t c memo united_states tax_court m s food stores inc petitioner v commissioner of internal revenue respondent frederick malcolm sutton and carolyn p sutton petitioners v commissioner of internal revenue respondent docket nos filed date a rexford willis iii for petitioners james r rich for respondent memorandum findings_of_fact and opinion parker judge respondent determined deficiencies in federal corporate income taxes additions to tax and a penalty for petitioner m s food stores inc as follows taxable_year ending date date date date date deficiency dollar_figure big_number big_number big_number big_number additions to tax under section penalty b b a b b b dollar_figure --- --- --- --- --- --- --- --- dollar_figure big_number --- --- --- --- --- dollar_figure --- --- --- --- plus an addition of percent of the interest due on the deficiency in the alternative respondent determined additions to tax and a penalty as follows taxable_year ending a a a a b a a a additions to tax under section penalty date --- date dollar_figure date big_number --- date --- date --- --- dollar_figure big_number --- --- --- --- --- dollar_figure --- --- --- --- --- --- --- --- --- --- --- dollar_figure --- --- --- dollar_figure plus an addition of percent of the interest due on the deficiency respondent determined deficiencies in federal income taxes additions to tax and penalties for petitioners frederick malcolm sutton and carolyn p sutton as follows year deficiency a a a a b a additions to tax under section year dollar_figure big_number big_number big_number big_number --- dollar_figure big_number big_number dollar_figure --- --- --- --- --- --- --- --- dollar_figure --- --- additions to tax under section penalty b a b b b dollar_figure big_number --- --- --- --- --- --- --- --- dollar_figure --- --- --- dollar_figure big_number --- --- --- --- --- dollar_figure big_number plus an addition of percent of the interest due on dollar_figure plus an addition of percent of the interest due on dollar_figure plus an addition of percent of the interest due on dollar_figure plus an addition of percent of the interest due on dollar_figure in the alternative respondent determined additions to tax and penalties as follows year additions to tax under section penalty a a a a b a a --- dollar_figure big_number big_number big_number dollar_figure big_number --- --- --- --- --- --- --- --- dollar_figure --- --- dollar_figure big_number big_number --- --- --- --- --- dollar_figure big_number plus an addition of percent of the interest due on the deficiency unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable years before the court and all rule references are to the tax_court rules_of_practice and procedure after concessions the issues remaining for decision are whether petitioner m s food stores inc the corporate petitioner had unreported income from rebates and coupons in its taxable years ending date and whether the corporate petitioner had unreported gross_receipts in its taxable years ending date and whether the corporate petitioner is liable for addition sec_1 on brief respondent has conceded the fraud additions to tax and penalties for all years before the court respondent has also conceded that petitioner carolyn p sutton is an innocent spouse as to the unexplained bank_deposits and disputed rebate and coupon checks diverted from the corporate petitioner grossly_erroneous_items respondent further conceded that petitioner carolyn p sutton is an innocent spouse as to any additions to tax predicated upon those income adjustments provided that the court determines that the substantial understatements are in amounts sufficient to satisfy the statutory requirements of sec_6013 through the parties have made various other concessions which are set out in their stipulations of fact and which will be discussed in the text below to tax under sec_6651 for its taxable years ending date and whether the corporate petitioner is liable for additions to tax for negligence for its taxable_year ending date under sec_6653 and for its taxable years ending date and under sec_6653 and b and for its taxable_year ending date under sec_6653 and for an accuracy-related_penalty for negligence for its taxable_year ending date under sec_6662 whether the corporate petitioner is liable for an addition_to_tax under sec_6661 for its taxable_year ending date whether petitioners frederick malcolm sutton and carolyn p sutton the suttons had unreported income in the taxable years and from rebate and coupon checks diverted from the corporate petitioner whether the suttons had additional unreported income in the taxable years through from diverted corporate funds unexplained bank_deposits whether the suttons are liable for additions to tax under sec_6651 for the taxable years through whether the suttons are liable for additions to tax for negligence for the taxable years and under sec_6653 and b and for the taxable_year under sec_6653 and for accuracy-related_penalties for negligence for the taxable years and under sec_6662 and whether the suttons are liable for additions to tax for the taxable years and under sec_6661 findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts the supplemental stipulation of facts and the exhibits attached thereto are incorporated herein by this reference the corporate petitioner had its principal_place_of_business in kinston north carolina at the time it filed its petition the suttons resided in kinston north carolina at the time they filed their petition the cases have been consolidated for trial briefing and opinion the corporate petitioner operated a retail grocery store in kinston north carolina during the years at issue petitioner frederick malcolm sutton mr sutton owned percent of the stock of the corporate petitioner previously his father frederick sutton fred sutton had owned and operated the grocery business mr sutton began working with his father at the store when he was approximately years old mr sutton is a high school graduate and took some community college courses in grocery management and butchering and meat cutting mr sutton has no education or training in accounting tax or financial matters during the years through mr sutton maintained a personal checking account at ncnb national bank ncnb during the years and the suttons maintained a personal checking account at first citizens bank trust company fcb the corporate petitioner had both checking and savings accounts at fcb during its taxable years ended date through the bank statements covering the periods at issue for all of the above checking accounts show numerous charges for checks returned for insufficient funds rebates and coupons the corporate petitioner received rebate checks from various wholesalers or vendors fred sutton had initiated an accounting procedure for the rebate checks whereby the amounts of such rebate checks were to be recorded on the corporate petitioner's sales summaries known and hereinafter referred to as the green sheets in a column entitled rebates the corporate petitioner's accountant reduced cost of sales by a credit adjustment to purchase expenses ie deducting the amount of the rebates from the purchase expenses the corporate petitioner accepted coupons from its customers the total cost of a grocery item was initially rung up on the cash register and then the coupon amount was rung up on the cash register as a deduction from the customer's bill with the customer paying the balance the coupon amount was deducted on the cash register tape but the coupons themselves were never added up by the corporate petitioner periodically after the corporate petitioner accumulated enough coupons to fill a large grocery bag about two-thirds full it sent such coupons to its wholesaler or vendor who would issue a check to the corporate petitioner for the amount of the coupons the corporate petitioner did not record the receipt of these coupon checks on its books judy stroud of the accounting firm of woolard hale the corporate petitioner's accountant could not recall ever discussing the accounting treatment of coupons and did not appear to have any knowledge about the corporate petitioner's treatment of the coupons or the coupon checks the corporate petitioner received checks for rebates from five wholesalers or vendors during its taxable years ended date through quinn wholesale company inc quinn eastern coca cola bottling company coke carolina dairies corporation carolina dairies philip morris and nash finch company nash finch quinn and nash finch issued checks for both rebates and coupons mr sutton indicated that the only way he could distinguish the rebate checks from the coupon checks was by the wholesaler's or vendor's name only half of the rebate checks were recorded on the corporate petitioner's books in a few instances rebate checks had been credited toward the corporate petitioner's purchase account with the vendor approximately one-third of the coupon checks were recorded on the corporate petitioner's books as rebates many of these coupon and rebate checks were deposited into the corporate petitioner's bank account a coupon check issued by quinn on date in the amount of dollar_figure was deposited in the corporate petitioner's bank account on date along with dollar_figure in currency change_of dollar_figure was returned that amount of dollar_figure was not included in the notice_of_deficiency as part of the corporate petitioner's unreported rebate amounts because it had been reported on the corporate petitioner's tax_return however respondent included this dollar_figure as part of an unexplained corporate bank deposit made on date the following chart sets out the source amounts and disposition of the various rebate and coupon checks included in the deficiency_notice to the corporate petitioner rebate coupon checks the corporate petitioner tye vendor amount in deficiency_notice conceded by respondent account cashed amount credited on vendor's account amount deposited in corporate bank amount dollar_figure quinn coke dollar_figure carolina dairies dollar_figure total dollar_figure dollar_figure quinn coke dollar_figure carolina dairies dollar_figure dollar_figure philip morris total dollar_figure dollar_figure quinn coke dollar_figure carolina dairies dollar_figure dollar_figure philip morris total dollar_figure coke philip morris nash finch total dollar_figure dollar_figure dollar_figure dollar_figure -0- dollar_figure -0- dollar_figure -0- dollar_figure -0- -0- dollar_figure dollar_figure dollar_figure -0- -0- dollar_figure dollar_figure -0- dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure -0- dollar_figure dollar_figure dollar_figure -0- -0- -0- dollar_figure dollar_figure -0- -0- -0- dollar_figure -0- -0- dollar_figure dollar_figure the record does not disclose what happened to the proceeds of the above rebate coupon checks that were cashed the record does not disclose whether the above rebate coupon checks that were deposited in the corporate bank account were part of the store deposits or part of the unexplained bank_deposits the following chart sets out the source amounts concessions by respondent and disputed amounts of rebate coupon checks included in the deficiency_notice issued to the suttons rebate coupon checks the suttons year vendor amount in deficiency_notice amount conceded by respondent amount still in dispute quinn dollar_figure dollar_figure