t c summary opinion united_states tax_court walter michael alley petitioner v commissioner of internal revenue respondent docket no 20484-03s filed date walter michael alley pro_se james e cannon 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 the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority 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 petitioner’s federal income taxes of dollar_figure and dollar_figure for the taxable years and respectively additionally respondent determined an addition_to_tax of dollar_figure pursuant to sec_6651 for the taxable_year after concessions the issue still in dispute is whether petitioner’s stipulated truck expenses of dollar_figure and dollar_figure for taxable years and respectively should be reported on petitioner’s schedule a itemized_deductions and therefore be subject_to the 2-percent floor of sec_67 or whether such expenses were a result of an independent trade_or_business and therefore should be reported on a schedule c profit or loss from business background some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioner resided in 1at trial the parties agreed with respect to the tax_year petitioner is entitled to an itemized_deduction for unreimbursed employee business_expenses of dollar_figure which is subject_to the 2-percent floor of sec_67 with respect to the tax_year petitioner is entitled to an itemized_deduction for unreimbursed employee business_expenses of dollar_figure which is subject_to the 2-percent floor of sec_67 with respect to the tax_year petitioner substantiated truck expenses of dollar_figure with respect to the tax_year petitioner substantiated truck expenses of dollar_figure and that petitioner’s federal_income_tax return was delinquent and thus petitioner is liable for the addition_to_tax of dollar_figure pursuant to sec_6651 farmington new mexico on the date the petition was filed in this case during taxable years and petitioner was employed by pacific industrial electric inc pacific as a field superintendent as field superintendent petitioner was responsible for all aspects of total on-site job management and supervision petitioner’s duties included but were not limited to personnel supervision work assignments work schedule management materials ordering materials management customer and inspector interaction and tool and equipment management pacific did not have a formal written expense reimbursement policy during taxable years and however pacific’s verbal reimbursement policy as relevant in the present case was to pay every employee dollar_figure per day for_the_use_of a personal vehicle while driving on corporate business during taxable_year petitioner used his personal vehicle a ford pickup truck for days while driving on business in accordance with pacific’s verbal reimbursement policy petitioner received payments from pacific totaling dollar_figure for the taxable_year during taxable_year petitioner used his personal vehicle for days while driving on business again in accordance with pacific’s verbal reimbursement policy petitioner received payments from pacific totaling dollar_figure for the taxable_year petitioner delinquently filed his taxable_year form_1040 u s individual_income_tax_return on date petitioner timely filed his taxable_year form_1040 on date petitioner attached to his federal_income_tax return a schedule c on his schedule c for taxable_year petitioner listed as his principal business or profession truck lease petitioner reported dollar_figure of business income on his schedule c for taxable_year and deducted dollar_figure in business_expenses this resulted in a reported business loss in the amount of dollar_figure petitioner’s schedule c business_expenses were as follows line line 16b line line line line car and truck expenses interest other auto loan repairs and maintenance taxes and licenses other expenses total expenses dollar_figure big_number dollar_figure petitioner attached to hi sec_2001 federal_income_tax return a schedule c on his schedule c for taxable_year petitioner 2as previously noted petitioner stipulated that his form_1040 for taxable_year was filed delinquently and conceded the addition_to_tax of dollar_figure pursuant to sec_6651 3this amount represents the payments received by petitioner from pacific for_the_use_of his personal vehicle in furtherance of pacific’s business listed as his principal business or profession truck lease petitioner reported dollar_figure of business income on his schedule c for taxable_year and deducted dollar_figure in business_expenses this resulted in a reported business loss in the amount of dollar_figure petitioner’s schedule c business_expenses were as follows line line line 16b line line line line car and truck expenses insurance other than health interest other auto loan repairs and maintenance taxes and licenses other expenses total expenses dollar_figure dollar_figure on date respondent issued a notice_of_deficiency to petitioner for the and taxable years in the notice_of_deficiency respondent denied petitioner the reported business_losses from his alleged trade_or_business for both taxable years and and disallowed all schedule c claimed deductions 4as previously noted this amount represents the payments received by petitioner from pacific for_the_use_of his personal vehicle in furtherance of pacific’s business 5as previously noted the parties have agreed that petitioner incurred truck expenses of dollar_figure and dollar_figure for the taxable years and respectively discussion6 as previously stated on his schedule c for taxable years and petitioner deducted business_expenses of dollar_figure and dollar_figure respectively the parties agreed at trial that petitioner substantiated truck expenses of dollar_figure and dollar_figure for the taxable years and respectively as we understand it petitioner’s principal contention is that he was individually and independently in the business of leasing his truck to his employer and that the agreed-upon expenses_incurred for maintenance and repairs of his truck were deductible as ordinary and necessary expenses of conducting that business and thus were above-the-line schedule c deductions on the other hand respondent contends that the agreed-upon expenses are deductible as unreimbursed employee business_expenses and thus are itemized_deductions subject_to the percent floor of sec_67 it is well established that a taxpayer is engaged in a trade_or_business if the taxpayer is involved in the activity with continuity and regularity and with the primary purpose of making a profit 480_us_23 893_f2d_656 4th cir 6we decide the issue in this case without regard to the burden_of_proof accordingly we need not decide whether the general_rule of sec_7491 is applicable in this case see 116_tc_438 affg 91_tc_686 petitioner has the burden of proving that he was engaged in a trade_or_business rule a 503_us_79 292_us_435 290_us_111 this court in 65_tc_862 quoting 315_f2d_731 9th cir affg t c memo stated from the very import of sec_23 referring to sec_23 the code predecessor of sec_162 which presupposes that the taxpayer has received taxable_income before deductions can be taken therefrom it is clear that congress intended that the profit or income motive must first be present in and dominate any taxpayer’s trade_or_business before deductions may be taken while the expectation of the taxpayer need not be reasonable and immediate profit from the business is not necessary nevertheless the basic and dominant intent behind the taxpayer’s activities out of which the claimed expenses or debts were incurred must be ultimately to make a profit or income from those very same activities absent that basic and dominant motive the taxpayer’s activities no matter how intensive extensive or expensive have not been construed by the courts as carrying_on_a_trade_or_business within the purview of sec_23 we therefore must determine whether petitioner entered into a lease with his employer and if so whether petitioner entered into said lease with the intent to make a profit during taxable years and petitioner did not lease any other vehicles petitioner testified he did not try to lease his truck to any other individual and there was no formal written lease between himself and his employer furthermore petitioner did not negotiate leasing terms with his employer instead he was paid a flat rate of dollar_figure per day for_the_use_of his personal vehicle in furtherance of pacific’s business the flat rate of dollar_figure per day could be received by any employee of pacific who used his or her personal vehicle in furtherance of pacific’s business based upon on the record in this case we conclude that petitioner did not possess the required profit or income motive when he used his personal vehicle in furtherance of pacific’s trade_or_business in fact we find that petitioner did not enter into any lease with his employer further we conclude that petitioner’s use of his personal vehicle in furtherance of pacific’s trade_or_business was within the scope of his activities as an employee of pacific and that petitioner was not individually and independently in the business of leasing his truck to his employer it is clear that an individual may be in the trade_or_business of being an employee and that ordinary and necessary expenses_incurred in that trade_or_business are deductible under sec_162 see sec_1_162-17 income_tax regs sec_162 allows a taxpayer to deduct all ordinary and necessary business_expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business to be necessary an expense must be appropriate and helpful to the taxpayer’s business welch v helvering supra pincite to be ordinary the transaction which gives rise to the expense must be of a common or frequent occurrence in the type of business involved 308_us_488 we hold that the agreed-upon expenses of dollar_figure and dollar_figure for taxable years and respectively are unreimbursed employee business_expenses properly deducted on schedule a and thus are itemized_deductions subject_to the 2-percent floor of sec_67 in view of the foregoing we sustain respondent’s determination on this issue reviewed and adopted as the report of the small_tax_case division decision will be entered under rule


