_tax for mr hatling’s guilty plea and subsequent conviction supports a finding of fraud in this case iii conclusion respondent has proven by clear_and_convincing evidence that mr hatling underpaid his joint tax_liabilities for mr hatling’s pattern of understating income his filing of false documents and his state tax conviction when coupled with his stipulation and testimony regarding his intention to delay payment of his federal_income_tax provides clear_and_convincing evidence that part of the underpayment for each year was due to mr hatling’s fraud therefore petitioners bear the burden of showing by a preponderance_of_the_evidence what portion of each underpayment if any is not attributable to fraud see sec_6663 petitioners appear to contend that the portions of the underpayments arising from mr hatling’s claim of right deductions are not attributable to fraud because sec_1341 provides for a claim of right deduction and mr hatling claimed the deductions in good_faith mr hatling testified however that he knew the deductions were impermissible and that at the time of filing petitioners’ returns he expected the irs to disallow the claim of right deductions and assess petitioners’ tax and appropriate penalties given mr hatling’s legal education and experience we reject petitioners’ argument that mr hatling claimed the claim of right deductions in good_faith we also note that this court and other courts have held similar claim of right arguments to be frivolous and groundless see pugh v commissioner tcmemo_2009_138 61_fedclaims_517 717_fsupp2d_271 e d n y we find that petitioners have failed to introduce any credible_evidence to prove that any specific_portion of any underpayment was not attributable to fraud the record overwhelmingly establishes that mr hatling acted with fraudulent intent accordingly we hold that mr hatling is liable for the sec_6663 fraud penalties as respondent determined we have considered all the other arguments made by the parties and to the extent not discussed above find those arguments to be irrelevant moot or without merit to reflect the foregoing decision will be entered for respondent


internal_revenue_service number release date index number ------------------ ------------------------------ ------------------------------------------------ ------------------------------------------------- ------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no --------------- telephone number -------------------- refer reply to cc corp plr-119200-17 date date legend x --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- -------------------------------------------------------------------- --------------------------------------------------------------- lp -------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ---------------------------------------------------------- -------------------------------------------------- gp ---------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------- -------------------------------------------------------- fund h --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------- -------------------------------------------------------------------- ----------------------------------------------------------- a -------------------------------------------------------------------- ------------------------------- b -------------------------------------------------------------------- ---------------------------------------------- c -------------------------------------- plr-119200-17 -------------------------------------------------------------------- state a ------------ operations ----------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --- --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ ------------------------------------------------------------------------ ---------------------------- operating_assets ------------ -------------------------------------------------------------- ----------------------------------------------------------------------- agreement ------------------------------------------------------------------------ ---------------------------------------------- unit exchange program ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------- ------------------------------------------------------------- dear ------------- this letter responds to your letter dated date submitted by your authorized representative requesting rulings under sec_351 and sec_721 of the internal_revenue_code code and related regulations with respect to the proposed transaction described below the information provided in that request and in later correspondence is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process this letter is issued pursuant to section dollar_figure of revproc_2017_1 2017_1_irb_1 regarding one or more significant issues under sec_332 sec_351 sec_355 sec_368 or sec_1036 the rulings contained in this letter only address one or more discrete legal issues involved in the transaction this office expresses no opinion as to the overall tax plr-119200-17 consequences of the transactions described in this letter or as to any issue not specifically addressed by the rulings below summary of facts x is a state a publicly traded limited_partnership and a partnership for federal tax purposes lp a state a limited_liability_company and a partnership for federal tax purposes owns through a disregarded subsidiary limited_partner interests in x gp a state a limited_liability_company and a disregarded indirect subsidiary of lp is x’s general_partner private funds are partnerships for federal tax purposes that are managed by lp and its affiliates x is engaged in operations and has acquired the majority of its operating_assets from private funds x is subject_to the agreement by and among itself gp and certain private funds the funds including fund h pursuant to the agreement x has a right of first offer with respect to all of the assets then owned or thereafter acquired by the funds x also has acquired operating_assets from unrelated third parties pursuant to x’s unit exchange program proposed transaction x proposes to form a new