coke carolina dairies dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure -0- dollar_figure quinn coke carolina dairies philip morris dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure -0- dollar_figure dollar_figure -0- dollar_figure dollar_figure quinn coke carolina dairies philip morris quinn coke carolina dairies philip morris coke philip morris nash finch dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure -0- -0- -0- dollar_figure -0- -0- -0- -0- -0- -0- -0- dollar_figure dollar_figure the rebate amount in the deficiency_notice is dollar_figure for the amount from quinn that year being erroneously listed as dollar_figure rather than the dollar_figure the amounts still in dispute represent checks made out to the corporate petitioner that were cashed by mr sutton the following rebate or coupon checks made out to the corporate petitioner were cashed by mr sutton issuer quinn date of check amount disposition dollar_figure dollar_figure deposited in mr sutton's personal ncnb account dollar_figure in cash withheld by mr sutton - -86 dollar_figure dollar_figure deposited into mr sutton's personal ncnb account dollar_figure in dollar_figure dollar_figure deposited in mr sutton's personal ncnb account dollar_figure in cash withheld by mr sutton cash withheld by mr sutton dollar_figure cashed by mr sutton dollar_figure cashed by mr sutton big_number cashed by mr sutton dollar_figure cashed by mr sutton dollar_figure cashed by mr sutton dollar_figure cashed by mr sutton dollar_figure cashed by mr sutton dollar_figure cashed by mr sutton dollar_figure cashed by mr sutton dollar_figure cashed by mr sutton coke -86 dollar_figure cashed by mr sutton carolina dairies dollar_figure cashed by mr sutton nash finch dollar_figure cashed by mr sutton dollar_figure of this amount was reported on the corporate return and only dollar_figure was taxed to the suttons the record does not show what happened to the proceeds of these rebate and coupon checks the suttons did not report any of these amounts on their individual tax returns checks to or on behalf of the corporate petitioner during the calendar years through mr sutton wrote personal checks to or for the benefit of the corporate petitioner as summarized below year deposited in corporate bank account cashed written to vendor disposition unknown total amount dollar_figure big_number big_number big_number big_number dollar_figure big_number --- --- big_number --- dollar_figure --- big_number dollar_figure --- --- big_number big_number dollar_figure big_number big_number big_number big_number a few of these checks were written to third parties the majority were payable to sutton food stores and were deposited in the corporate petitioner's bank account many of the check sec_2 amounts are rounded to the nearest whole dollar deposited in the corporate petitioner's bank account were part of the store deposits ie those deposits into the corporate petitioner's checking acount that were recorded as deposits on the green sheets accordingly those amounts are not part of the unexplained bank_deposits of the corporate petitioner among the checks included above those checks relating to deposits other than the store deposits include the following date check number amount dollar_figure big_number big_number big_number big_number as to his personal checks to the corporate petitioner that were cashed mr sutton did not know the specific disposition of the proceeds of those personal checks fred sutton also wrote checks to the corporate petitioner which during the years before the court included the following date amount dollar_figure big_number on date the corporate petitioner made a deposit of dollar_figure to its bank account in addition to the store deposit for that date we cannot determine that the other two checks from we have not included those checks where it is clear that respondent either did not include the related deposits in the unexplained deposits or has conceded them fred sutton were deposited into the corporate account other than as part of the store deposits personal resources mr sutton claimed that he obtained personal loans from charles w palmer an elderly man who has known mr sutton for the latter's entire life mr palmer did not charge mr sutton interest on these alleged loans although mr palmer did charge interest to others to whom he made loans these loans were allegedly made in cash by mr palmer and repaid in cash by mr sutton mr sutton testified that he would write a check to mr palmer for the amount of the loan that mr palmer would hold that check until the loan was repaid that on the back of that check the dates and amounts of mr sutton's payments would be recorded and that usually the payments were weekly and in amounts of dollar_figure but sometimes they would be dollar_figure neither mr palmer nor mr sutton had any contemporaneous_records of these alleged loans once a loan was repaid mr palmer allegedly would return the check to mr sutton and mr sutton would tear mr sutton testified that mr palmer recorded the payments on the back of the check mr palmer testified that he never wrote anything and that mr sutton kept the checks and made the payment notations the court did not believe the testimony of either mr palmer or mr sutton in regard to these alleged loans mr palmer testified that he kept up to dollar_figure in a metal box and that he lent out money from that box over and over again without any interest the court found his testimony to be inherently incredible it up in two instances mr sutton wrote checks to mr palmer both dated date and both in the amount of dollar_figure which mr palmer negotiated in march and june of mr sutton wrote the following checks from the suttons' personal checking accounts which were endorsed by mr palmer date payee amount negotiated charlie palmer charlie palmer cash cash cash cash cash cash dollar_figure big_number on or before on or before on or before on or before on or before the court is not persuaded that mr palmer made any loans to mr sutton see supra note mrs sutton's father died on date mrs sutton was the sole beneficiary of his estate the estate which had a net value of dollar_figure mr sutton was the executor of the estate mrs sutton received four distributions from the estate's checking account totaling dollar_figure that she loaned to the corporate petitioner of this amount dollar_figure was deposited in the corporate petitioner's bank account during january of whether or when the remaining dollar_figure was deposited is not shown by the record mrs sutton received another dollar_figure distribution from the estate on date which was deposited in the corporate petitioner's checking account other distributions from the estate were as follows the date of distribution and disposition are stated where known date amount disposition dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure paid to fcb cashed cashed paid to gay construction company paid for rental property repairs deposited in mr sutton's ncnb account nationwide money market nationwide credit_union deposited in mr sutton's ncnb account deposited in mr sutton's ncnb account deposited in mr sutton's ncnb account deposited in mr sutton's ncnb account cashed during the years before the court the suttons paid the following expenses by check or cash payee or item amount parrott academy gay construction american express walnut creek country club city of kinston taxes lenoir county taxes chevy ft boat ford t-bird home improvements jewelry church sign american express parrott academy ford truck items for boat dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure big_number in the suttons traded in the boat they had purchased in for one costing dollar_figure they also received dollar_figure in that trade corporate accounting and financial statements the handwritten green sheets prepared by mr sutton were the sole record of income for the corporate petitioner the totals of sales for each month were totaled at the bottom of the green sheets for that month the following column headings appeared on the green sheets date register food stamps rebates cash paid outs balance cash on hand tax deposit savings and count one row of information appeared for each business_day of that month the green sheets were prepared using the daily cash register reconciliations from one to four cash registers however no register tapes or cash register reconciliations were provided to the accounting firm or submitted into evidence according to mr sutton the figures in the column entitled register represented total sales or gross_receipts before coupons were deducted the entries under cash represented the sum of register plus rebates paid outs were subtracted from cash to arrive at balance cash on hand represented actual money checks and money equivalents such as vouchers and there is no explanation in the record as to the last column heading the full price of the grocery item was rung up on the cash register but then the coupon amount was deducted on the cash register tape without the cash register tapes or the cash register reconciliations it is not possible to verify whether the total sales or gross_receipts figures listed on the green sheets included or excluded coupon amounts since the court did not find mr sutton to be a credible witness the court is unwilling to accord much weight to his self-serving and wholly unsupported testimony with a retail grocery business involving a lot of cash receipts and with mr sutton's practice of dealing in cash and failing to distinguish between his pockets and those of his corporation's business the absence of the cash register tapes is particularly troublesome food stamps ie items that can be taken to the bank deposit was the deposit made to the corporate petitioner's checking account the deposit amounts were usually rounded figures that did not correlate with the cash on hand figures savings was used to record taxes such as payroll and sales_taxes accumulated but not yet due to the particular government agency these tax amounts were not necessarily deposited in the corporate petitioner's savings account on the dates indicated on the green sheets some were deposited as much as a month or longer after the date of the entry on the green sheet examples of these delayed deposits are amount green sheet deposited dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure ms stroud prepared the corporate petitioner's monthly financial statements based on the green sheets and the corporate petitioner's bank statements she did not have the cash register tapes cash register reconciliations or the bank deposit slips during the process of completing the monthly accounting for the corporate petitioner ms stroud contacted mr sutton if she had any questions cash on hand did not include coupon amounts or employee i o u 's for grocery charges that would be deducted from the employee's paycheck mr sutton did not document any funds that he contributed to or that he withdrew from the corporate petitioner there were no promissory notes repayments schedules or other documentation of any loans to or from him mr sutton did not tell ms stroud about any funds he contributed other than to answer any specific questions she asked him ms stroud would post any deposits mr sutton identified as being from him as well as any unexplained deposits as a credit to account 135-loan