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc intl b01 plr-118276-97 date date re tax_year a country b year c year d year e year f date g dear this is in response to your letter dated date requesting a ruling under sec_877 of the internal_revenue_code_of_1986 code that a’s surrender of his u s alien registration card green card did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code additional information was submitted in letters dated date and date the information submitted for consideration is substantially as set forth below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by penalty of perjury statements executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination plr-118276-98 a was born in country b and has been a citizen of country b since birth his parents were also born in country b and his wife has been a citizen of country b since her birth a moved to the united_states in year c to join a u s firm and became a permanent resident_of_the_united_states in year d a was assigned to a european post in year e and then to a country b post in year f a surrendered his green card expatriated on date g at the time of a’s surrender of his green card a had lived and worked outside of the united_states for nine years a intends to live permanently in country b a is domiciled in country b and is subject_to country b income_tax on his worldwide income at a rate comparable to the applicable u s income_tax base and rate on the date of a's expatriation his net_worth exceeded dollar_figure sec_877 as amended by the health insurance portability and accountability act of generally provides that a u s citizen who loses citizenship or a long-term_resident who ceases to be taxed as a resident_of_the_united_states within the 10-year period immediately preceding the close of the taxable_year will be taxed on all of his or her u s source income as modified by sec_877 for such taxable_year unless such loss or cessation did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code sec_2107 generally provides that u s estate_tax will be imposed on the transfer of the taxable_estate of every nonresident decedent if the individual lost u s citizenship within the 10-year period ending on the date of death unless such loss did not have for one of its principal purposes the avoidance of u s taxes sec_2501 of the code generally provides that a tax will be imposed for each calendar_year on the transfer of property by gift during such year by any individual resident or nonresident sec_2501 of the code provides that sec_2501 will not apply to the transfer of intangible_property made by a nonresident_not_a_citizen_of_the_united_states however sec_2501 of the code provides that this exception does not apply in the case of a donor who within the 10-year period ending with the date of a transfer lost u s citizenship unless such loss did not have for one of its principal purposes the avoidance of u s taxes sec_877 of the code generally provides that any long-term_resident who ceases to be a lawful permanent resident_of_the_united_states or commences to be treated as a resident of a foreign_country under the provisions of a tax_treaty between the united_states and the foreign_country and who does not waive the benefits of such treaty applicable to residents of the foreign_country shall be treated for purposes of this section and sec_2107 sec_2501 and sec_6039g in the same manner as if such resident were a citizen_of_the_united_states who lost united_states citizenship on the date of such cessation or commencement for purposes of applying the foregoing provisions a former citizen is considered to have lost u s citizenship with a principal purpose to avoid u s citizenship if either i plr-118276-98 the individual’s average annual net u s income_tax for the five taxable years prior to expatriation exceeded dollar_figure as modified by post-1996 cost-of-living adjustments or ii the net_worth of the individual on the date of expatriation was at least dollar_figure as modified by post-1996 cost-of-living adjustments sec_877 of the code see also sec_2107 and sec_2501 of the code however a former citizen will not be considered to have lost citizenship with a principal purpose to avoid u s taxes as a result of the individual’s tax_liability or net_worth if he or she qualifies for an exception under sec_877 of the code to qualify for an exception a former citizen must be described in certain statutory categories and submit a ruling_request within one year of the date of loss of u s citizenship for a determination by the secretary as to whether the individual’s expatriation had for one of its principal purposes the avoidance of u s taxes sec_877 of the code see also sec_2107 and sec_2501 of the code under notice_97_19 1997_1_cb_394 as modified by notice_98_34 1998_27_irb_30 a former long-term_resident whose net_worth or average tax_liability exceeds the applicable thresholds will not be presumed to have a principal purpose of tax_avoidance if that former resident is described within certain categories and submits a complete and good_faith request for a ruling as to whether such loss had for one of its principal purposes the avoidance of u s taxes notice_97_19 as modified by notice_98_34 requires that certain information be submitted with a request for a ruling that an individual’s expatriation did not have for one of its principal purposes the avoidance of u s taxes a is eligible to request a ruling pursuant to notice_97_19 because he is described in one of the categories of individuals eligible to submit ruling requests prior to the issuance of notice_98_34 on the date of a’s expatriation a was and continues to be a citizen and resident fully liable to income_tax in country b the country where a was born all of the information required by notice_97_19 as modified by notice_98_34 was submitted including any additional information requested by the service after review of the submission accordingly based solely on the information submitted and the representations made it is held that a has made a complete and good_faith submission in accordance with sec_877 and notice_97_19 as modified by notice_98_34 and therefore a will not be presumed to have expatriated with a principal purpose of tax_avoidance it is further held that a will not be treated under sec_877 as having as one of his principal purposes for expatriating the avoidance of u s taxes because the information submitted clearly establishes the lack of a principal purpose to avoid taxes under subtitle a or b of the code plr-118276-98 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition no opinion is expressed as to a’s u s tax_liability for the taxable years prior to expatriation or his united_states tax_liability for periods after his loss of permanent resident status under sections of the code other than sec_877 sec_2107 and sec_2501 a copy of this letter must be attached to a’s u s income_tax return for the year in which a obtained the ruling whether or not a is otherwise required to file a return this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to a sincerely allen goldstein reviewer office of associate chief_counsel international


t c memo united_states tax_court mark n kantor and marla r kantor petitioners v commissioner of internal revenue respondent docket no filed date mark n kantor pro_se cheryl a mcinroy for respondent memorandum findings_of_fact and opinion swift judge respondent determined deficiencies of dollar_figure and dollar_figure in petitioners’respective federal income taxes for and and a dollar_figure addition_to_tax under sec_6651 for unless otherwise indicated all 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 petitioner marla kantor is a petitioner because she filed with her husband a joint federal_income_tax return for and the issue for decision is whether mark kantor petitioner is entitled under sec_475 to use the mark-to-market method_of_accounting in connection with his business as a trader in securities findings_of_fact some of the facts have been stipulated and are so found at the time the petition was filed petitioners resided in the state of new york petitioners are married and have two children petitioner holds a bachelor’s degree in economics from brooklyn college a law degree from st john’s law school and a master of laws degree from harvard law school since finishing his education petitioner has worked primarily as a securities trader on wall street over the years petitioner has repeatedly used drugs and has been admitted to a number of drug rehabilitation programs petitioner is the same taxpayer involved in kantor v commissioner tcmemo_1997_112 wherein we held petitioner liable for additions to tax under sec_6653 in connection with petitioner’s failure_to_file timely federal_income_tax returns for through in date petitioner retired as a wall street securities trader and in date petitioner received from his wall street firm a retirement bonus of dollar_figure million from january until date petitioner enjoyed his retirement by playing golf and vacationing with family beginning date through date petitioner as a sole_proprietor carried on a securities trading business petitioner received from his broker monthly brokerage statements which reported petitioner’s securities trading activities using the mark-to-market method_of_accounting petitioner used the monthly brokerage statements to track his trading activities petitioner realized significant losses in his business as a securities trader in date petitioner closed his securities trading business in april and date petitioners filed with respondent requests for extensions of time to file their federal_income_tax return and petitioners included with their requests estimated income_tax payments relating to the dollar_figure million retirement bonus petitioner received in from date through date petitioner was admitted to a drug rehabilitation program in florida on date and on date respectively petitioners filed their and joint federal_income_tax returns late petitioners attached to each return a schedule c profit or loss from business sole_proprietorship showing petitioner’s business as a securities trader petitioner’s schedules c prepared using the mark-to-market method_of_accounting reported ordinary losses of dollar_figure and dollar_figure for and respectively on date petitioners amended their joint federal_income_tax return to reflect an additional dollar_figure in ordinary losses from petitioner’s business as a securities trader after an audit on date respondent mailed to petitioners a notice_of_deficiency in which respondent determined that petitioner had not properly elected under sec_475 the mark-to-market method_of_accounting for his securities trading business for and and respondent treated petitioner’s securities trading losses as capital losses respondent’s determinations gave rise to the dollar_figure and dollar_figure deficiencies in petitioners’ respective and federal income taxes during a date conference with respondent’s counsel petitioner for the first time claimed that in he and his wife had formed a partnership in connection with hi sec_2 it is not clear from the record how respondent treated petitioner’s additional dollar_figure claimed losses for securities trading business and that the partnership had elected under sec_475 to use the mark-to-market method_of_accounting as proof thereof petitioner submitted a form_1065 u s return of partnership income for indicating that the alleged partnership had made a mark-to-market_election the form_1065 was signed by petitioner’s accountant but was dated date also the form_1065 was not signed by either petitioner or his wife and was never filed with respondent at the conference petitioner claimed that as partners he and his wife made an internal election in to use the mark-to-market method_of_accounting in connection with his business as a securities trader petitioner never filed with respondent for or a form_3115 application_for change in accounting_method or a statement describing an election to use the