entity that will elect to be taxed as a real_estate_investment_trust reit as defined in sec_856 of the code new reit and to contribute substantially_all of x’s operating_assets to new reit the restructuring subsequent to the restructuring x will acquire additional operating_assets specifically x will acquire the assets of fund h pursuant to the agreement the fund h dropdown and will acquire assets from a b and c pursuant to the unit exchange program the exchanges once these acquisitions are complete x plans to transfer substantially_all of the acquired assets to new reit in exchange for additional interests in new reit representations x makes the following representations a immediately after the restructuring the total value of x’s direct ownership interests in new reit will be more than percent of the total value of all equity interests outstanding in new reit b at the time of the restructuring there will be no plan in existence pursuant to which the total value of x's direct ownership interests in new reit will become less than percent of the total value of all equity interests outstanding in new reit plr-119200-17 c x will maintain a minimum ownership of at least percent of the voting power of all classes of stock entitled to vote and at least percent of the total number of shares of all other classes of stock of new reit rulings based solely on the information submitted and representations made we rule as follows provided that immediately after the restructuring x’s direct ownership interests in new reit will represent percent or more of the total value of all new reit equity interests x’s new reit equity interests will be disregarded and x will be deemed to own its ratable share of new reit’s assets for purposes of determining whether x is an investment_company under sec_351 provided that x will maintain a minimum ownership of at least percent of the voting power of all classes of stock entitled to vote and at least percent of the total number of shares of all other classes of stock of new reit a transfer of assets to x in the fund h dropdown and in the exchanges followed by a transfer of the same assets to new reit as part of the same plan will be respected as separate transactions for purposes of applying sec_721 and sec_351 respectively caveats except as expressly provided herein no opinion is expressed or implied concerning the tax treatment of the proposed transaction under any provision of the code and regulations or the tax treatment of any condition existing at the time of or effects resulting from the proposed transaction that is not specifically covered by the above rulings in particular no opinion is expressed regarding whether new reit will qualify as a reit under subchapter_m part ii of chapter of the code procedural statements this ruling letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of this ruling letter plr-119200-17 in accordance with the power_of_attorney on file in this office a copy of this ruling letter is being sent to your authorized representative sincerely stephanie d floyd stephanie d floyd assistant to branch chief branch office of associate chief_counsel corporate


t c summary opinion united_states tax_court gerard j mcenroe and regina mcenroe petitioners v commissioner of internal revenue respondent docket no 7381-18s filed date gerard j mcenroe and regina mcenroe pro sese monica e koch for respondent summary opinion guy special_trial_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 1unless otherwise indicated section references are to the internal revenue continued any other court and this opinion shall not be treated as precedent for any other case respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax and an accuracy-related_penalty of dollar_figure under sec_6662 for the taxable_year year in issue petitioners husband and wife filed a timely petition for redetermination with the court pursuant to sec_6213 at the time the petition was filed petitioners resided in new york after concessions the issue remaining for decision is whether petitioners are liable for federal_income_tax on a deemed_distribution of dollar_figure from mr mcenroe’s employer-sponsored retirement account continued code code as amended and in effect for and rule references are to the tax_court rules_of_practice and procedure 2mrs mcenroe did not appear at the trial of this case mr mcenroe appeared and informed the court that mrs mcenroe was aware of the proceeding and had authorized him to prosecute the case on her behalf 3petitioners concede that they failed to report dividend income of dollar_figure and are subject_to the additional tax prescribed in sec_72 but only if the court decides that mr mcenroe received a deemed_distribution from his retirement account in respondent concedes that petitioners are not liable for an accuracy-related_penalty under sec_6662 other adjustments are computational and will flow from the court’s resolution of the issue remaining in dispute background4 mr mcenroe wa sec_51 years old during the year in issue at that time he had been employed for about years in the office of the inspector general for the new york city school construction authority sca as an sca employee mr mcenroe participated in the new york city employees retirement_system nycers a qualified_trust forming part of an employer-sponsored pension_plan within the meaning of sec_401 in date mr mcenroe borrowed dollar_figure from his nycers retirement account to help pay college tuition expenses for one of his children he immediately began to repay the loan through biweekly payroll withholding on date mr mcenroe left sca and accepted a job in the private sector he quickly grew disillusioned with his new position however and returned to sca in date mr mcenroe did not make loan payments to nycers after he left sca when he returned to sca mr mcenroe learned that nycers had determined that his outstanding loan balance would be treated as a distribution prompting him to contact the sca human resources office in search of a solution on 4the parties stipulated some of the facts date