to shareholder account nearly all of the credits to account are marked as deposits ms stroud would also charge to account any personal items of the suttons paid_by the corporate petitioner and any unexplained shortages the following yearend adjusting journal entries were made charging account in order to reconcile cash on hand to the actual cash balance tye amount dollar_figure dollar_figure dollar_figure dollar_figure the yearend adjustment for bears the notation assumed went to malcolm sutton since it did not go to savings acct the corporate petitioner's unaudited financial statements for date through date do not mention any liabilities owed to mr sutton to the contrary these financial statements show the following tye loans receivable stockholder fred sutton loans payable mrs sutton fred sutton dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure --- dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure --- dollar_figure dollar_figure the corporate petitioner reported liabilities to commercial lenders on these financial statements the corporate petitioner's u s_corporation income_tax returns show the following amounts at the end of the respective taxable years tye loans to shareholder loans from shareholder dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure -0- dollar_figure dollar_figure dollar_figure dollar_figure these were actually loans from mrs sutton who was not a shareholder the suttons' north carolina intangible personal_property_tax returns for the years through do not show any loans from mr sutton to the corporate petitioner nor do they show any loans from the corporate petitioner to mr sutton those intangibles returns do reflect a dollar_figure loan from mrs sutton to the corporate petitioner the value of that debt at the end of each year was indicated as year value dollar_figure dollar_figure dollar_figure dollar_figure mr sutton signed a personal financial statement for fcb dated date stating the suttons' net_worth as dollar_figure this statement indicates dollar_figure in notes due from friends relatives or affiliated companies mr sutton signed another financial statement for fcb on date stating the suttons' net_worth as dollar_figure this statement indicates dollar_figure in notes due from friends relatives or affiliated companies neither financial statement lists any liabilities other than notes payable to banks federal_income_tax returns the woolard hale firm prepared the tax returns of the corporate petitioner and the suttons for the years at issue the corporate petitioner's federal_income_tax returns for taxable years ending date and date were due under extension and filed on the following dates taxable_year ending due filed date date date date date date respondent determined in the notice_of_deficiency to the corporate petitioner that the extensions for those years were invalid since the balance due was materially understated the suttons' federal_income_tax returns for through were due under extension and filed on the following dates year due filed date date date date date date date date respondent determined in the notice_of_deficiency to the individual petitioners additions to tax for delinquency computed without regard to the extensions of time petitioners relied almost entirely on their accountants for purposes of taking care of the corporate petitioner's monthly and yearly books and financial records and corporate and personal tax returns for the corporate petitioner ms stroud relied upon the green sheets prepared by mr sutton and the corporate bank statements it is not clear what materials the individual petitioners furnished to ms stroud for the preparation of their individual tax returns however ms stroud did not have the suttons' personal bank statements when she prepared their returns respondent's determinations the corporate petitioner respondent reconstructed the corporate petitioner's income for its taxable years ended date through based on the accounting and bank records that were available revenue_agent joseph board mr board compiled a list of specific unexplained bank_deposits for the corporate petitioner's taxable years ended date through those unexplained deposits do not include the store deposits respondent adjusted the corporate petitioner's income as follows item purchase rebates gross_receipts contributions taxable_year ending nol deduction dollar_figure dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number dollar_figure big_number big_number respondent has since conceded the amounts of those rebate checks that were credited to the corporate petitioner's accounts_payable at the respective vendors where net costs were used in calculating cost of sales and has conceded some receipts the amounts of respondent's concessions are rounded to the nearest dollar item taxable_year ending rebates and coupons gross_receipts dollar_figure -0- dollar_figure big_number dollar_figure big_number dollar_figure -0- the suttons mr board examined the suttons' bank records and compiled a list of specific unexplained deposits which respondent included in the suttons' income the yearly totals of these unexplained deposits to the suttons' personal bank accounts over the 5-year period are amount number of deposits dollar_figure big_number big_number big_number big_number year respondent also included the amounts of all rebate and coupon checks issued to the corporate petitioner that were not accounted for in the corporate petitioner's income respondent since has conceded amounts representing such rebate coupon checks that were shown to have been deposited in the corporate petitioner's bank account other adjustments are reflected in the concessions listed below respondent has conceded rounded to the nearest dollar the following item rebate coupons annuity ira distribution interest_income dividend income_tax on ira dependency_exemption dollar_figure dollar_figure dollar_figure dollar_figure big_number big_number dollar_figure big_number big_number big_number big_number respondent concedes those items because the suttons had already conceded them during the audit and those items should not have been included in the notice_of_deficiency the suttons have conceded that they failed to report on their individual income_tax returns the following item dividend income dollar_figure dollar_figure --- capital_gain annuity received by mrs sutton inherited ira interest_income --- --- --- --- big_number big_number --- dollar_figure --- --- opinion the corporate petitioner rebate and coupon checks the corporate petitioner acknowledges that rebates are to be considered in calculating its income in some instances the corporate petitioner recorded rebates as a reduction to cost of sales and in other instances where rebates had been credited against amounts owed to wholesalers the corporate petitioner reflected the net costs respondent agrees with that treatment to the extent however that the proceeds of rebate checks were not accounted for by either of those methods we hold that the corporate petitioner had unreported income from rebate checks in other words if the rebate checks did not in some way reduce cost of sales then the cost of sales was overstated and the gross_income was correspondingly understated the parties also agree that the coupons result in income they disagree however as to the proper treatment of that income respondent has determined that the corporate petitioners have speculated that some rebate checks may have been rung up on the register thereby being included in income twice once in cash register gross_receipts and again as a result of reducing cost of sales as a rebate petitioners have not established any such instances petitioner's income should be increased by the amounts of those coupon checks not previously recorded in the corporate petitioner's books as rebates the corporate petitioner argues that the value of the coupons was included in income as a component of gross_receipts and therefore should not be included again upon receipt of the coupon checks the corporate petitioner has failed to establish the factual predicate for its argument we cannot find that the coupon amounts were initially included in the gross_receipts register figures on the green sheets no cash register tapes or reconciliation records were submitted the amount of income received from coupons was not accounted for as a separate item on the corporate petitioner's green sheets or any other books_or_records accounting practices were inconsistent some coupon checks being recorded as rebates on the green sheets ms stroud from the accounting firm knew nothing of the accounting procedures for coupons or coupon checks the corporate petitioner has not met its burden of showing respondent's determination to be incorrect therefore we sustain respondent's determination as adjusted by respondent's concessions which are detailed in the findings_of_fact above unexplained bank_deposits every person liable for tax is required to keep books_and_records sufficient to establish the amount of such taxpayer's income sec_6001 96_tc_858 affd 959_f2d_16 2d cir where a taxpayer fails to maintain adequate books_or_records the commissioner may determine the taxpayer's income by among other methods the bank_deposits method 695_f2d_145 5th cir dileo v commissioner supra bank_deposits are prima facie evidence of income 399_f2d_744 4th cir affg tcmemo_1967_67 102_tc_632 dileo v commissioner supra pincite the taxpayer has the burden of proving that the commissioner's determination is incorrect rule a mills v commissioner supra pincite clayton v commissioner supra pincite the corporate petitioner argues that its unexplained bank_deposits consist entirely of funds advanced by mr sutton to provide the corporate petitioner with sufficient working_capital the corporate petitioner includes in these funds cash loans mr sutton allegedly received from mr palmer the court is not persuaded that mr palmer made any loans to mr sutton let alone that such loans account for the corporate petitioner's unexplained bank_deposits the corporate petitioner asserts that the proceeds of all of mr sutton's personal checks to the corporate petitioner that were cashed eventually ended up as deposits on the whole that has not been established the totals of the personal checks mr sutton wrote to or on behalf of the corporate petitioner are summarized in the findings_of_fact above however most of the personal checks that were deposited were part of the store deposits and thus do not reduce the corporate petitioner's unexplained bank_deposits those checks that were deposited separately from the store deposits and that do not constitute income to the corporate petitioner are listed separately in the findings_of_fact above as for the proceeds of personal checks that were cashed mr sutton could not remember their specific disposition and thus could not correlate their proceeds to the unexplained bank_deposits checks written to third parties do not explain bank_deposits there is no credible_evidence of any cash contributions from mr sutton to the corporate petitioner either from any of his personal funds or from any funds deriving from mr palmer both the corporate petitioner and the individual petitioners allege that mr sutton loaned small amounts to the corporate petitioner regularly and withdrew small amounts regularly in essence alleging that the same funds