mark-to-market accounting_method petitioner also has not requested relief under sec_301_9100-3 proced admin regs section relief from the timely election requirements of sec_475 opinion sec_475 provides generally that a taxpayer engaged in business as a securities trader may elect to use the mark-to- market method_of_accounting for securities held in a business under the mark-to-market method_of_accounting a trader generally recognizes at the end of the year ordinary gain_or_loss on all securities held in the business as if the securities were sold at the end of the year for fair_market_value sec_475 f a i knish v commissioner tcmemo_2006_268 lehrer v commissioner tcmemo_2005_167 affd 279_fedappx_549 9th cir chen v commissioner tcmemo_2004_132 a securities trader electing under sec_475 to use the mark-to-market method_of_accounting for securities held in the business is generally required to file with respondent a statement making the mark-to-market_election identifying the first taxable_year for which the election is effective and describing the business to which the election relates see knish v commissioner supra lehrer v commissioner supra revproc_99_17 sec_5 1999_1_cb_503 the statement must be filed no later than the due_date of the trader’s original federal_income_tax return without regard to extension for the taxable_year immediately preceding the election_year and if the election entails a change in accounting_method the trader must also attach a form_3115 to the trader’s timely filed original federal_income_tax return for the election_year revproc_99_17 sec_5 c b pincite for a trader’s first year of business revproc_99_17 sec_5 c b pincite provides that the trader may make the sec_475 mark-to-market_election by placing in the books_and_records of the business no later than months and days after the first day of the year a written_statement making the mark-to-market_election identifying the first taxable_year for which the election is effective and describing the business to which the election relates the trader must attach a copy of the statement to the trader’s federal_income_tax return for the election_year id where an individual securities trader has made a proper mark-to-market_election under sec_475 losses resulting from the trader’s business will be treated as ordinary losses and will be deductible under sec_165 however where the trader has not made a proper election such losses will be treated as capital losses and will be deductible only to the extent of capital_gains plus dollar_figure sec_165 c f b knish v commissioner supra petitioner admits that he has not filed with respondent a form_3115 petitioner argues that the monthly brokerage statements relating to his business reflecting the mark-to- market method_of_accounting qualify as a statement making the mark-to-market_election that he therefore made an election under sec_475 and that he should be entitled to treat his securities trading losses as ordinary losses in the alternative petitioner claims that the form_1065 he submitted at the date conference with respondent’s counsel combined with the alleged internal election he and his wife made in should be treated as a valid sec_475 election we disagree petitioner’s monthly brokerage statements do not contain a written_statement that makes the mark-to-market_election further petitioner’s form_1065 was never filed with respondent was not signed by petitioner and his wife and was not submitted to respondent’s counsel until over years after it was due additionally petitioner did not attach to petitioners’ tax returns for or for any other year a statement making the mark-to-market_election identifying the first taxable_year for which the election was to be effective and describing the business to which the election was to relate courts have consistently held that a securities trader did not make an election under sec_475 where the trader did not follow the election requirements of revproc_99_17 supra see knish v commissioner supra election not made where statement was not attached to prior year tax_return and form_3115 was filed late 76_fedclaims_237 election not made where statement filed with amended tax returns acar v united_states aftr 2d ustc par big_number n d cal election not made where statement was filed with amended_return years after due_date of original return and no form_3115 was filed affd 545_f3d_727 9th cir petitioner has not satisfied the election requirements of revproc_99_17 supra and petitioner has not properly elected under sec_475 to use the mark-to-market method_of_accounting for and under sec_301_9100-3 proced admin regs respondent may grant administrative relief to a securities trader with regard to improper mark-to-market elections if the trader among other things requests section relief and demonstrates that he acted reasonably and in good_faith in failing to make a timely election under sec_475 see 126_tc_279 a trader has not acted reasonably and in good_faith if the trader uses hindsight in requesting relief by attempting to make a sec_475 mark-to-market_election years after the election was due in order to convert capital losses into ordinary losses see vines v commissioner supra pincite lehrer v commissioner supra acar v commissioner supra sec_301_9100-3 proced admin regs petitioner however has not requested section relief see knish v commissioner tcmemo_2006_268 relief denied where request not made in petition marandola v united_states supra relief denied where taxpayer neither requested relief through a private_letter_ruling nor asked for relief in a refund claim even if petitioner had requested section relief we conclude that petitioner a wall street trader with a master of laws degree used hindsight in claiming that he made the sec_475 election on the monthly brokerage statements and on the form_1065 petitioner does not qualify for section relief sec_6651 imposes an addition_to_tax for a taxpayer’s failure to timely file a tax_return unless the taxpayer proves that such failure is due to reasonable_cause and not willful neglect see 469_us_241 by virtue of our finding that petitioners’ return for was filed late respondent has carried his burden of production under sec_7491 as to the addition_to_tax petitioners argue that they were unable to file their tax_return because petitioner was undergoing drug rehabilitation from date through date while we sympathize with petitioner’s drug problems petitioners did not actually file their joint tax_return until date nearly months after petitioner’s date release from the drug program petitioners have not offered an adequate explanation for the delay in filing their tax_return we conclude that petitioners’ failure_to_file timely their joint federal_income_tax return was due to willful neglect rather than to reasonable_cause and we sustain respondent’s imposition of the sec_6651 addition_to_tax for to reflect the foregoing decision will be entered under rule


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc corp 1-plr-124544-00 date date number release date index number distributing distributing sub controlled date a business a division division dear this is a reply to your letter dated date requesting a ruling supplementing and affirming the rulings granted in plr-114099-99 prior ruling specifically rulings under sec_355 of the internal_revenue_code the code and other code sections as to the federal_income_tax consequences of a proposed transaction since the issuance of the prior ruling certain business conditions have resulted in distributing’s desire to discontinue an operating division of distributing sub the information submitted for consideration is substantially as set forth below on date a the transactions described in the prior ruling including the tax-free separation of distributing from controlled the distributions were effectuated ultimately the transactions resulted in distributing sub becoming a first tier wholly owned subsidiary of distributing distributing sub currently engages in integrated business a more specifically distributing sub conducts division and division which each perform a separate function of business a due to a change in economic conditions since the issuance of the original letter_ruling division has been unable to compete with larger companies engaged in business a and is experiencing unprecedented losses division however continues to meet or exceed business expectations plr-124544-00 the following representation was made by the taxpayer in connection with the prior ruling there is no plan or intention to liquidate either corporation x or corporation y to merge either corporation x or corporation y herein distributing sub with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the transaction except in the ordinary course of business as a result of the unprecedented and unexpected losses distributing sub now proposes to sell or write off the assets associated with division and to use the proceeds to enhance division the proceeds will not be used for distributions or dividends to distributing or distributing shareholders based solely on the information submitted and the representations made we rule that the discontinuation of division of distributing sub as discussed above will have no effect on the rulings provided in the prior ruling and those rulings remain in full force and effect this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter should be attached to the federal_income_tax returns of the taxpayers involved for the taxable_year in which the transactions covered by this ruling are consummated sincerely associate chief_counsel corporate by christopher w schoen assistant to the chief branch


office_of_chief_counsel department of the treasury internal_revenue_service washington d c date number release date conex-108115-16 uil the honorable daniel webster member u s house of representatives w plant street winter garden fl attention -------------------- dear representative webster i am responding to your inquiry dated date on behalf of your constituent ------ -------------------- ----------------is a former member of the ----------------------- florida police department who has been receiving service-connected disability payments since ------ when he retired the florida department of management services told him that his service-connected disability payments would be tax-free for the duration of the payments but he recently received a letter from them stating that his payments will be taxable starting at age he wrote that his disability retirement payments should remain nontaxable and asked why the law changed generally an employee can exclude payments for on-the-job injuries or illness from his or her gross_income as workers’ compensation under sec_104 of the internal_revenue_code the exclusion of payments does not apply however to a retirement pension or annuity determined by an employee’s age length of service or prior contributions even if an occupational injury or sickness caused the employee to retire it is possible that ----------------is receiving his service-connected disability benefits pursuant to a florida statute that requires the payments to be converted to regular retirement at a specified age any benefits he receives after reaching that age would not qualify for exclusion_from_gross_income if his benefits are then determined with conex-108115-16 reference to years_of_service age or prior contributions these long-standing principles are not related to any recent change in federal_law or irs position i hope this information is helpful if you need additional information please contact me or ----------------------- of my staff at -------------------- sincerely christine ellison acting branch chief health and welfare branch_tax exempt and government entities