the human resources office sent an email to nycers stating in relevant part per our conversations please be advised that mr mcenroe wishes his outstanding loan to be reinstated with installment payments effective immediately mr mcenroe had left the sca for a brief period of time and as such payments were not being withheld a notice of distribution was subsequently sent to his home as mr mcenroe is now once again an active sca employee he would like for his loan not to be treated as a distribution and to repay in bi-weekly payroll deductions thank you for your assistance in this matter please advise when we can expect payments to begin and confirm this loan will not be treated as a distribution nycers responded to sca by email as follows i did receive you sic e-mail and we will process a revision and it will be done for in early date mr mcenroe resumed making loan payments to nycers through biweekly payroll withholding nycers issued form 1099-r distributions from pensions annuities retirement or profit sharing plans iras insurance contracts etc reporting that mr mcenroe had received a distribution of dollar_figure from his retirement account in the dollar_figure amount represents the outstanding balance on mr mcenroe’s loan from his nycers retirement account as of date petitioners filed a joint form_1040 u s individual_income_tax_return for but did not report any income attributable to pension or annuity payments as indicated above respondent determined that petitioners received a deemed_distribution of dollar_figure from mr mcenroe’s nycers retirement account during the year in issue and that the distribution is subject_to both income_tax and the additional tax prescribed in sec_72 petitioners contend that mr mcenroe should not be considered to have received a taxable_distribution from his retirement account because he successfully reinstated the loan and resumed loan payments in date discussion the commissioner’s determination of a taxpayer’s liability in a notice_of_deficiency normally is presumed correct and the taxpayer bears the burden of proving that the determination is incorrect rule a 290_us_111 because the facts relevant to the court’s disposition of this case are not in dispute the assignment of the burden_of_proof is immaterial 5petitioners were unaware that the form 1099-r had been issued until date unreported income sec_61 provides that gross_income means all income from whatever source derived gross_income includes but is not limited to items such as compensation annuities income from life_insurance and endowment contracts and pensions sec_61 sec_402 provides the general_rule that any amount actually distributed to any distributee by any employees’ trust described in sec_401 which is exempt from tax under sec_501 shall be taxable to the distributee in the taxable_year of the distributee in which distributed under sec_72 relating to annuities because mr mcenroe’s nycers retirement_plan was a qualified_plan under sec_401 any amount actually distributed to him normally would be subject_to federal_income_tax pursuant to sec_72 see sec_402 sec_72 provides the general_rule that if a participant receives either directly or indirectly any amount as a loan from a qualified_employer_plan such amount shall be treated as having been received by such individual as a distribution under such plan sec_72 provides an exception to the general_rule however where the loan when added to the outstanding balance of all other loans from the same plan does not exceed a specified limit see sec_72 where the loan by its terms must be repaid within years from the date of its inception or used to finance the acquisition of a home that is the principal_residence of the participant see sec_72 and where the loan is subject_to substantially level amortization with quarterly or more frequent payments required over the term of the loan see sec_72 if a plan participant fails to make a loan payment either on the date it is due or within an allowed grace period a loan from a qualified_plan no longer satisfies the requirements of sec_72 see martinez v commissioner tcmemo_2016_182 at in this regard sec_1_72_p_-1 q a-10 a income_tax regs provides that in the event of an overdue payment plan administrators may allow a cure grace period which cannot continue beyond the last day of the calendar_quarter following the calendar_quarter in which the required_installment payment was due and that sec_72 will not be considered to have been violated if the installment_payment is made not later than the end of the cure period mr mcenroe failed to make loan payments that were due over a roughly six-month period stretching from june to date because he first defaulted in respect of a loan payment that was due in date which falls in the second calendar_quarter a grace period if any would have been required to expire no later than date the last day of the third calendar_quarter see sec_1_72_p_-1 q a-10 a income_tax regs mr mcenroe did not resume making loan payments however until date moreover when he did resume making loan payments he did not cure the earlier default ie he did not make a lump-sum payment to cover the many payments with accrued interest that he had failed to remit earlier in the year under the circumstances nycers properly concluded that mr mcenroe had defaulted on the loan during the year in issue and correctly reported his entire loan balance at the time of the default dollar_figure as a deemed_distribution it follows that respondent’s determination that petitioners are liable for federal_income_tax and additional tax under sec_72 in respect of the deemed_distribution is sustained additional argument petitioners maintain that considering all the facts and circumstances it would be inequitable to impose income_tax and additional tax under sec_72 on a deemed_distribution from mr mcenroe’s retirement account for the year in issue in particular they assert that nycers did not provide mr mcenroe with timely notice that his loan was considered to be in default and in any event he acted reasonably and in good_faith when he resumed making loan payments in date we have considered similar claims in the past and have observed that there is no authority in the code or caselaw for an equitable or hardship exception to the imposition of income_tax and additional tax under sec_72 on early distributions from a retirement account see 111_tc_250 adams v commissioner tcmemo_2015_162 at dollander v commissioner tcmemo_2009_187 the court may not add an exception to the code by judicial fiat and we are obliged to apply the law as written see 270_us_245 to reflect the foregoing an appropriate decision will be entered