were loaned and repaid over and over they argue that respondent has distorted the corporate petitioner's income by summing the amounts advanced without subtracting the repayments petitioners point to ms stroud's reconciliations as reflecting the net effect to the corporate petitioner and thus a more accurate picture on the contrary ms stroud's knowledge of these alleged loan transactions was limited restricted by mr sutton himself the failure to document these transactions must weigh against petitioners we have considered all deposits attributable to mr sutton to the extent made possible by the record before us the parties have stipulated that mrs sutton loaned a total of dollar_figure to the corporate petitioner during yet we are unable to ascertain whether the last dollar_figure installment was ever deposited in the corporate bank account similarly fred sutton provided funds to the corporate petitioner however the fred sutton checks were included in the store deposits in part the remaining fred sutton funds the date check for dollar_figure were conceded by respondent therefore the fred sutton funds do not assist in reducing the remaining unexplained bank_deposits however the delayed deposits to the corporate petitioner's savings account for taxes as described in the findings_of_fact above do serve to account for unexplained deposits on march and also respondent listed an unexplained deposit of dollar_figure on date for that date the corporate petitioner's bank statement shows a withdrawal of dollar_figure and a deposit in the amount of dollar_figure the latter deposit represents the total of four delayed savings deposits also detailed in the findings_of_fact above the unexplained bank_deposits should be reduced by those amounts both the corporate petitioner and the individual petitioners argue that the proceeds of the rebate and coupon checks that were cashed ended up in the corporate petitioner's bank_deposits and have been included by respondent in income twice other than self-serving speculation petitioners have not provided any information as to the disposition of these cashed checks such cash proceeds may have been part of the store deposits and already excluded from the unexplained bank_deposits since we are unable to determine how much if any was deposited and unable to distinguish such cash from the other items deposited we cannot find as fact that the proceeds of these cashed rebate and coupon checks were included in the unexplained bank_deposits however there is evidence of the date deposit of the dollar_figure check from quinn within an unexplained deposit of dollar_figure on that day and the corporate petitioner's income should be adjusted accordingly additions to tax under sec_6651 sec_6651 imposes an addition_to_tax for failure_to_file a return on the date prescribed determined with regard to any extension of time for filing unless it is shown that such failure is due to reasonable_cause and not due to willful neglect this addition_to_tax i sec_5 percent of the tax required to be shown on the return per month of such failure up to percent sec_6651 respondent has determined that the corporate petitioner's extensions of time to file for taxable years ending date and were invalid and that the corporate petitioner is liable under this section the corporate petitioner asserts that the extensions for both years were valid but offers no proof and no argument other than that respondent did not prove the extensions to be invalid the corporate petitioner has the burden_of_proof to show the additions are improper 469_us_241 687_f2d_264 8th cir affg tcmemo_1981_506 the commissioner may void an extension where the taxpayer's request for extension is invalid because of a failure to properly estimate tax_liability 92_tc_899 the corporate petitioner has not shown it made a bona_fide and reasonable estimate of its tax_liability at the time the requests for extension were made we hold for respondent on this issue additions to tax and penalties for negligence respondent has determined that all of the corporate petitioner's underpayments for the years at issue were due to negligence or disregard of rules or regulations and imposed an addition_to_tax or penalty for each year in contesting these additions and penalty the corporate petitioner relies primarily on its position that no deficiency exists but does argue that any deficiency due to unreported rebates was due to mr sutton's lack of education and understanding of accounting practices negligence is the lack of due care or the failure to do what a reasonable and prudent person would do under the circumstances 85_tc_934 for purposes of the accuracy-related_penalty under sec_6662 the term negligence also includes any failure to make a reasonable attempt to comply with the internal_revenue_code and the term disregard includes any careless reckless or intentional disregard sec_6662 we find the corporate petitioner to be negligent in its failure to maintain full and accurate records of its financial transactions during the years at issue mr sutton failed to disclose fully to ms stroud the information she needed to keep proper records and file accurate returns reliance on her was not reasonable ma-tran corp v commissioner 70_tc_9 the additions to tax and penalty are under the following sections tye sections sec_6653 and sec_6653 and b sec_6653 and b sec_6653 sec_6662 we sustain respondent's determination that the corporate petitioner was negligent with respect to its underpayments addition_to_tax under sec_6661 respondent has determined an addition_to_tax under sec_6661 for substantial_understatement of tax for the corporate petitioner's taxable_year ended date this addition applies when the understatement of income_tax of a corporate taxpayer exceeds the greater of percent of the tax required to be shown on the return for the taxable_year or dollar_figure sec_6661 the understatement for purposes of this addition shall be reduced where there is substantial_authority for the tax treatment of any item or if there was adequate_disclosure in or attached to the return of the relevant facts affecting any item sec_6661 the corporate petitioner has presented no argument in objection to this addition since the amount of the understatement for the taxable_year ended date is substantial we sustain respondent's determination on this issue the suttons rebate and coupon checks respondent contends that mr sutton diverted the proceeds of the cashed rebate and coupon checks from the corporate petitioner thereby receiving constructive dividends petitioners allege that all of the proceeds were used by the corporate petitioner but argue that if any such proceeds are found to be used by the suttons such funds should be characterized as repayments of loans mr sutton made to the corporate petitioner some of the proceeds of these cashed checks were deposited into the suttons' personal bank account it is not known what happened to the remainder on the record before us we conclude that mr sutton retained these funds for his personal_use rule a sec_301 and sec_316 provide that a distribution_of_property made by a corporation with respect to its stock is a taxable dividend to the extent of its earnings_and_profits when a shareholder receives an economic benefit from the corporation without an expectation that that benefit be repaid the shareholder has received a constructive_dividend 627_f2d_1032 10th cir affg tcmemo_1978_306 however where a shareholder has made a loan to the corporation the corporation's repayment of that loan would not be taxable to the shareholder 38_tc_1011 in order for any monies that mr sutton may have retained from these cashed rebate and coupon checks to be repayments from the corporate petitioner to mr sutton there must have been a bona_fide loan from mr sutton to the corporate petitioner 405_f2d_481 6th cir affg tcmemo_1967_62 whether a transaction between a shareholder and his closely_held_corporation represents a bona_fide indebtedness must be determined based on the facts and circumstances surrounding the transaction 56_tc_1324 affd without published opinion 496_f2d_876 5th cir the shareholder's mere statement that he considered the distributions to be repayments of loans is not sufficient to show that the intrinsic economic nature of the transactions themselves is that of a debt rather than a constructive_dividend williams v commissioner supra 505_f2d_873 5th cir cordes v commissioner tcmemo_1994_377 the only records of funds transferred between mr sutton and the corporate petitioner were the limited books of the corporate petitioner ie the financial statements and the corporate tax returns these records indicated that mr sutton owed the corporation for funds loaned to him not vice versa ms stroud recorded any bank_deposits identified as advances from mr sutton as reductions in what mr sutton owed the corporate petitioner not as loans from him there were no promissory notes repayment schedules interest charges or other credible_evidence of any loans from mr sutton to his corporation it follows that the cash proceeds of the rebate and coupon checks were constructive dividends to mr sutton donisi v commissioner supra cordes v commissioner supra unexplained bank_deposits mr sutton argues that the unexplained bank_deposits in his personal bank account consist of repayments of his loans to the corporate petitioner the proceeds of checks cashed by the store loans from mr palmer and cash distributions from the estate all of which would be nontaxable sources the factual predicate for that argument has not been established we cannot find that mr sutton made any loans to the corporate petitioner thus any payments out of the corporation to him cannot be repayment of loans ms stroud's entries to account support respondent's position indicating that mr sutton withdrew greater amounts of money than any amounts he may have contributed mr sutton has not argued that the funds he withdrew from the corporate petitioner were intended to be loans from the corporate petitioner see alterman foods inc v united_states supra pincite n we conclude that any funds that mr sutton withdrew from the corporate petitioner were constructive dividendsdollar_figure we are unable to attribute any of the unexplained bank_deposits in the suttons' bank accounts to the proceeds of personal petitioners have not presented argument or proof that any distributions would be nontaxable due to the limitations of the corporate petitioner's earnings_and_profits checks cashed by the corporate petitioner since we cannot distinguish checks that may have been handled in this fashion we cannot find that the suttons received any funds from mr palmer we have found that the suttons received funds from the estate yet we are unable to trace such funds to the remaining unexplained bank_deposits in the suttons' personal bank account in summary petitioners have failed to prove that any of the suttons' unexplained bank_deposits derived from nontaxable sources the individual petitioners argue that they should not have to include the proceeds of the cashed rebate and coupon checks in addition to the unexplained bank_deposits as this would be double counting since the disposition of the cash proceeds is unknown we cannot find that they were part of the unexplained bank_deposits additions to tax under sec_6651 respondent has determined