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 tege eoeg teb presp-146672-06 date date dear ------------------ this letter is in response to your application_for an allocation of authority to issue dollar_figure------- --------------- in clean renewable energy bonds crebs under sec_54 of the internal_revenue_code the code pursuant to sec_54 of the internal_revenue_code the code and notice_2005_98 2005_52_irb_1211 and after review of your application submitted on date including supplements thereto we have determined that the project described in appendix a attached hereto is qualified for purposes of sec_54 and will be owned by one or more qualified borrowers we allocate authority to ---------------------------------------- ---------- the issuer a qualified issuer under sec_54 to issue up to dollar_figure------------- of clean renewable energy bonds crebs bonds issued pursuant to this allocation must be designated by the issuer as bonds for purposes of sec_54 for the project described in appendix a up to the amount allocated for each project described in appendix a bonds so designated must be issued on or before date please be aware that in order for bonds to be crebs the applicable_requirements of the code including without limitation sec_54 notice_2005_98 and notice_2006_7 2006_10_irb_559 must be met please note that creb proceeds may be used to reimburse capital expenditures paid_by qualified borrowers for qualified projects only if the provisions of sec_54 are met sec_54 of the code imposes a limitation of dollar_figure on the amount of crebs which may be issued to finance qualified projects the limitation sec_54 provides that the limitation is to be allocated by the secretary of treasury in such manner as the secretary deems appropriate except that no more than presp-146672-06 dollar_figure of the limitation may be allocated to finance qualified projects of qualified borrowers which are governmental bodies section of notice_2005_98 2005_52_irb_1211 provides that the limitation will be allocated among qualified projects for which a share of such limitation has been requested beginning with the project s requesting the smallest share in dollar amount and continuing with the project s requesting the next-smallest share until the total limitation has been exhausted however in the event that dollar_figure has been allocated to qualified projects of qualified borrowers that are governmental bodies the remaining shares of the limitation will be allocated under the methodology described in the previous sentence only to qualified projects of qualified borrowers that are not governmental bodies for purposes of allocating the limitation among projects all qualified projects located at the same site and owned by the same qualified_borrower are treated as a single project and each project is treated as requesting a single allocation an allocation of shares of the limitation cannot be made with respect to the project owned by the borrower listed in appendix b because such borrower is a governmental body and dollar_figure has already been allocated to applications requesting a smaller share of the limitation to finance qualified projects owned by qualified borrowers that are governmental bodies we appreciate your submission of the application_for our consideration and encourage you to continue to pursue your plans for constructing clean renewable energy projects if you have any questions with respect to this allocation please contact --------------------- ------------------------------------------------------------------------------------------------------------------- - -------- or ----------------------------of the office of division counsel associate chief_counsel tax-exempt and government entities on --------------------- not a toll-free call except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter for purposes of the renewable_electricity_production_credit under sec_45 of the code no inference may be drawn from this allocation that any project listed in the appendices attached hereto is a qualified_facility or that electricity to be produced at such project s is electricity from a qualified_energy resource at a qualified_facility within the meaning of sec_45 this determination is directed only to the applicant named above 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 form 8038-g information_return for tax- exempt governmental obligations filed for bonds issued pursuant to this allocation presp-146672-06 the allocation contained in this letter is based upon information and representations submitted by the applicant for the creb allocation 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 application_for an allocation it is subject_to verification on examination sincerely assistant chief_counsel exempt_organizations employment_tax government entities tax exempt government entities by timothy l jones senior counsel tax-exempt_bonds branch presp-146672-06 borrower name appendix a project type project location -------------------------------- ------------------- hydropower facility -------------------------------- ----------- amount allocated -------------- presp-146672-06 borrower name appendix b project type project location ------------------------------- ------------------- geothermal facility -------------------------------- ------------- amount requested ---------------


t c memo united_states tax_court ajf transportation consultants inc et al petitioners v commissioner of internal revenue respondent docket nos filed date j is a corporation engaged in furniture delivery services f is j's sole shareholder and president j's client issued checks to j for its delivery services and for fuel costs f cashed the checks personally and diverted the funds for his own personal benefit none of the diverted funds were reported as income on f's individual tax returns or on j's corporate tax returns for the and taxable years j did not timely file its corporate tax returns for the years at issue r determined that the full amount of the diverted funds was taxable to both j and f r's deficiency notices were issued more than years after j and f's income_tax returns were filed 1cases of the following petitioners are consolidated herewith ajf transportation consultants inc docket no anthony j ferrentino docket no and anthony j ferrentino and carol l ferrentino docket no - -2 held the period of assessment is unlimited because j and f filed fraudulent tax returns sec_6501 sec_2 held further the diverted funds were constructive dividends and taxable to f in the manner provided by sec_301 and sec_316 sec_3 held further the diverted funds were properly includable in j's income sec_61 i r c 348_us_426 held further j and f are liable for additions to tax and penalties under sec_6653 and sec_6663 i r c held further j is liable for additions to tax under sec_6651 i r c gary d borek for petitioners jerome f warner and raymond m boulanger for respondent memorandum findings_of_fact and opinion nims judge respondent determined deficiencies additions to tax and penalties for and with respect to petitioner ajf transportation consultants inc 's ajf federal income taxes as follows year deficiency dollar_figure big_number big_number additions to tax sec_6653 dollar_figure sec_6651 dollar_figure big_number big_number penalty sec_6663 dollar_figure dollar_figure respondent also determined deficiencies an addition_to_tax and penalties for and with respect to petitioners anthony j and carol l ferrentino's federal income taxes and for with respect to petitioner anthony j ferrentino's federal income taxes as follows year deficiency dollar_figure big_number big_number - -3 addition_to_tax sec_6653 dollar_figure penalty sec_6663 dollar_figure dollar_figure the parties have agreed that petitioner carol l ferrentino is entitled to innocent spouse relief under the provisions of sec_6013 and sec_6015 for the and taxable years unless otherwise indicated all 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 after concessions by both parties the remaining issues for decision are whether an exception under sec_6501 to the general 3-year period of limitations on assessment under sec_6501 applies to petitioners' and taxable years if so whether petitioners must include diverted corporate funds in gross_income whether petitioners are liable for the additions to tax for fraud under sec_6653 for and the penalties for fraud under sec_6663 for and and whether petitioner ajf is liable for additions to tax imposed by sec_6651 for failing to file timely and income_tax returns - -4 findings_of_fact background of petitioners anthony j ferrentino ferrentino was the president and sole shareholder of ajf during the years at issue ferrentino resided in williamsville new york at the time the petitions were filed ferrentino married carol ferrentino on date they separated in the fall of and on date they entered into a separation agreement support and property settlement separation agreement under the separation agreement ferrentino was obligated to pay carol dollar_figure over years specifically ferrentino was required to pay carol ferrentino dollar_figure per year from to and was thereafter obligated to pay at least dollar_figure per year until the remainder of the obligation was satisfied ferrentino has not paid all the amounts reflected in the separation agreement at various times between and ferrentino asked carol to modify their separation agreement or forbear his obligation to pay the required amounts ferrentino told carol that she would recognize a greater return on her money if she allowed ferrentino to keep the funds owed invested in ajf their divorce became final on date - -5 ajf is a new york corporation with principal offices in williamsville new york at the time the petitions were filed ajf is involved in the business of furniture delivery and is a cash receipts and disbursement method taxpayer ajf's employees were mainly drivers helpers for loading helpers for drivers of home deliveries and tractor-trailer drivers during the years in issue ajf earned_income by performing services for j c penney company inc j c penney pursuant to a delivery service agreement contract dated date the contract required ajf to deliver furniture to customers of j c penney and transport furniture for j c penney from various locations including the buffalo new york and toledo ohio distribution centers of j c penney ajf also performed delivery work for j c penney in other states and delivered fabricated goods for the buffalo custom decorating division of j c penney