department of the treasury internal_revenue_service bec -9 pre ee t3 uniform issue list ee eek oe bee legend taxpayer a taxpayer plan c amountd state e court f date date dear - ee ah ee ek ae ae at ae this is in response to a request submitted on behalf authorized representative dated date as supplemented by correspondence dated date date and date in which the estate requests a waiver of the 60-day rollover requirement contained in sec_402 of the internal_revenue_code the code of the estate of taxpayer a by an the following facts and representations have been submitted under penalty of perjury in support of the ruling requested ak page taxpayer a was a participant in plan c a profit sharing plan which was intended to be qualified under sec_401 a of the code taxpayer a received a distribution amount d from plan c on date taxpayer a died on date without having attained age amount d represents taxpayer a's full interest in plan c ‘taxpayer b is the executrix of taxpayer a’s estate taxpayer a through taxpayer b asserts that the failure to accomplish a rollover of amount d within the 60-day period prescribed by sec_402 of the code was due to taxpayer a’s medical_condition treatments for such condition and subsequent death taxpayer b further represents that amount d has not been used for any other purpose taxpayer b has submitted letters testamentary issued by court f that reflect taxpayer b’s standing as executrix of taxpayer a’s estate court f is located in state e and is asserted to be a court of competent jurisdiction in this matter documentation has been submitted that reveals taxpayer a intended to roll over amount d within days of date the date of distribution as stated above taxpayer a was unable to complete the rollover due to intervening medical circumstances based on the facts and representations you request a ruling that the internal_revenue_service waive the 60-day rollover requirement contained in sec_402 of the code with respect to the distribution of amount d sec_402 c of the code provides that if any portion of the balance_to_the_credit of an employee in a qualified_trust is paid to the employee in an eligible_rollover_distribution and the distribute transfers any portion of the property received in such distribution to an eligible_retirement_plan and in the case of a distribution_of_property other than money the amount so transferred consists of the property distributed then such distribution to the extent transferred shall not be includible in gross_income for the taxable_year in which paid an individual_retirement_account ira constitutes one form of eligible_retirement_plan sec_402 c a of the code states that such rollover must be accomplished within days following the day on which the distributee received the property sec_402 c b of the code provides in relevant part that the secretary may waive the 60-day requirement under sec_402 c where the failure to waive such requirement would be against equity or good conscience including casually disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_402 c b of the code sec_401 a provides the rules for governing direct transfers of eligible rollover distributions te page sec_1 a of the income_tax regulations question and answer-15 provides in relevant part that an eligible_rollover_distribution that is paid to an eligible_retirement_plan in direct_rollover is a distribution and rollover and not a transfer of assets and liabilities revproc_2003_16 lr b date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_402 c of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred ‘the information presented and documentation submitted on behalf of taxpayer a is consistent with the assertion that the failure to accomplish a timely rollover was caused by taxpayer a’s medical_condition treatments for such condition and subsequent death therefore subject_to the restrictions noted below pursuant to sec_402 c b of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of atnount d from plan c the estate of taxpayer a is granted a period of days from the issuance of this ruling letter to contribute amount d into a rollover ira provided all other requirements of sec_402 c of the code except the 60-day requirement are met with respect to such contribution amount d will be considered a rollover_contribution within the meaning of sec_402 c of the code taxpayer b will establish an ira in the name of taxpayer a the service notes that the ira into which amount d is rolled over will not have a designated_beneficiary as that term is defined in sec_461 a of the code and distributions from the new ira will be subject_to the rules set forth in sec_401 a b this ruling assumes that taxpayer b’s action in this instance are taken pursuant to her represented authority as executtix of taxpayer a’s estate and that the rollover ira set up in taxpayer a’s name will be in accordance with the laws of state b this letter assumes that plan c was qualified under sec_401 a of the code at the time of distribution of amount d no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 k of the code provides that it may not be used or cited as precedent ee page pursuant to a power of attomey on file with this office a copy of this letter is being sent to the authorized representative if you wish to inquire about this ruling please contact i d at please address all correspondence to se t ep ra t3 sincerely yours fasea s employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose copy to power of attomey