additions to tax for late filing for the suttons' taxable years through the suttons applied for extensions in each of these years and for years through filed their returns after the respective due dates as extended they admit that the returns for through were filed after the due dates as extended and if a deficiency should be found for any of these years that some addition would apply for each of those years however they assert that the extensions for though were valid and argue that the addition should only apply from the respective due dates as extended the suttons have not shown they made a bona_fide and reasonable estimate of their tax_liability at the time the requests for extension were made we hold for respondent on this issue additions to tax and penalties for negligence respondent has determined that all of the suttons' understatements for the years at issue were due to negligence or disregard of rules or regulationsdollar_figure the individual petitioners have argued only that they correctly reported their income and were not otherwise negligent we disagree they have presented no specific evidence that they acted as would a reasonable and ordinarily prudent person under the circumstances we sustain respondent on the negligence issue addition_to_tax under sec_6661 respondent has determined additions to tax for substantial the additions to tax and penalties are under the following sections year sections sec_6653 and b sec_6653 and b sec_6653 sec_6662 sec_6662 underpayment for the suttons' taxable years through an understatement_of_tax by an individual taxpayer is substantial if it exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6661 the suttons have presented no arguments on this issue other than to deny the underlying deficiencies we sustain respondent as to the additions under sec_6661 in keeping with the above and the concessions of the parties decisions will be entered under rule


internal_revenue_service number release date index number 468a ---------------------- ----------------------------------------------- ------------------------------------------------- ------------------------------------------------- ----------------------- -------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------------- --------------------------------------------------- telephone number --------------------- refer reply to cc psi b6 plr-107596-11 date date re schedule of deductions revised schedule of ruling amounts --------------------------------------------------------- --------------------------------------------------------- -------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------------------- legend taxpayer company a company b ----------------------------------------------------------------------------------------------------------- plant location independent study -------------------------------------------------------------------------------------------------------------- method amount year a year b year c year d year e year f year g ba fv x y -------------- --- ------- ------ ------- ------- ------- ------- ------- ------------------ --------------------- --------- --------- ----- ---------- ---------- ----------------- ------------------------------------------ --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- plr-107596-11 p a b st fund director dear ------------ this letter responds to your request dated date for a schedule of deduction amounts pursuant to sec_468a of the internal_revenue_code and sec_1_468a-8 of the income_tax regulations and for a mandatory revised schedule of ruling amounts under sec_468a prior to the issuance of final regulations under sec_468a taxpayer requested a schedule of deduction amounts under the provisions of the temporary income_tax regulations under sec_468a the internal_revenue_service issued a schedule of deduction amounts and a schedule of ruling amounts by letter dated date the final regulations under sec_468a were issued on date fed reg these final regulations at sec_1_468a-8 provide certain limited transitional relief for taxpayers that did not have the certainty provided in the final regulations with respect to schedules of deduction amounts taxpayer requests a schedule of deduction amounts as allowed by the transitional rules taxpayer represents the facts and information relating to its request for rulings as follows taxpayer a corporation is a holding_company and the sole member of company a a single member limited_liability_company that is disregarded for federal_income_tax purposes company b the legal owner of plant is a single member limited_liability_company that is disregarded for federal_income_tax purposes and is wholly-owned by company a taxpayer has a direct ownership_interest of p percent in plant the estimated base cost for decommissioning plant is based on an independent study and the proposed method of decommissioning the plant is method no public_utility commission specifically authorizes taxpayer to currently include decommissioning costs in taxpayer’s cost of service for ratemaking purposes therefore the taxpayer has based the request for the revised schedule of ruling amounts on the independent study the estimated cost of dollar_figureba year a dollars was used as a base cost for decommissioning the plant the estimated cost of decommissioning the plant in future dollars is dollar_figurefv it is estimated that substantial decommissioning costs will first be incurred in year b and that decommissioning will be substantially complete at the end of year c the methodology used to convert the year a dollars to future dollars was by plr-107596-11 escalating the estimated costs at an inflation rate of x percent to the year of estimated expenditure the assumed after-tax rate of return to be earned by the amount collected for decommissioning is y percent regarding the request for a schedule of deduction amounts taxpayer represents that the percentage of the total estimated costs qualifying for deduction in the schedule of ruling amounts under prior_law was a percent plant was included in rate base for ratemaking purposes under the jurisdiction of the commission for the period prior to date the date used in the first such ratemaking proceeding as the estimated date on which the nuclear plant will no longer be included in the taxpayer’s rate base is year f sec_468a as amended by the energy tax incentives act of the act publaw_109_58 119_stat_594 allows an electing taxpayer to deduct payments made to a nuclear decommissioning reserve fund sec_468a limits the amount that may be paid into the nuclear decommissioning fund in any year to the ruling_amount applicable to that year prior to the changes made by the act the deduction was limited to the lesser_of the amount included in the utility’s cost of service for ratemaking purposes or the ruling_amount generally as a result only regulated utilities could take advantage of sec_468a the act amendment of sec_468a eliminated the cost-of-service limitation accordingly decommissioning costs of an unregulated nuclear power plant may now be funded by deductible contributions to a qualified nuclear decommissioning fund sec_468a provides that no deduction shall be allowed for any payment to the nuclear decommissioning fund unless the taxpayer requests and receives from the secretary a schedule of ruling amounts the ruling_amount for any_tax year is defined under sec_468a as the amount which the secretary determines to be necessary to fund the total nuclear decommissioning cost of that nuclear power plant over the estimated_useful_life of the plant this term is further defined to include the amount necessary to prevent excessive funding of nuclear decommissioning costs or funding of these costs at a rate more rapid than level_funding taking into account such discount rates as the secretary deems appropriate prior to the changes made by the act deductible contributions were limited to the amount necessary for an electing taxpayer to fund the plant’s post-1983 nuclear decommissioning costs determined as if decommissioning costs accrued ratably over the estimated_useful_life of the plant provided that the taxpayer elected to establish a fund in prior_law also did not allow a taxpayer electing to establish a fund later than to contribute to that fund any amount in excess of that amount necessary to fund the ratable portion of the plant’s nuclear decommissioning costs beginning in the year the fund is established plr-107596-11 sec_468a now allows a taxpayer to contribute to a nuclear decommissioning fund the entire cost of decommissioning the plant including both the pre-1984 amount that was denied under the law prior to the act as well as any amount attributable to any year after in which a taxpayer had not established a fund under sec_468a sec_468a provides that the deduction for the contribution of the previously-excluded amount is allowed ratably over the remaining useful_life of the nuclear plant sec_468a provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of a taxable_year if the payment is made on account of such taxable_year and is made within 2½ months after the close of the tax_year this section applies to payments made pursuant to either a schedule of ruling amounts or a schedule of deduction amounts sec_1_468a-1 provides that an eligible_taxpayer may elect to deduct nuclear decommissioning costs under sec_468a of the code an eligible_taxpayer as defined under sec_1_468a-1 of the regulations is a taxpayer that has a qualifying interest in any portion of a nuclear power plant a qualifying interest is among other things a direct ownership_interest sec_1_468a-2 provides that the maximum amount of cash payments made or deemed made to a nuclear decommissioning fund during any_tax year shall not exceed the ruling_amount applicable to the nuclear decommissioning fund for such taxable_year the limitation on the amount of cash payments for purposes of sec_1 468a- b does not apply to any special transfer permitted under sec_1_468a-8 sec_1_468a-3 provides that in general a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that over the tax years remaining in the funding_period as of the date the schedule first applies will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding_period equal to and in no event more than the amount of decommissioning costs allocable to the fund sec_1_468a-3 provides that to the extent consistent with the principles and provisions of this section each schedule of ruling amounts shall be based on reasonable assumptions concerning the after-tax rate of return to be earned by the amounts collected for decommissioning the total estimated cost of decommissioning the nuclear plant and the frequency of contributions to a nuclear decommissioning fund for a taxable_year under sec_1_468a-3 the internal_revenue_service shall provide a schedule of ruling amounts identical to the schedule proposed by the taxpayer but no such schedule shall be provided by the service unless the taxpayer's proposed schedule is consistent with the principles and provisions of that section plr-107596-11 sec_1_468a-3 provides that the taxpayer bears the burden of demonstrating that the proposed schedule of ruling amounts is consistent with the principles of the regulations and that it is based on reasonable assumptions that section also provides additional guidance regarding how the service will determine