ajf used the trucks of j c penney to perform its contract services from to date thereafter ajf supplied both the drivers and the trucks j c penney reimbursed ajf for fuel purchased by ajf in performing its delivery services under the agreement ajf employees used cash and corporate credit cards for the purchase of fuel used in the delivery of j c penney products - -6 ajf's delivery employees generally a driver and sometimes a helper maintained a trip sheet which was a diary of their deliveries the trip sheet formed the basis of ajf's payroll and billing to j c penney the drivers would also maintain a delivery manifest which listed tasks the drivers were to perform for the day when ajf's employees delivered the furniture they would sometimes collect a cod cash on delivery from j c penney's customer under the contract ajf was responsible for the collection of cod's and maintained a cod account which was an account of cash collected from j c penney's customers the delivery manifest reflected all the cod's collected and the form in which those cod's were paid eg checks cash or money orders the trip sheet or manifest contained the name or names of employees on the particular delivery and listed expenses_incurred by the driver as of the time of trial ajf did not retain the delivery manifests or the trip sheets for the years in issue the drivers were authorized to and did use cod cash funds to pay for any expenses such as towing charges or anything out of the ordinary and would insert the invoice for the services in an envelope - -7 when ajf suffered a shortage of drivers for its scheduled deliveries it hired leased labor from manpower temporary services during and ajf claimed expenses for leased labor in the amounts of dollar_figure dollar_figure and dollar_figure respectively ajf also claimed deductions for driver expenses for and in the amounts of dollar_figure dollar_figure and dollar_figure respectively respondent has allowed these deductions circumstances surrounding ferrentino's cashing of ajf's delivery service and fuel reimbursements checks during the years in issue ferrentino controlled all the checks issued from j c penney to ajf ferrentino determined whether he would cash checks personally or have them deposited into ajf's corporate operating account ferrentino knew that ajf corporate income was determined by its accountants by examining deposits into ajf's bank account ajf's gross_income was determined from deposits to the bank account which were reflected in the cash receipts journal he also knew that if the checks for fuel reimbursement and delivery services were not deposited into ajf's bank account then corporate_income_tax returns would not reflect these amounts j c penney custom decorating divisions custom decorating issued checks to ajf and or a j ferrentino for services - -8 performed ferrentino cashed checks issued by custom decorating in the following amounts year amount cashed by ferrentino dollar_figure dollar_figure dollar_figure ajf did not include these amounts in gross_income on its federal_income_tax returns the j c penney buffalo distribution center issued checks for fuel reimbursement solely to ferrentino during the years at issue ferrentino cashed all but two fuel reimbursement checks from the buffalo distribution center the cashed check proceeds totaled year amount cashed by ferrentino dollar_figure dollar_figure dollar_figure the j c penney toledo distribution center issued checks for fuel reimbursement to anthony j ferrentino ajf trans inc ferrentino cashed these checks in the following amounts year - -9 amount cashed by ferrentino dollar_figure dollar_figure dollar_figure ajf maintained a cash disbursements journal which tracked among other things fuel expenses but the journal did not account for fuel reimbursements from j c penney employees of ajf would prepare an invoice entitled fuel billing which would be sent to j c penney for fuel reimbursement these fuel billings also included amounts for tolls and truck repairs ajf's accountants would use the cash disbursements journal to prepare ajf's tax returns and financial statements ajf claimed deductions for gas oil and tires expenses in and in the amounts of dollar_figure and dollar_figure respectively in ajf claimed a deduction for fuel expenses of dollar_figure ajf did not include any amounts relating to fuel reimbursements in gross_income ferrentino's cash hoard ajf maintained a business operating account at manufacturers hanover trust co subsequently purchased by fleet bank ferrentino cashed checks on approximately a weekly basis usually averaging dollar_figure to dollar_figure per transaction and paid in dollar_figure denominations on date ferrentino presented for exchange dollar_figure in water-damaged currency to the federal reserve bank in buffalo of the amount presented dollar_figure was in denominations of dollar_figure or larger ferrentino's guilty plea to filing a false tax_return on date ferrentino pleaded guilty to a one count information charging him with willfully making and subscribing to a false and fictitious u s income_tax return for the year in violation of sec_7206 on date ferrentino filed form sec_1040x amended u s individual_income_tax_return for the taxable years and which reported additional income in the amounts of dollar_figure dollar_figure and dollar_figure respectively respondent issued notices of deficiency after the 3-year period of limitations on assessment had expired ferrentino filed timely tax returns for the and taxable years ajf on the other hand filed its tax returns late ajf filed its and tax returns on date and its return on date respondent mailed notices of deficiency on date with respect to petitioners' and income_tax returns the general 3-year period of limitations on assessment under sec_6501 expired before the issuance of the notices of deficiency in these consolidated cases circumstances surrounding the late filing of ajf's tax returns john witkowski c p a witkowski prepared ajf's tax returns during the years in issue when preparing the returns witkowski relied on ajf's books_and_records which included receipts journals disbursement journals payroll records and bank reconciliations witkowski determined ajf's gross_income from ajf's cash receipts journal expenses were determined using check registers and cash-paid-out journals ajf's books_and_records did not disclose amounts pertaining to the fuel reimbursement checks from the j c penney distribution centers nor did they disclose the custom decorating checks for delivery services in general after the returns were prepared for clients including petitioners witkowski's office would contact the client who would normally pick them up if the client had not picked them up after a reasonable length of time witkowski's office would again contact the client witkowski signed ajf's corporate returns for and on date date and date respectively for some unexplained reason the and corporate returns reflect that ferrentino signed them on date he signed the corporate return on date i fraudulent return exception opinion since the 3-year period of limitations on assessment under sec_6501 has expired with respect to the taxable years at issue respondent is barred from assessing the deficiencies unless an exception to sec_6501 applies however sec_6501 provides exceptions to the general_rule the pertinent exception in this case is found in sec_6501 which provides that in the case of a false_or_fraudulent_return with the intent to evade tax the tax may be assessed or a proceeding in court for collection of such tax may be begun without assessment at any time where respondent asserts that a taxpayer has filed a fraudulent return with the intent to evade tax the burden_of_proof is on the respondent sec_7454 rule b respondent must satisfy his burden_of_proof with clear_and_convincing evidence rule b 61_tc_704 to establish fraud respondent must prove by clear_and_convincing evidence for each year and with respect to each petitioner that petitioner underpaid his income_tax and some part of the underpayment was due to fraud 91_tc_874 citations omitted see also 81_tc_640 although respondent need not prove the precise amount of the underpayment resulting from fraud respondent may not carry his burden by merely relying on a taxpayer's failure to carry the burden_of_proof on the underlying deficiency 96_tc_858 affd 959_f2d_16 2d cir 53_tc_96 a underreporting of tax respondent asserts that petitioners had unreported income arising from the checks issued by j c penney for delivery services rendered by ajf to custom decorating and fuel reimbursements for fuel expenses_incurred by ajf petitioner ajf concedes that checks which were cashed by ferrentino received from custom decorating for delivery services should have been included in ajf's gross_income however petitioners argue that the fuel reimbursements are not includable in gross_receipts of ajf and the proceeds from ferrentino's check cashing are not includable in his gross_income because he used the proceeds to pay casual labor for performance of services for which the checks were issued entitling him to deduct such amounts from gross_income resulting in no underpayment fuel reimbursement checks the first question is whether the fuel reimbursement checks should be included in ajf's gross_income sec_61 defines the term gross_income as all income from whatever source derived except as otherwise provided by law income has been defined as undeniable accessions to wealth clearly realized and over which the taxpayers have complete dominion 348_us_426 unless specifically excluded by another provision of the internal_revenue_code all income is subject_to tax id pincite therefore reimbursed expenses must be included in gross_income but these expenses may be deducted only if allowed under other provisions of the internal_revenue_code and if adequately substantiated 40_tc_443 vaughn v commissioner tcmemo_1992_317 affd without published opinion 15_f3d_1095 9th cir petitioners argue that the unreported fuel reimbursement checks should not be included in gross_income because the checks were repayments of a loan made from ajf to j c penney for expenses_incurred by ajf on behalf of j c penney it is true that we have previously held that 'where a taxpayer makes expenditures under an agreement that he will be reimbursed therefor such expenditures are in the nature of loans or advancements and are not deductible as business_expenses ' 53_tc_217 quoting 27_tc_592 affd 447_f2d_484 9th cir nevertheless as respondent points out ajf deducted amounts for fuel reimbursement expenses on its and tax returns which persistent course of action is inconsistent with petitioners' assertion that the reimbursements were repayments of a loan we have also held that taxpayers are entitled to attack the form of their transactions only when their tax reporting and other actions have shown an honest and consistent respect for what they argue is the substance of the transactions fnma v commissioner 90_tc_405 affd 896_f2d_580 d c cir neither ajf's cash disbursements journal nor other accounting_records treated the fuel reimbursements as loan repayments had