whether a proposed schedule of ruling amounts is based on reasonable assumptions for example if a public_utility commission established or approved the currently applicable rates for the furnishing or sale by the taxpayer of electricity from the plant the taxpayer can generally satisfy this burden_of_proof by demonstrating that the schedule of ruling amounts is calculated using the assumptions used by the public_utility commission in its most recent order in addition a taxpayer that owns an interest in a deregulated nuclear plant may submit assumptions used by a public_utility commission that formerly had regulatory jurisdiction over the plant as support for the assumptions used in calculating the taxpayer’s proposed schedule of ruling amounts with the understanding that the assumptions used by the public_utility commission may be given less weight if they are out of date or were developed in a proceeding for a different taxpayer the use of other industry standards such as the assumptions underlying the taxpayer's most recent financial assurance filing with the nrc are described by the regulations as an alternative means of demonstrating that the taxpayer has calculated its proposed schedule of ruling amounts on a reasonable basis sec_1_468a-3 further provides that consistency with financial_accounting statements is not sufficient in the absence of other supporting evidence to meet the taxpayer’s burden_of_proof sec_1_468a-3 provides that in general the ruling_amount for any_tax year in the funding_period shall not be less than the ruling_amount for any earlier tax_year under sec_1_468a-3 the funding_period begins on the first day of the first tax_year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day of the taxable_year that includes the last day of the estimated_useful_life of the nuclear power plant to which the fund relates sec_1_468a-3 provides rules for determining the estimated_useful_life of a nuclear plant for purposes of sec_468a in general under sec_1_468a-3 if the plant was included in rate base for ratemaking purposes for a period prior to date the date used in the first such ratemaking proceeding as the estimated date on which the nuclear plant will no longer be included in the taxpayer’s rate base is the end of the estimated_useful_life of the nuclear plant sec_1_468a-3 provides that if the nuclear plant is not described in sec_1_468a-3 the last day of the estimated_useful_life of the nuclear plant is determined as of the date the plant is placed_in_service under sec_1_468a-3 any reasonable method may be used in determining the estimated_useful_life of a nuclear power plant that is not described in sec_1_468a-3 sec_1_468a-3 provides that the amount of decommissioning costs allocable to a nuclear decommissioning fund is the taxpayer's share of the total estimated cost of decommissioning the nuclear power plant sec_1_468a-3 plr-107596-11 provides that a taxpayer's share of the total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning such plant multiplied by the taxpayer's qualifying interest in the plant sec_1_468a-3 provides the rules regarding the manner of requesting a schedule of ruling amounts sec_1_468a-3 provides that the service will not provide or revise a ruling_amount applicable to a taxable_year in response to a request for a schedule of ruling amounts that is filed after the deemed payment_date as defined in sec_1_468a-2 for such taxable_year sec_1_468a-3 enumerates the information required to be contained in a request for a schedule of ruling amounts filed by a taxpayer in order to receive a ruling_amount for any taxable_year sec_1_468a-3 provides that the service may prescribe administrative procedures that supplement the provisions of sec_1_468a-3 and in addition that section provides that the service may in its discretion waive the requirements of sec_1_468a-3 and under appropriate circumstances sec_1_468a-3 describes the circumstances in which a taxpayer must request a revised schedule of ruling amounts sec_1_468a-3 requires that a taxpayer requesting a schedule of deduction amounts must also request a revised schedule of ruling amounts for the fund the revised schedule of ruling amounts must apply beginning with the first taxable_year following the first year in which a deduction is allowed under the schedule of deduction amounts sec_1_468a-3 provides that any taxpayer that has previously obtained a schedule of ruling amounts may request a revised schedule of ruling amounts such a request must be made in accordance with the rules of sec_1_468a-3 the internal_revenue_service shall not provide a revised schedule of ruling amounts applicable to a taxable_year in response to a request for a schedule of ruling amounts that is filed after the deemed payment deadline date for such taxable_year sec_1_468a-8 provides that under the provisions of sec_468a as described above a taxpayer may make a special transfer of cash or property to the nuclear decommissioning fund this special transfer is not subject_to the sec_468a limitation the amount of the special transfer is the present_value of the pre-2005 nonqualifying percentage of the estimated future costs of decommissioning the nuclear plant that was disallowed under sec_468a prior to the act sec_1_468a-8 defines the pre-2005 nonqualifying percentage as equal to percent reduced by the sum of the qualifying percentage used in determining the taxpayer’s last schedule of ruling amounts for the fund under sec_468a as it existed prior to the act and the percentage transferred in any previous special transfer plr-107596-11 sec_1_468a-8 provides that the taxpayer is not required to transfer the entire amount eligible for the special transfer in one year but must take any prior special transfers into account in calculating the pre-2005 qualifying percentage further pursuant to sec_1_468a-8 a taxpayer making a special transfer in more than one year must request a new schedule of deduction amounts in connection with each special transfer sec_1_468a-8 provides that the amount of any special transfer made by a taxpayer on or before the 15th day of the third calendar month after the close of any taxable_year the deemed payment deadline date shall be deemed made during that taxable_year if the taxpayer irrevocably designates the amount of the special transfer as relating to that taxable_year sec_1_468a-8 provides that a taxpayer may designate certain special transfers as relating to a taxable_year beginning after date and ending before date the taxpayer must request a ruling from the service under the provisions of sec_1_468a-8 and must actually make the special transfer within days after the taxpayer receives a ruling from the service relating to that special transfer in such limited circumstances the designated special transfer is deemed made during the taxable_year designated as the year to which the special transfer relates sec_1_468a-8 provides that the deduction for the special transfer is allowed ratably over the remaining useful_life of the nuclear plant under sec_1 468a- b i the deduction for property contributed in a special transfer is limited to the lesser_of the fair_market_value of the property or the taxpayer’s basis in the property except as provided in sec_1_468a-8 under sec_1_468a-8 the taxpayer recognizes no gain_or_loss on the special transfer of property the taxpayer’s basis in the fund is not increased by reason of the special transfer of property and the fund’s basis in the property transferred in the special transfer is the same as the transferee’s basis in that property immediately prior to the special transfer sec_1_468a-8 provides that taxpayer may not make a special transfer to a qualified nuclear decommissioning fund unless the taxpayer requests from the irs a schedule of deduction amounts in connection with such transfer a request for a schedule of deduction amounts may be made in connection with a request for a schedule of ruling amounts but in such case the calculations for both the schedule of ruling amounts and the schedule of deduction amounts must be separately_stated sec_1_468a-8 describes the manner of requesting a schedule of deduction amounts sec_1_468a-8 provides that except as provided in sec_1 468a- d vi the service will not provide or revise a deduction amount applicable to a taxable_year in response to a request for a schedule of deduction amounts that is filed after the deemed payment deadline date for such taxable_year sec_1 468a- plr-107596-11 d vi provides that for special transfers which relate to a taxable_year beginning after date and ending before date the service will not provide a deduction amount in response to a request for a schedule of deduction amounts that is filed after date as stated above prior to the changes made by the act deductible contributions were limited to the lesser_of the amount necessary to fund the plant’s post-1983 nuclear decommissioning costs or the amount necessary to fund the plant’s decommissioning costs for that portion of the plant’s estimated_useful_life for which a fund had been established under that prior_law taxpayer was allowed to contribute a percent of the amounts necessary to fully decommission the plant sec_468a allows a taxpayer to contribute to the nuclear decommissioning fund the pre-1984 amount that was denied under the law prior to the act thus taxpayer is able to contribute the additional b percent of the amounts necessary to fully decommission the plant taxpayer has requested that it be allowed to designate the special transfer made in year g as taking place in year d under the transitional relief granted in sec_1_468a-8 of the final regulations sec_1_468a-8 provides the general_rule that the service will not provide or revise a deduction amount applicable to a taxable_year in response to a request for a schedule of deduction amounts that is filed after the deemed payment deadline date for such taxable_year however the final regulations provide in sec_1_468a-8 a limited exception for special transfers designated by the taxpayer as relating to a taxable_year beginning after date and ending before date for requests for schedules of deduction amounts that are filed on or before date sec_1_468a-8 provides that special transfers designated by the taxpayer as relating to a taxable_year beginning after date and ending before date which are actually made within days after the taxpayer receives a ruling from the service relating to that special transfer are deemed made during the taxable_year designated as the year to which the special transfer relates under sec_1_468a-8 the deduction for the special transfer is allowed ratably over the remaining useful_life of plant the useful_life of plant for purposes of sec_1_468a-3 and sec_1_468a-8 ends in year f we have examined the representations and information submitted by the taxpayer in relation to the requirements set forth in sec_468a and the regulations thereunder based solely upon these representations of the facts we conclude that the taxpayer may make a special transfer of dollar_figurest and designate that transfer as relating to year d and may deduct the amount contributed in year d as set forth below schedule of deduction amounts year year d deduction amount dollar_figurest plr-107596-11 the special transfer amount stated above is the maximum amount permitted to be transferred to the fund under sec_468a if taxpayer transfers a lesser amount to the fund in year d in order to make an additional special transfer in a later year including a special transfer of the difference between the special transfer amount stated above and the lesser amount transferred in year d taxpayer must request a new schedule of deduction amounts and in that request must take the year d transfer into account and recalculate the pre-2005 qualifying percentage in such request we note that if taxpayer elects to make a special transfer of property for all or a portion of this special transfer the amount of the deduction is the lesser_of the fair_market_value of the property transferred or the basis of the property in the hands of the taxpayer immediately prior to the transfer unless the taxpayer makes the election as described in sec_1_468a-8 in either event the deduction of the taxpayer with respect to the property is limited to the taxpayer’s basis in the property we have examined the representations and information submitted by the taxpayer in relation to the requirements set forth in sec_468a and the regulations thereunder based solely upon these representations of the facts we reach the following conclusions pursuant to sec_1_468a-3 taxpayer has met its burden of demonstrating that the proposed schedule of ruling amounts is consistent with the principles of the code and regulations and is based on reasonable assumptions taxpayer has a qualifying interest in the plant and is therefore an eligible_taxpayer under sec_1_468a-1 of the regulations taxpayer as owner of the plant has calculated its share of the total decommissioning costs under sec_1_468a-3 of the regulations the proposed schedule of ruling amounts was derived by following the assumptions contained in an independent decommissioning study that taxpayer has represented is a standard type study used in the industry based on that representation taxpayer has demonstrated pursuant to sec_1_468a-3 that the proposed schedule of ruling amounts is based on reasonable assumptions and is consistent with the principles of sec_468a and the regulations thereunder the maximum amount of cash payments made or deemed made to the fund during any_tax year is restricted to the ruling_amount applicable to the fund as set forth under sec_1_468a-2 of the regulations plr-107596-11 taxpayer has been granted above a schedule of deduction amounts relating to year d sec_1_468a-3 provides that the service will not provide or revise a ruling_amount applicable to a taxable_year in response to a request for a schedule of ruling amounts that is filed after the deemed payment_date as defined in sec_1_468a-2 for such taxable_year the deemed payment_date for year d has passed prior to the submission of this request sec_1_468a-3 provides that the service may in its discretion waive the requirements of sec_1_468a-3 and under appropriate circumstances in this case taxpayer has as is permitted by sec_1_468a-8 designated a special transfer as relating to a taxable_year beginning after date and ending before date further sec_1 468a- f iii requires that a taxpayer requesting a schedule of deduction amounts must also request a revised schedule of ruling amounts for the fund and provides that the revised schedule of ruling amounts must apply beginning with the first taxable_year following the first year in which a deduction is allowed under the schedule of deduction amounts to apply the requirement in sec_1_468a-3 that a schedule of ruling amounts must be filed before the deemed payment_date in this case would render the requirements of the transitional rules of sec_1_468a-8 a nullity therefore in order to give effect to these transitional rules the service is exercising its discretion to waive the requirement in sec_1_468a-3 that a schedule of ruling amounts must be filed before the deemed payment_date for the taxable_year to which the schedule of ruing amounts relates we note that this waiver is limited and that the service may not waive these provisions if a taxpayer sought to contribute additional_amounts to the fund based solely on the determinations above we conclude that the taxpayer’s proposed schedule of ruling amounts satisfies the requirements of sec_468a of the code we have approved the following revised schedule of ruling amounts the mandatory review date for this matter remains the same approved schedule of ruling amounts year year e ruling_amount dollar_figureamount if any of the events described in sec_1_468a-3t f occur in future years the taxpayer must request a review and revision of the schedule of ruling amounts generally the taxpayer is required to file such a request on or before the deemed payment deadline date for the first taxable_year in which the rates reflecting such action became effective when no such event occurs the taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline of the tenth taxable_year following the close of the tax_year in which the most recent schedule of ruling amounts was received plr-107596-11 except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above specifically no determination is made whether the independent decommissioning study conforms to industry standards and practices this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides 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 your authorized representatives we are also sending a copy of this letter_ruling to the director pursuant to sec_1_468a-7t a a copy of this letter must be attached with the required election statement to the taxpayer's federal_income_tax return for each tax_year in which the taxpayer claims a deduction for payments made to the fund sincerely peter c friedman senior technician reviewer branch passthroughs special industries


internal_revenue_service number release date index number -------------------------- ------------------------ ----------------------------- ------------- --------------------------------- in re ----------------------------------------- --------------------------------- ------------------------ --------------- -------------------------- department of the treasury washington dc person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc intl b01 - plr-104721-03 date date ty ------------------- ----------------------------------------- ----------------------- ------------------------- -------------------------- ----------------------------------------------------- ---------------------------------------- legend taxpayer date a date b x y dear ----------------- this responds to your letter dated date and additional information submitted by you on date date and date in which you requested a ruling and closing_agreement that premiums received by taxpayer on policies of insurance or reinsurance of u s risks are exempt from the insurance excise_tax imposed by ' of the internal_revenue_code_of_1986 as amended acode pursuant to the united states-ireland income_tax convention atreaty the ruling contained in this letter is based upon information and representations submitted by or on behalf of taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for a ruling it is subject_to verification on examination taxpayer is a foreign stock insurance_company that was organized in ireland on date a it is a wholly owned subsidiary of x an irish company y a bermuda corporation owns of the stock of x sec_4371 imposes an excise_tax on premiums_paid on insurance policies issued to u s persons and covering risks wholly or partly within the united_states and to foreign persons engaged in a u s trade_or_business and covering risks within the united_states see ' d revproc_92_39 1992_1_cb_860 establishes procedures for entering into a closing_agreement to establish an exemption from the ' excise_tax when the exemption is claimed under a u s income_tax treaty article business profits of the treaty provides as follows the profits of an enterprise of a contracting state shall be taxable only in that state unless the enterprise carries on business in the other contracting state through a permanent_establishment situated therein article a taxes covered includes the ' excise_tax within the scope of the treaty but contains the following limitation the convention shall however apply to the federal excise_taxes imposed on insurance premiums_paid to foreign insurers only to the extent that the risks covered by such premiums are not reinsured with a person not entitled to the benefits of this or any other convention which provides exemption from these taxes paragraph of the protocol amending the tax_convention with ireland aprotocol to the treaty requires that an irish insurance_company be subject_to the generally applicable irish tax on such companies as follows for the purposes of paragraph it is understood that this convention shall not apply to the federal excise_taxes imposed on insurance premiums_paid to foreign insurers where such premiums are not subject_to the generally applicable tax imposed on insurance corporations in the contracting state in which such insurers are resident the limitation_on_benefits provision in article of the treaty sets forth several alternative safe harbors for claiming benefits under the treaty article a provides that a person who is not a aqualified person under paragraph of article nevertheless may qualify for benefits under the treaty with respect to an item_of_income derived from the other state if i such resident is engaged in the active_conduct_of_a_trade_or_business in the first-mentioned state other than the business of making or managing investments unless such business is carried out by a bank or insurance_company acting in the ordinary course of its business and ii the item_of_income is connected with or incidental to the trade_or_business in the first-mentioned state provided that where such item is connected with a trade_or_business in the first-mentioned state and such resident has an ownership_interest in the activity in the other state that generated the income the trade_or_business is substantial in relation to that activity paragraph b i b of the protocol states that an insurance_company will be considered to be engaged in the active_conduct_of_a_trade_or_business if its gross_income consists primarily of insurance or reinsurance premiums and investment_income attributable to such premiums article b i of the treaty provides that an item_of_income is connected with a trade_or_business if the activity in the other state that generated the item_of_income is a line_of_business that forms a part of or is complementary to the trade_or_business conducted in the first-mentioned state by the income recipient taxpayer represents that it is a resident of ireland and is subject_to the generally applicable irish tax imposed on irish insurance_companies taxpayer states that its gross_income will consist primarily of insurance or reinsurance premiums and the investment earnings attributable to such premiums the premium income it receives from u s insureds is generated by an activity that forms a apart of its trade_or_business in ireland according to taxpayer taxpayer does not expect to receive premiums from only one u s company in taxpayer received the majority of its premium income from policies written on risks located outside of ireland and the united_states further taxpayer represents that the following decisions are made by employees in its office in ireland decisions regarding whether to reinsure a risk computations and decisions regarding the pricing of a reinsurance policy the decision as to whether any risk reinsured by taxpayer should be reinsured with another reinsurer and decisions regarding the investment of premiums based on these representations we conclude that taxpayer satisfies the active trade_or_business test of article and is eligible for benefits under the treaty according to paragraph a of the closing_agreement the liability of taxpayer for federal excise_tax as agreed upon including liability resulting from reinsurance of u s risks with persons not entitled to exemption under the treaty or another convention will commence on date b the letter_of_credit required by paragraph a of the closing_agreement in the amount of dollar_figure--------- must be in effect within days of the date the agreement is signed on behalf of the commissioner any person otherwise required to remit the federal excise_tax on foreign insurance or reinsurance policies issued by taxpayer pursuant to ' a of the excise_tax regulations may rely upon a copy of this letter or an executed copy of the closing_agreement as authority that they may consider premiums_paid to taxpayer on and after date b as exempt under the treaty from the federal excise_tax 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 this ruling does not address the issues of whether taxpayer is an insurance_company or whether premiums_paid to taxpayer are deductible under ' of the code 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 taxpayer sincerely w edward williams senior technical reviewer branch office of associate chief_counsel international cc