ajf intended to treat the fuel reimbursement arrangement as a loan it would not have claimed deductions for fuel expenses in sum ajf's tax reporting and other actions have not shown an honest and consistent respect for what petitioners argue is the substance of these reimbursements therefore respondent has shown by clear_and_convincing evidence that the fuel reimbursement checks should be included in ajf's gross_income inclusion of ajf's custom decorating checks and fuel reimbursement in ferrentino's gross_income the next question is whether ferrentino as president and sole shareholder of ajf must include the custom decorating and fuel reimbursement checks in gross_income because he cashed the checks personally generally income that is subject_to a man's unfettered command and that he is free to enjoy at his own option may be taxed to him as his income whether he sees fit to enjoy it or not 281_us_376 respondent argues that ferrentino should include the diversions as ordinary_income ferrentino on the other hand argues that the cashed checks do not represent income to him because he received the checks on behalf of ajf as its agent and that the cash was held in constructive trust to pay a business_expense of ajf generally a taxpayer need not treat as income moneys which he did not receive under a claim of right which were not his to keep and which he was required to transmit to someone else as a mere conduit 56_tc_530 affd 492_f2d_286 7th cir no tax is imposed upon the receipt of money in a fiduciary or agency capacity 865_f2d_342 d c cir 44_tc_96 however where a shareholder uses corporate property for his personal benefit not proximately related to corporate business the shareholder must include the value of the benefit in income as constructive dividends to the extent of the corporation's earnings_and_profits 348_f2d_122 2d cir revg in part and remanding for additional findings to support the tax court's holding tcmemo_1964_121 remanding tcmemo_1966_16 89_tc_1280 85_tc_332 ferrentino argues that he used the check proceeds to pay for casual labor needs of ajf during certain peak times or when additional help was needed respondent counters that any additional labor needs of ajf were satisfied by the use of leased helpers from manpower services the burden_of_proof to establish the existence of cash payments to casual labor is on petitioners once respondent establishes the existence of unreported income and allows the deductions claimed on the return he does not have the further burden of proving the negative that the taxpayer did not have any additional deductions see perez v commissioner tcmemo_1974_211 citations omitted one court_of_appeals has stated that this rule is grounded on the realization that it would be virtually impossible for the government to show the negative fact that a taxpayer had no unreported deductions or exclusions 218_f2d_869 7th cir respondent is entitled to rely on the presumption that the deductions and exclusions listed by a taxpayer in his return are all that exist this presumption is based upon reasonable experience and has the effect of shifting the burden of going forward with the evidence to the taxpayer when the government has shown unreported income 246_f2d_24 2d cir quoting united_states v bender supra pincite in this case ferrentino has admitted by filing amended returns for the years in issue that he had unreported income ajf has conceded that it should have reported the amounts earned from delivery services for custom decorating furthermore respondent has shown that the fuel reimbursement check amounts should have been included in ajf's gross_income therefore since respondent has shown that petitioners had unreported income the burden of proving the existence of cash payments to casual labor lies with ferrentino relying on perez v commissioner supra 264_f2d_400 4th cir affg in part revg in part tcmemo_1958_59 and h j feinberg co inc v commissioner a memorandum opinion of this court dated date ferrentino argues that respondent should be required to present affirmative evidence disputing ferrentino's claim of casual labor expenditures in these cases the courts recognized that understatements of gross_receipts did not establish that a taxpayer had fraudulently intended to evade tax where the taxpayer also showed that he had offsetting deductions relating to such receipts that he failed to claim on his return zack v commissioner tcmemo_1981_700 affd 692_f2d_28 6th cir the taxpayers in perez richardson and h j feinberg co inc submitted positive proof that unreported deductible payments were in fact made and were related to their respective unreported receipts zack v commissioner supra based on such proof the courts shifted the burden of going forward to the commissioner to prove that at least some unreported net_income resulted from the unreported transactions id therefore to shift such burden to respondent ferrentino must submit credible_evidence of whether and to what extent he made such payments the underlying support for ferrentino's claimed casual labor cash payments rests on ferrentino's credibility on the testimonial credibility of ajf's employees and on a report authored by elaine brittain brittain ajf's office manager it is well established that we are not required to accept self-serving testimony in the absence of corroborating evidence 99_tc_202 87_tc_74 ferrentino testified that he cashed the checks when he needed funds to pay for casual labor brittain testified that she obtained cash from ferrentino to cover shortages of cod funds received by the drivers but brittain's testimony indicates that she did not have personal knowledge of a casual laborer ever working at ajf donald travis an employee of ajf testified that he could recall hiring his son doug and a person named harold andrew davis another employee testified that he had once hired his ex-brother-in-law and a big indian gentleman whose name started with a c and was foot tall for the reasons stated below we hold that ferrentino has not submitted credible_evidence of any cash payments made to casual labor petitioners have presented no documentation to corroborate the oral testimony of the above-mentioned witnesses ajf did not maintain any records of alleged payees who received cash for services performed as casual laborers during the and taxable years ajf did not retain the trip sheets or delivery manifests which might have verified the existence of casual labor ajf did not maintain any lists of names of any casual laborers records reflecting casual labor hours worked or records of individual earnings in a given year of any casual laborer employment_tax returns prepared by brittain did not show casual laborers being paid in cash ajf did not maintain records of how many alleged casual laborers were paid in cash finally ajf did not require receipts from alleged casual laborers when they were paid in cash a factor which dilutes the credibility of ferrentino and brittain's testimony is that casual labor was never mentioned during audit revenue_agent kathleen oswald who conducted the audit of ajf testified that neither ferrentino nor brittain had disclosed casual labor expenses during audit had ferrentino actually paid cash for casual labor we think that ferrentino or brittain would have disclosed the payments during the audit process instead of waiting until litigation commenced petitioners did not introduce testimony of any purported casual laborer the rule is well established that the failure of a party to introduce evidence within his possession and which if true would be favorable to him gives rise to the presumption that if produced it would be unfavorable 6_tc_1158 affd 162_f2d_513 10th cir donald travis testified that his son doug was used as casual labor andrew davis testified that he hired his ex-brother-in-law as a casual laborer we think that petitioners could have called these people to testify under subpoena if necessary without undue_hardship therefore we presume that these alleged casual laborers would have testified unfavorably petitioners' most strenuous effort to establish cash payments for casual labor took the form of a report report authored by brittain which attempted to illustrate the use by ajf of cash payments in very large amounts for casual labor if the report were to be believed ajf expended cash for casual labor in the respective amounts of dollar_figure dollar_figure and dollar_figure in and respectively petitioners claim that brittain's report accurately computed the number of hours attributable to the alleged casual labor by comparing ajf's payroll figures to the billing invoices for services rendered by ajf to j c penney brittain used the billing invoices to determine the total number of manpower hours ajf employees actually rendered to j c penney she used ajf's payroll records to determine the number of manpower hours attributable to ajf employees as reflected on the payroll records the report attributed the difference between the payroll and billing invoice figures to casual labor for example the report concludes that for the second quarter of the manpower hours attributable to casual labor totaled hours the report derived this figure by subtracting big_number manpower hours shown on afj's payroll records from the manpower hours of big_number shown on the invoices brittain's report is laced with flaws for purposes of computing payroll manpower hours the report treated all employees listed in the report as drivers even though they had helpers who were also on the payroll the record indicates that a delivery truck required two people a driver and a helper brittain testified that she had no way of knowing which individual was a driver or a helper in fact she had no way of knowing in her report and the records it was based on the capacity in which a particular employee was employed thus drivers listed in the report could instead have been helpers the report thus arbitrarily assumes that the helper on any given delivery truck crew must have been a casual laborer not listed on the payroll who was paid in cash it follows that the hours attributed to casual labor--if any were in fact hired--were erroneously increased because payroll manpower hours were erroneously treated as drivers' hours alone moreover the report does not account for the hours attributable to leased labor which ajf had deducted on its tax returns this omission further erroneously inflates the hours attributable to casual labor therefore we cannot trust the accuracy of the report the credibility of brittain's report is further challenged by other evidence brittain admitted on direct examination that her report was prepared specifically for this litigation to support her theory that there must have been substantially more manpower hours than shown on ajf's payroll records and which therefore must have been worked by casual laborers paid solely in cash as we have observed ajf failed to produce records which could have verified the existence of casual labor and the numbers used in the report brittain testified that the trip sheets that drivers used nonexistent as of the time of trial would have shown whether casual labor was used since the report bases manpower hours attributable to delivery services on the trip sheets these key figures in the report cannot be verified brittain did not keep any records on the number of alleged casual laborers used brittain testified that she had knowledge of casual labor being paid in cash but did not include the amount_paid to casual labor on employment_tax returns and did not withhold amounts from laborers' wages brittain also testified that she knows everything about the business of ajf with the exception of how to drive a truck but does not know how many casual laborers were used finally brittain's testimony indicates that she herself doubts the accuracy of her report when asked whether the buffalo office hired casual laborers brittain replied probably yes the tentativeness of her response suggests a significant lack of confidence in her report based on the foregoing we reject the report in its entirety due to its flawed analysis and lack of credibility since ferrentino cannot show that payments were made for casual labor we conclude that ferrentino used the funds derived from cashing the delivery service and fuel reimbursement checks solely for his own benefit since ferrentino used the check proceeds solely for his personal benefit we must then decide whether ferrentino must include the value of the check proceeds as dividends in gross_income under sec_301 and sec_316 dividends are taxable to the shareholder as ordinary_income to the extent of the corporation's earnings_and_profits and any amount received by the shareholder in excess of earnings_and_profits is considered a nontaxable return_of_capital to the extent of the shareholder's basis in his stock any amount received in excess of both the earnings_and_profits of the corporation and the shareholder's basis in his stock is treated as gain from the sale_or_exchange of property 89_tc_1280 dividends may be formally declared or they may be constructive a constructive_dividend is found where a corporation confers a benefit upon its shareholder in order to distribute available earnings_and_profits without expectation of repayment truesdell v commissioner supra pincite therefore if ferrentino is to be required to include the constructive distribution in gross_income as a dividend ajf must have had earnings_and_profits sufficient to support the distribution of a dividend the u s court_of_appeals for the second circuit the court to which this case would normally be appealable has held that in cases where the commissioner alleges fraudulent intent to evade income_tax with respect to the diversion of corporate funds which is not per se unlawful the burden_of_proof is on the taxpayer to establish that the corporation did not have earnings_and_profits equal to the amounts diverted dizenzo v commissioner f 2d pincite sec_312 provides that a corporation's earnings_and_profits are reduced by among other things the amount of money distributed with respect to its stock earnings_and_profits for a particular period include tax-exempt_income as well as items included in gross_income under sec_61 sec_1_312-6 income_tax regs we are required to make a finding as to whether ajf had sufficient earnings_and_profits to sustain a dividend dizenzo v commissioner supra pincite remanding to the tax_court to make a finding with respect to whether amounts of accumulated_earnings_and_profits were at least equal to a constructive distribution the only evidence with respect to ajf's earnings_and_profits is ajf's tax returns for and the tax returns reveal that ajf reported taxable_income of dollar_figure and dollar_figure in and respectively ajf's tax_return reports a dollar_figure loss since we have held that ajf should have included the amounts of the checks cashed by ferrentino in gross_income earnings_and_profits for and must be increased by dollar_figure dollar_figure and dollar_figure respectively if distributed funds constitute constructive dividends earnings_and_profits should be reduced by such amount under sec_312 57_tc_781 because ajf is on the cash_receipts_and_disbursements_method of accounting accrued tax_liabilities and penalties do not reduce earnings_and_profits until paid sec_1_312-6 income_tax regs petitioners have presented no credible_evidence requiring the further reduction of ajf's earnings_and_profits we conclude that petitioners have not shown that ajf had insufficient earnings_and_profits to sustain a dividend to ferrentino for each of the years in issue the evidence show sec_29 that ajf had sufficient current_earnings_and_profits to sustain a dividend in each of the and taxable years although ajf shows a deficit of dollar_figure in taxable_income for the taxable_year ajf had sufficient accumulated_earnings_and_profits to sustain a dividend therefore the constructive distributions from ajf to ferrentino must be included in ferrentino's income as a dividend accordingly we hold that respondent has shown by clear_and_convincing evidence that ferrentino had underpayments in tax for the years in issue due to unreported dividend income in the amounts he diverted from ajf by cashing the custom decorating and fuel reimbursement checks b underpayments due to fraud since we have found that respondent has shown by clear_and_convincing evidence that petitioners had underpayments of tax for the years in issue the next issue is whether some part of petitioners' underpayment each year was due to fraud with the intent to evade tax_fraud is established by showing that the taxpayer intended to evade tax believed to be owing by conduct intended to conceal mislead or otherwise prevent the collection of such tax recklitis v commissioner t c pincite tax_evasion need not be a primary motive but the respondent may satisfy his burden by showing that a 'tax-evasion motive played any part' in petitioner's conduct id respondent must establish fraud on the part of each petitioner for each taxable_year involved by clear_and_convincing evidence 53_tc_96 the fraud of a sole or dominant shareholder can be attributed to the corporation 42_tc_358 affd 355_f2d_929 6th cir see also dileo v commissioner t c pincite c orporate fraud necessarily depends upon the fraudulent intent of the corporate officers affd 959_f2d_16 2d cir in these cases ferrentino is the sole shareholder and president of ajf he exercised total control_over all the checks issued from j c penney to ajf ferrentino determined whether he would cash checks personally or have them deposited into ajf's corporate operating account we think ferrentino exercised sufficient control_over the affairs of ajf to justify imputing to ajf any fraud committed by ferrentino the existence of fraud is a question of fact to be resolved upon examination of the entire record 94_tc_654 recklitis v commissioner supra pincite fraud is never presumed but it must be established by independent evidence 55_tc_85 otsuki v commissioner supra pincite fraud may be proven by circumstantial evidence because direct evidence of the taxpayer's intent is rarely available recklitis v commissioner supra pincite 80_tc_1111 circumstantial evidence of fraud includes consistent and substantial_understatement of income failure to maintain adequate_records failure to cooperate with an irs investigation inconsistent or implausible explanations of behavior and awareness of the obligation to file returns report income and pay taxes 899_f2d_164 2d cir citing 796_f2d_303 9th cir affg t c memo other badges_of_fraud include concealing assets extensive dealings in cash recklitis v commissioner supra pincite failure_to_file timely returns 86_tc_1253 and failure to provide tax_return_preparers with complete and accurate information 781_f2d_1566 11th cir affg tcmemo_1985_63 ferrentino presented a cash hoard of dollar_figure to the federal reserve bank in buffalo new york according to the required currency transaction report dollar_figure of the amount presented was in bills of dollar_figure or higher the record indicates that when ferrentino cashed the custom decorating and fuel reimbursement checks manufacturer's hanover would generally cash the checks in dollar_figure denominations during audit ferrentino told revenue_agent oswald he did not report the cash hoard as income he knew that the source of the cash hoard constituted taxable_income and he called the cash hoard pocket monies at trial ferrentino explained that he had accumulated the cash hoard over a period of to years he further testified that the cash hoard resulted from the selling and restoration of furniture and that he accumulated the cash hoard in anticipation of his divorce based on the amount of dollar_figure bills presented to the federal reserve bank and the fact that ferrentino received dollar_figure bills when cashing the checks at manufacturer's hanover we may justifiably infer that part of ferrentino's cash hoard was attributable to the cashed checks we may further infer that ferrentino hoarded the cash to conceal income from his wife carol ferrentino in order to avoid meeting the obligations enumerated in the separation agreement it is therefore fair to apply to ferrentino and his devious course of conduct what we said in a prior case namely that a man who will misappropriate another's funds to his own use through concealment will not hesitate to conceal his receipt of those same funds from the government with intent to evade tax 61_tc_249 affd 519_f2d_1121 5th cir ferrentino's extensive use of cash is a further badge of fraud because it indicates a desire to avoid detection of income- producing activities 796_f2d_303 9th cir petitioners have not presented credible_evidence of cash payments to casual labor furthermore ferrentino did not disclose during audit that the delivery service and fuel reimbursement checks were issued and cashed instead respondent became aware of ferrentino's dealings only through contacts with j c penney and wittlin ferrentino's accountant at the time the circumstances here suggest that ferrentino was attempting to conceal income ferrentino pleaded guilty to violating sec_7206 for the taxable_year sec_7206 makes it a crime for a taxpayer to willfully make and submit any return verified by a written declaration that it is made under the penalties of perjury which he does not believe to be true and correct as to every material matter 84_tc_636 while not dispositive on the issue of fraud it is a factor we may consider relevant see id pincite the supreme court has defined willfully as used in sec_7206 as a voluntary intentional violation of a known legal duty 429_us_10 we think ferrentino's intentional filing of a false tax_return for is strong indicia of fraudulent intent with respect to the taxable_year the failure to provide tax_return_preparers with complete and accurate information is also an indication of fraud witkowski determined ajf's gross_income from ajf's cash receipts journal ajf's books_and_records did not disclose the fuel reimbursement checks from the j c penney distribution centers nor did they disclose the delivery service checks from custom decorating ferrentino knew that ajf's corporate income was determined by deposits to its operating account he also knew that by not depositing the custom decorating and fuel reimbursement checks ajf's corporate tax returns would not report these amounts under these circumstances ferrentino's failure to provide accurate information to witkowski is strong indicia of fraud with the intent to evade tax petitioners' failure to maintain adequate books_and_records of alleged casual labor is further evidence of fraudulent intent see 317_us_492 75_tc_1 zack v commissioner tcmemo_1981_700 petitioners failed to maintain records of trip sheets and manifests which would have verified the existence of casual labor and cash payments to the alleged casual labor petitioners failed to keep a list of the names and social_security numbers of alleged casual laborers we think petitioners intentionally chose not to maintain adequate_records of their activities in order to conceal income finally petitioners ajf and ferrentino have deliberately failed to report dollar_figure and dollar_figure respectively in cashed checks over the course of the taxable years in issue we conclude that respondent has proven by clear_and_convincing evidence that at least part of petitioners' underpayment for each taxable_year involved is attributable to fraud with the intent to evade tax therefore the fraudulent return exception under sec_6501 applies ii the additions to tax and fraud penalties under sec_6653 and sec_6663 respondent has determined that petitioners owe additions to tax and penalties under sec_6653 and sec_6663 sec_6663 provides if any part of any underpayment_of_tax required to be shown on a return is due to fraud there shall be added to the tax an amount equal to percent of the portion of the underpayment which is attributable to fraud once the secretary establishes that a part of an underpayment is due to fraud the entire underpayment shall be treated as attributable to fraud except with respect to any portion of the underpayment which the taxpayer establishes by a preponderance_of_the_evidence is not attributable to fraud sec_6663 the burden that respondent bears in proving fraud under sec_6501 is the same burden that he bears in establishing fraud for purposes of the sec_6663 penalty 476_f2d_502 10th cir affg in part and remanding in part tcmemo_1971_194 debrouse v commissioner tcmemo_1988_119 affd 878_f2d_379 4th cir since respondent has met his burden for purposes of sec_6501 we hold that respondent has established that a portion of petitioners' underpayment is due to fraud for purposes of sec_6663 we further hold that petitioners have not presented credible_evidence that any portion of their underpayment was not due to fraud accordingly we sustain respondent's determination for additions to tax and penalties imposed by sec_6653 and sec_6663 iii additions to tax under sec_6651 respondent determined that petitioner ajf was liable for the additions to tax imposed by sec_6651 sec_6651 imposes an addition_to_tax for failing to file a timely income_tax return unless such failure_to_file is due to reasonable_cause and not due to willful neglect the addition_to_tax i sec_5 percent of the amount required to be reported on the return for each month or fraction thereof during which such failure_to_file continues but not to exceed percent in the aggregate sec_6651 in this case ajf's and tax returns were due on date and respectively sec_6072 ajf filed its and returns on date and its return on date unless ajf can show that its failure to timely file its returns was due to reasonable_cause and not due to willful neglect respondent's determination will be sustained the term reasonable_cause as set forth in sec_6651 has been defined as the exercise of ordinary business care and prudence sec_301_6651-1 proced admin regs willful neglect means a conscious intentional failure or reckless indifference 469_us_241 the question of whether a failure_to_file timely i sec_38 due to reasonable_cause and not willful neglect is one of fact on which petitioners bear the burden_of_proof rule a 227_f2d_181 5th cir affg a memorandum opinion of this court dated date 67_tc_111 taxpayers have a nondelegable duty to file timely tax returns united_states v boyle supra pincite reasonable_cause for the failure to timely file the return cannot be established merely by stating that such return was in the hands of the agent lynch v commissioner tcmemo_1983_173 citing 365_f2d_846 5th cir affg t c memo in this case ajf neglected to retrieve its tax returns from its return preparer witkowski and timely file them with respondent therefore we find that ajf's untimely filing of its returns was not due to reasonable_cause accordingly we sustain respondent's determination with respect to the additions to tax imposed by sec_6651 for ajf's and taxable years contentions not addressed are either irrelevant or without merit to reflect the foregoing decisions will be entered under rule


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date ------------------ number release date conex-103425-16 uil the honorable john p sarbanes u s house of representatives washington dc attention dear representative sarbanes i am responding to your inquiry dated date on behalf of your constituent -- --------------------------- ---------------- wrote asking for guidance from the irs about the use of debit cards for the pre-tax public transportation benefit first the monthly tax-free exclusion limit for transit passes for is dollar_figure this may be sufficient to allow payment and therefore a transit_pass may in fact be readily available in her case as a general matter we cannot provide binding legal advice to taxpayers unless they request a private_letter_ruling as described in revproc_2016_1 internal_revenue_bulletin however i may provide the following general information gross_income means all income from whatever source derived including compensation_for services including fees commissions fringe_benefits and similar items sec_61 of the code consequently we presume a fringe benefit provided by an employer to an employee to be income to the employee unless another section of the code specifically excludes it from gross_income gross_income does not include any benefit that is a qualified_transportation_fringe sec_132 of the code qualified_transportation fringes include any transit_pass sec_132 to purchase a marc train ticket with one form of ---------------- conex-103425-16 a transit_pass is any pass token farecard voucher or similar item entitling a person to transportation or transportation at a reduced price if such transportation is on mass transit facilities or is provided by any person in the business of transporting persons for compensation or hire in a commuter_highway_vehicle sec_132 a qualified_transportation_fringe includes cash reimbursement for transit passes provided the reimbursement is made under a bona_fide reimbursement arrangement however cash reimbursement for transit passes under a bona_fide reimbursement plan is only allowed if no voucher or similar item which may be exchanged only for a transit_pass is readily available for direct distribution by the employer to employees sec_132 and sec_1_132-9 q a a q a-16 b a transit system voucher is an instrument which may be purchased by employers from a voucher provider accepted by one or more mass transit operators for example train subway and bus in an area either as fare media or in exchange for fare media sec_1_132-9 q a-16 b a voucher provider is any person in the trade_or_business of selling transit system vouchers to employers or any transit system or transit operator that sells vouchers to employers for the purpose of direct distribution to employees sec_1_132-9 q a- b the requirement that a voucher be distributed in-kind by the employer is satisfied if the voucher is distributed by another person on behalf of the employer sec_1_132-9 q a-16 b a voucher or similar item is readily available for direct distribution by an employer to employees if and only if the employer can get it from a voucher provider that does not impose fare media charges greater than percent of the average annual value of the voucher for a transit system and does not impose other restrictions causing the voucher not to be readily available sec_1_132-9 q a-16 b revrul_2006_57 2006_47_irb_911 provided guidance on the use of smartcards debit cards or other electronic media to provide employees with transportation fringe_benefits one type of debit card discussed in revrul_2006_57 was terminal-restricted debit cards which are debit cards that are restricted for use only at merchant terminals at points of sale at which only fare media for local transit systems is sold while terminal-restricted debit cards could qualify as a transit_pass in other types of debit cards did not revrul_2006_57 provided that as use of terminal-restricted debit cards increased the irs intended to issue guidance clarifying under what situations the terminal-restricted debit cards are considered to be readily available and thus preclude cash reimbursement for transit benefits in the interim revrul_2006_57 provided that the irs would not challenge the ability of employers to provide qualified_transportation fringes in the form of cash reimbursement for transit passes when the only available voucher or similar item was a terminal-restricted debit card conex-103425-16 in notice_2012_38 2012_24_irb_1014 the irs requested comments on issues surrounding an employer’s provision of transit benefits in light of changes in technology since the publication of revrul_2006_57 revrul_2014_32 modified and superseded revrul_2006_57 to account for technological changes in the debit card industry since based on comments received in response to notice_2012_38 the irs concluded that terminal-restricted debit cards are now widely used and generally available for purchase by employers subject_to terms and costs that are similar to other forms of electronic media thus beginning after date employers are no longer permitted to provide qualified_transportation_fringe_benefits in the form of cash reimbursement in geographic areas where the only readily available voucher or similar item is a terminal-restricted debit card cash reimbursement is also not allowed in geographic areas where other readily available debit cards in other words debit cards that are not terminal-restricted debit cards qualify as a transit passes thus the prohibition against cash reimbursement for transit passes under a bona_fide reimbursement plan only applies if a voucher or similar item that may be exchanged only for a transit is readily available for direct by the employer to employees it is a factual determination whether a voucher or similar item is readily available it is possible that a voucher would not be readily available due to purchase restrictions imposed by the voucher provider similar to the one your constituent describes in such cases cash reimbursement under a bona_fide reimbursement plan would not be prohibited i hope this information is helpful if you have any additional questions please contact me at or -------------------- ---------------- at sincerely lynne a camillo branch chief employment_tax branch te_ge associate chief_counsel