internal_revenue_service number release date index numbers ----------------------------- --------------------------------------------------- ------------------------------------------------ ------------------------ ------------------------------------------------------------ ------- --------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-112147-09 date date legend x --------------------------------------------------------------------------- --------------------------------------------------- ---------------------------------------------------- d1 d2 country ------------------- ------------------- -------- dear --------------- this is in response to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x was formed on d1 under the laws of country x intended to be treated as a disregarded_entity for federal tax purposes effective d2 however x inadvertently failed to timely file form_8832 entity classification election to be treated as a disregarded_entity for federal tax purposes effective d2 plr-112147-09 law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single owner having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 and iii provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed sec_301_7701-3 provides that an election under sec_301_7701-3 must be signed by - a each member of the electing entity who is an owner at the time the election is filed or b any officer manager or member of the electing entity who is authorized under local law or the entity’s organizational documents to make the election and who represents to having such authorization under penalties of perjury sec_301_7701-3 provides that if a purchasing_corporation makes an election under sec_338 regarding an acquired subsidiary an election under sec_301 c i for the acquired subsidiary can be effective no earlier than the day after the acquisition_date within the meaning of sec_338 under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i section b defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 plr-112147-09 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a properly executed form_8832 effective d2 with the appropriate service_center to elect to be classified as a disregarded_entity a copy of this letter should be attached to the form_8832 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 this ruling is directed only to the taxpayer requesting it sec_6110 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 your authorized representative sincerely curt g wilson curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


significant index no department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division re company ‘ sub seller this letter constitutes notice that with respect to the above-named plan your request for an extension for amortizing the unfunded liabilities described in sec_412 of the internal_revenue_code code and sec_302 of the employee_retirement_income_security_act_of_1974 erisa has been approved subject_to the condition that the contributions required to satisfy the minimum_funding_standard taking into account the extension are to be timely made as defined in sec_412 of the code without a waiver being granted for such years for the plan years beginning date and date this approval applies to the plan_year beginning date - your authorized representative agreed to this condition in a fax dated date if this condition is not satisfied the approval to extend the amortization periods for amortizing the unfunded liabilities would be retroactively null and void the particular unfunded liabilities for which the extension of the amortization period is granted are the actuarial loss bases of the plan created on date through and the actuarial assumption change base created on date the remaining amortization periods of these bases before an extension are and years respectively the extension granted for these amortization bases is years accordingly the remaining amortization periods of these amortization bases after extension would be and years respectively the extension of the amortization periods of the unfunded liabilities of the plan has been granted in accordance with sec_412 of the code and sec_304 of erisa sec_412 of the code and sec_304 of erisa authorize the secretary to extend the period of time required fo amortize any unfunded_liability described in sec_412 of the code and sec_302b of erisa ofa plan for a period of time not in excess of years if the secretary determines that such extension would carry out the purposes of erisa and would provide adequate protection for participants under the plan and their beneficiaries and ifthe secretary determines that the failure to permit such extension would result in a a substantial risk to the voluntary continuation of the plan or b a substantial curtailment of pension benefit levels or employee compensation and be adverse to the interests of plan participants in the aggregate __ sec_101 of reorganization plan no of 1979_1_cb_480 transferred the authority for issuing rulings under sec_304 of erisa from the secretary of labor to the secretary_of_the_treasury accordingly the amortization periods for the unfunded liabilities of the plan are extended as described above under sec_412 of the code and sec_304 of erisa the plan is a single employer defined_benefit_plan benefit accruals to the plan ceased effective date as of date the market_value of assets of the plan was approximately equal to of the present_value of accrued_benefits under the plan the company is a contract manufacturer and supplier of electronics and sophisticated electro-mechanical systems and provides a complete array of services including turnkey and consignment production of complex electromechanical systems printed circuit board assemblies value-added elector-mechanical assemblies process engineering materials management and product testing the economic downturn after date and the proliferation of off-shore manufacturing have had a significant negative impact on the company’s business the company has struggled to remain competitive in this commercial environment further exacerbating the company's financial difficulties was an increase in healthcare costs since in early the company acquired sub from seller the acquisition of sub will more than double the company’s sales the company believes that sub’s plant capacity and capability will enable it to be more competitive on future contracts your attention is called to sec_412 of the code and sec_304 of erisa which describe the consequences that would result in the event the plan is amended to increase benefits change the rate in the accrual_of_benefits or to change the rate of vesting while any portion of the waived_funding_deficiency remains unamortized please note that any amendment to a profit sharing plan or any other retirement plans covering employees covered by this plan maintained by the trustees of this plan to increase the liabilities of those plans would be considered an amendment for purposes of sec_412 of the code and sec_304 of erisa similarly the establishment of anew profit sharing plan or any other retirement_plan by the trustees of this plan covering employees covered by this plan would be considered an amendment for purposes of sec_412 of the code and sec_304 of erisa when filing the amended form_5500 for the plan_year beginning date the date of this letter should be entered on the amended schedule b actuarial information we have sent a copy of this letter to the manager ep classification in to the manager ep compliance unit in - and to your authorized representative pursuant to a power_of_attorney on file in this office if you require further assistance in this matter please contact sincerely yours welles james e holland jr manager employee_plans technical


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b01-plr-124455-01 date date x country date this letter responds to a letter dated date written on behalf of x requesting a ruling that x be granted an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a partnership for federal tax purposes facts according to the information submitted x is a country entity incorporated on date x represents that it is an entity that is eligible to elect under sec_301 c of the procedure and administration regulations to be treated as a partnership for federal_income_tax purposes however the form_8832 entity classification election was not timely filed law and analysis sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if a foreign eligible_entity more than one owner it may elect to be treated as a partnership pursuant to the rules in sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date on which the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term plr-124455-01 regulatory election as including an election whose deadline is prescribed by a regulation published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic_extension of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301 a conclusion based solely on the facts submitted and the representations made the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time to elect to be treated as a partnership for federal tax purposes effective date the election should be made by following the procedure for filing form_8832 within days following the date of this letter a copy of this letter should be attached to the election except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transactions described above under any other provision of the code this ruling is directed only to the taxpayer on whose behalf it was requested sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative s paul f kugler sincerely yours associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes