office_of_chief_counsel department of the treasury i n t e r n a l r e v e n u e s e r v i c e washington d c date number info release date uil conex-149809-06 the honorable mel martinez united_states senator sh-317 washington dc attn -------------------- dear senator martinez this letter is in response to your fax dated date sent to ------------------------- assistant secretary legislative affairs department of the treasury on behalf of your constituent ---------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------contacted your office for help in resolving a dispute regarding the tax treatment and reporting of compensation it pays its -------------------- because -----------------------------------------completed a form_8821 tax_information_authorization authorizing you and ---------------------of your office to receive confidential tax information in connection with this tax matter we are able to respond to the inquiry regarding the irs rules about the tax treatment and reporting of compensation paid to -- -------------------- according to your fax we understand the following facts ---------------------------------------- ------ is a --------------------------subject to regulation by the u s department ------------------ --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- in their published guidance these agencies refer to ---------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- currently -----------------------------------------treats its ---------------------as independent contractors and reports compensation paid to them on forms however according to a recently revised -------------- ------ requires ---------------- to treat --------------- -------------- as employees and to report compensation paid to them on forms w-2 ------ ---------------------------------------- has a private_letter_ruling from the internal_revenue_service ------------------------------------------------ ---------------------------------------- relies on -- -----------------for permission to report compensation paid to ---------------------on forms -----------------------------------------is looking for additional guidance from both the irs and ------ in order to determine whether --------------supersede the new ------------------ ------------- guidance the application of the ----------------------is within --------- jurisdiction moreover because of the confidentiality and disclosure requirements of sec_6103 of the internal_revenue_code without the consent of a taxpayer we cannot disclose that taxpayer’s identity or other tax_return information to a third party thus we cannot talk to ------ about a specific taxpayer such as ---------------------------------------- a taxpayer’s letter_ruling from us or a taxpayer’s specific facts therefore we are not able to advise you as to whether -----------------------------------------must comply with the new ---------------------- -------------------------------------------------------------------------------------------------------------------- if you would like to discuss your constituent’s questions with a representative from ------- -------------------------------------------------------------------------------------------------------------------- you can contact ----------------------------------------------of the ---------------------------------------- ------------------------------- we can verify that the plr issued to ----------------------------------------- ---------- remains valid for federal tax purposes provided that the facts remain as set forth in the ruling we understand your constituent’s concern regarding the proper tax treatment of its ------ -------------- and its desire to pay the proper amount of employment_taxes thus we are providing additional information which explains the tax laws and also explains what tax consequences may follow if -----------------------------------------changes its federal tax reporting with respect to its -------------------- we hope the following is helpful to you and your constituent as explained below the tax laws impose employment_taxes on employers and employees the tax laws provide relief from employment_taxes for a business that did not treat a worker as an employee when certain criteria are met if the business continues to meet the criteria despite other changes i n the working arrangement the relief continues if the business fails to meet the criteria for a tax period the relief ends definition of employee and imposition of employment_taxes the tax laws define an employee as any individual who under the usual common_law rules for determining the employer-employee relationship has the status of employee we determine whether a worker is an independent_contractor or an employee under the common_law rules by considering all of the facts and circumstances of each individual case sec_3121 sec_3306 and sec_3401 of the internal_revenue_code the code relating to the federal_insurance_contributions_act fica the federal_unemployment_tax_act futa and income_tax_withholding respectively guides for determining employment status are found in three substantially_similar sections of the employment_tax regulations the regulations sec_31_3121_d_-1 sec_31_3306_i_-1 and sec_31_3401_c_-1 generally the relationship of employer and employee exists when the person for whom the worker performs the services has the right to control and direct not only as to the results of that person’s work but also as to the details and means by which he or she accomplishes the result sec_31_3121_d_-1 of the regulations publication 15-a employer’s supplemental tax guide found at www irs gov http www irs gov pub irs-pdf p15a pdf explains this further i am enclosing a copy for your convenience generally an employer must withhold deposit report and pay employment_taxes including federal_income_tax withholding fica tax and futa_tax on wages it pays to employees employment_tax relief for taxpayers under sec_530 of the revenue act of if a business has a reasonable basis for not treating a worker as an employee the law provides relief for that business from having to pay employment_taxes with respect to that worker under sec_530 of the revenue act of a reasonable basis for not treating a worker as an employee could be that the business reasonably relied on a court case about federal taxes or an irs ruling issued to the business underwent an irs audit at a time when the business treated similar workers as other than employees and the irs did not reclassify those workers as employees treated the worker as other than an employee because of knowledge that a significant segment of the same industry treated similar workers as other than employees relied on some other reasonable basis such as the advice of an accountant who knew the facts about the business in addition the business must not have treated the worker or any similar workers as employees finally the business must have filed all required federal tax returns including information returns for the worker for the period consistent with the worker not being an employee for example if the business treated the worker as an independent_contractor the business must have filed required forms for the worker if a business meets the requirements of sec_530 the business is relieved from having to pay employment_taxes regardless of whether the worker or workers in question may be employees revproc_85_18 1985_1_cb_518 is a revenue_procedure issued by the irs to provide instructions for implementing the provisions of sec_530 of the revenue act of i am enclosing a copy for your convenience section dollar_figure of revproc_85_18 provides that for any period after date the relief under sec_530 will not apply even if the taxpayer has met the safe haven rules outlined above if the appropriate forms have not been timely filed with respect to the workers involved section dollar_figure of revproc_85_18 provides that in determining whether a taxpayer did not treat an individual as an employee for any period within the meaning of sec_530 the following guidelines should be followed a the withholding of income_tax or fic a tax from an individual's wages is treatment of the individual as an employee whether or not the tax is paid over to the government b except as otherwise provided in revproc_85_18 the filing of an employment_tax return including form_940 employer's annual federal unemployment tax_return form_941 employer's quarterly federal tax_return and form_w-2 wage and tax statement for a period with respect to an individual whether or not tax was withheld from the individual is treatment of the individual as an employee for that period thus if a business files a form_w-2 with respect to a worker for a tax period the business has treated the worker as an employee and sec_530 relief will not apply other federal_law - department of ------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------ the u s department of -------------------------------------------- is authorized by legislation to approve ------------------------to participate in ------------------------------------------------------------ --------------programs and to regulate those ---------- this authority is contained in the ---- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------- interpretation of these laws and promulgation of rules implementing the laws are under the jurisdiction of ------ ------ maintains a ---------------------------------------------------------------------------- which covers --------- requirements and policies for ------ approval and -------------------- of --------- ---------------- for participation in the -------------------------------------------programs the ------ -------------- provides information to ------ staff and participating ---------------- on procedures for obtaining and retaining ------ approval as a -------------- the -------------- also provides basic information on --------- program for monitoring the ------------------------ and ------------ performance of ---------------- ------------------------------------------------------------ ---------------------- on --------------- -------- ------ issued a revised ----------------------------------- updating the prior version dated --------------------------- the revised --------------incorporates the provisions of ------------------------ ---------------------------------------------- --------------------------- ------------------------------- as well as all ------------------------------------------------- regarding the ----------------------approval requirements the --------------is available electronically at ------------------------------------------------- ---------------------------- --------------------------------------- ----------------------------------- ------------ -------------- ----------------------------------------------------------------------------------------------------- provides ---- -------------- must meet the following general requirements to be approved for participation in the ----------------------------------programs -- -------------------------------------------provides -an approved ---------------must employ trained personnel that are competent to perform their assigned responsibilities the ---------------must demonstrate the essential characteristics of the employer-employee relationship upon inquiry by the department all compensation must be reported on form_w-2 - --------------------------------------------provides -------------------- -------------------- ------------------ ----------------------------------------------------must be employees of the ----------------- ------------ ------------------------------------------------------must be employees of the -------------- its authorized agent or if the -------------- is a ------------------------------------------- managers --------------------------------------------may not be independent contractors or contract employees - although in the federal employment_tax area sec_530 of the revenue act of provides relief for taxpayers that qualify from having to pay employment_taxes or file forms w-2 with respect to workers that may be employees the ------ rules do not explicitly address employers who qualify for relief under sec_530 you would need to speak with --------------------------------at ------ to determine what ------ requires of an employer that qualifies for sec_530 relief constituent’s ------- irs private_letter_ruling in ---------------------------------------- ---------- irs private_letter_ruling we explained that a significant percentage of ---------------------------------------- -- activities and conduct is regulated by ------------------- the ruling says that ------ asked for certain revisions in ----- --------------------------------------- -- ------------------- agreement to satisfy --------- requirement that the --------------------functions be performed by persons classified as common_law employees in response to --------- request for revisions to the agreement ------------------ ------------------------------ revised the agreement to add provisions-- that -----------------------------------------will exercise control and responsible management supervision over the --------------------- conduct and activity in -------related activity including regular and ongoing reviews of the ----------------------performance that -----------------------------------------will pay the ---------------------------- operating_expenses incurred with respect to -------related activity including furniture office rent overhead charges and office supplies that the --------------------will personally perform all customary -------------- ------------ functions with respect to -------related activity and the --------------- ------------- agrees not to contract with a third party for any of these functions as explained above if a taxpayer has the right to direct and control the results as well as the details and the means of accomplishing the results of a person’s work then the relationship of employer and employee exists if ---------------------------------------------------- --------------------------------------------------------------------------------------------------------is the employer of the -------------------- then it would ordinarily be required to withhold deposit report and pay employment_taxes on compensation it pays to them ----------------------------------------- --------------- private_letter_ruling from the irs that concludes that the use of the revised agreement with the ---------------------will not be considered treatment of the ---------------------as employees within the meaning of sec_530 and therefore will continue to qualify for relief under sec_530 with respect to these workers as long as- -----------------------------------------continues to timely file all the required federal tax returns including information returns consistent with its treatment of ---------------------as not being employees -----------------------------------------continues to treat individuals holding substantially_similar positions as not being employees -----------------------------------------does not withhold income_tax or fica tax from a --------------------or pay the employer s share of fica tax or the futa_tax on behalf of a ------------------- and -----------------------------------------does not file federal forms w-2 and with respect to the -------------------- the irs private_letter_ruling addresses only federal tax issues within the jurisdiction of the irs it does not address compliance with the new ----------------------guidance the private_letter_ruling remains in effect provided that ----------------------------------------- is continuing to operate consistent with the facts set forth in the ruling a change in these facts will mean that the private_letter_ruling is not binding on the irs and ------------------- ------------------------------ may no longer qualify for relief under sec_530 if a business has relief under sec_530 for a class of workers and subsequently files a form_w-2 with respect to a worker in that class this is considered treatment of the worker as an employee with the result that the business no longer qualifies for relief under sec_530 for the class of workers once relief under sec_530 for a class of workers terminates the business will be responsible for employment_taxes with respect to workers in that class i hope this information is helpful in responding to --------------------------------------- if you have any questions please contact me or ----------------------at ----- ------------- sincerely michael swim senior technician reviewer office of division counsel associate chief_counsel tax exempt and government entities enclosures publication 15-a employer’s supplemental tax guide revproc_85_18 1985_1_cb_518


of f i c e of c h i ef c ou n sel department of the treasury i n t e r n al r e v e n u e s e r v i c e w ashington d c date number info release date uil the honorable joseph r pitts member u s house of representative sec_150 north queen street suite lancaster pa attention -------------- dear congressman pitts cc ita b4 ------------ conex-149596-09 i am responding to your inquiry dated date on behalf of your constituent who asked why she cannot take the first-time_homebuyer credit for a home that she purchased from her mother’s estate eligible first-time homebuyers may claim a credit against income_tax for the purchase of a principal_residence sec_36 of the internal_revenue_code the code the credit is not allowed however for acquisitions from certain related_persons related_persons include an executor of an estate and a beneficiary of the estate except for a sale_or_exchange that satisfies a pecuniary_bequest sec_36 and sec_267 of the code if your constituent is a beneficiary of her mother’s estate she will not qualify for the first- time homebuyer credit for purchasing a home from the executor of the estate unless the sale of the home satisfies a pecuniary_bequest the statute does not contain any exceptions or grant the internal_revenue_service the authority to make exceptions to this rule any changes to this rule would require legislative action by congress conex-149596-09 i hope this information is helpful if you have any questions please contact --------------------or me at --------------------- sincerely michael j montemurro chief branch office of associate chief_counsel income_tax and accounting


t c memo united_states tax_court larry g schuster petitioner v commissioner of internal revenue respondent docket no filed date larry g schuster pro_se joan steele dennett for respondent memorandum opinion ruwe judge on date respondent issued a notice of final_determination denying petitioner’s claim to abate interest on his and federal_income_tax liabilities petitioner timely filed a petition to this court under section petitioner has conceded his claim for interest abatement with respect to the taxable_year - i and rules the sole issue for decision is whether respondent abused his discretion by denying petitioner’s request to abate interest background the parties submitted this case fully stipulated the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioner resided in great falls montana at the time he filed his petition petitioner timely filed his federal_income_tax returns for the years through respondent audited petitioner’s income_tax returns for all these years respondent determined deficiencies in petitioner’s income_tax for the years through petitioner did not dispute those deficiencies and they were assessed prior to date petitioner made various payments in partial satisfaction of his tax_liabilities for the years and as of date petitioner’s outstanding tax_liabilities consisting of assessments and additional accrued statutory additions for and were dollar_figure dollar_figure and dollar_figure respectively for a total of dollar_figure as of date unless otherwise indicated all section references are to the internal_revenue_code in effect at the time that the petition was filed in this case and all rule references are to the tax_court rules_of_practice and procedure respondent also determined the estimated_tax penalty applied for the taxable_year petitioner does not dispute the estimated_tax penalty - - petitioner’s outstanding tax_liability for consisted of dollar_figure of tax and dollar_figure of interest on date respondent levied on petitioner’s bank account located at the first interstate bank--commerce in billings montana for the amounts petitioner owed for the years and on date respondent received dollar_figure from first interstate bank-commerce and credited the full amount to petitioner’s and tax_liabilities as a result petitioner’s tax_liability was fully paid ’ on date respondent issued a second levy this time on petitioner’s bank account located at the state capitol employees credit_union in helena montana the notice_of_levy stated that the levy was for unpaid tax_liabilities for and in the amounts of dollar_figure and dollar_figure respectively for a total of dollar_figure on date respondent received dollar_figure from the state capitol employees credit_union because petitioner’s tax_liability had already been satisfied by the date levy the dollar_figure was shown as an overpayment on petitioner’s account respondent then applied the proceeds of the date levy to petitioner’s and unpaid tax_liabilities in the amounts of dollar_figure dollar_figure and the levy proceeds were credited to petitioner’s accounts as of date q4e- dollar_figure respectively as a result of the second levy petitioner’s tax_liability was satisfied on date petitioner filed a form_843 claim_for_refund and request for abatement for the and taxable years on date respondent denied petitioner’s claim for interest abatement on date petitioner filed an appeal with respondent’s appeals_office on date respondent issued a notice of final_determination denying petitioner’s claim_for_abatement of interest petitioner timely filed a petition to this court seeking review of respondent’s failure to abate interest discussion this court may order an abatement of interest only where there is an abuse_of_discretion by the commissioner in refusing to abate interest see sec_6404 1i in order to show an abuse_of_discretion petitioner must establish that respondent exercised his discretion arbitrarily capriciously or without sound basis in fact or law see rule a woodral v commissioner t cc petitioner argues that interest should be abated because the date levy resulted in the collection of interest for the taxable_year after such interest had been paid in full by proceeds from the date levy petitioner argues that these amounts were credited to petitioner’s and accounts as of date - - the issuance of the date levy was an error in performing a ministerial_act and that respondent failed to give petitioner notice_of_intent_to_levy pursuant to sec_6331 for the taxable_year petitioner asks this court to abate interest in the amount of dollar_figure and statutory additions in the amount of dollar_figure which he claims is the portion of the date levy proceeds attributable to respondent’s error respondent argues that no additional interest was assessed after date thus there is no interest to be abated respondent claims that the date levy was issued because the date levy proceeds were not inputted as a credit into petitioner’s account until date respondent claims that petitioner’s argument should properly be characterized as a wrongful_levy claim not a claim for the abatement of interest respondent further argues that any error on his part is not due to a ministerial_act because the issuance of a levy requires the exercise of judgment and is not a procedural or mechanical act sec_6404 provides in pertinent part that the commissioner has discretionary authority to abate part or all of an assessment of interest on any deficiency attributable to sec_6331 provides that levy may be made upon the salary wages or other_property of any person with respect to any unpaid taxes only after the secretary has given written notice to such person of an intent to levy no less than days before the day of levy -- - any error or delay by the commissioner’s officers or employees in performing a ministerial_act or any payment of tax to the extent any error or delay in such payment is attributable to such officers or employees being erroneous or dilatory in performing a ministerial_act ’ an error or delay by the commissioner can be taken into account only if it occurs after the commissioner has contacted the taxpayer in writing with respect to the deficiency or payment and if no significant aspect of the error or delay is attributed to the taxpayer sec_6404 nerad v commissioner tcmemo_1999_376 a ministerial_act does not involve the exercise of judgment or discretion sec_301 2t b temporary proced admin regs fed reg date it is a procedural or mechanical act that occurs during the processing of the taxpayer’s case after all prereguisites to the act such as conferences and review by supervisors have taken place see id because congress did not intend for sec_6404 to be used routinely we order abatement only where failure to abate interest would be widely perceived as grossly unfair 113_tc_145 h rept pincite c b vol ‘in sec_6404 was amended by the taxpayer bill of right sec_2 publaw_104_168 110_stat_1452 to allow the commissioner to abate interest for an unreasonable error or delay resulting from managerial and ministerial acts the amendment is in effect for tax years beginning after date and thus is not applicable in this case see 112_tc_19 n - s rept pincite 1986_3_cb_1 petitioner does not dispute the amount of his tax_liability as of date and agrees that the date levy was appropriate and resolved petitioner’s tax_liability for petitioner has not alleged that respondent assessed additional interest after date with respect to petitioner’s taxable_year rather petitioner’s dispute concerns his claims that his property was levied upon twice for and that application of the date levy proceeds to his tax_liability was erroneous because he did not receive notice of respondent’s intent to levy for the year respondent did not cause any delay in the payment of petitioner’s tax_liability petitioner has not alleged any error on the part of respondent prior to date the date on which his tax_liability was resolved although it appears that respondent mistakenly levied on petitioner’s property twice for his tax_liability respondent promptly ‘petitioner alleges that respondent wrongfully levied on petitioner’s property because notice_of_intent_to_levy was not provided for the year the evidence before us indicates that respondent levied on petitioner’s property twice for petitioner’s tax_liability but that proceeds from the second levy were used to satisfy petitioner’s undisputed tax_liabilities for subsequent years petitioner brought this action under sec_6404 seeking review of respondent’s failure to abate interest in the instant case we lack jurisdiction to decide petitioner’s claim that respondent made a wrongful_levy see sec_6404 1i1 112_tc_230 --- - applied the proceeds of the second levy to petitioner’s undisputed tax_liabilities for subsequent tax years petitioner was not assessed any additional interest for respondent chose not to abate interest because petitioner’s tax_liability was resolved by the first levy and the proceeds from the second levy were applied to petitioner’s outstanding tax_liabilities for subsequent years respondent’s decision not to abate interest was not arbitrary capricious or without sound basis in fact or law accordingly we hold that respondent’s denial of petitioner’s claim to abate interest was not an abuse_of_discretion decision will be entered for respondent


t c memo united_states tax_court holly ruocco petitioner v commissioner of internal revenue respondent docket no filed date holly ruocco pro_se charles b burnett for respondent memorandum opinion cohen judge respondent determined deficiencies of dollar_figure and dollar_figure in petitioner’s federal income taxes for and respectively respondent also determined that petitioner is liable for a penalty of dollar_figure under sec_6662 for and an addition_to_tax of dollar_figure under sec_665l1 a for petitioner declined to present any evidence at trial and - - respondent filed a motion to dismiss for failure to properly prosecute and for a penalty under sec_6673 motion to dismiss unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure background respondent’s determinations at issue in this case are set forth in two separate statutory notices of deficiency both dated date the notice for was addressed to kyle w storks storks and holly l ruocco petitioner the deficiency resulted primarily from an increase in income on schedule c profit or loss from business for canyon state chiropractic that was explained in the notice for as follows b sch c-canyon state during the taxable_period ended date income earned by you was incorrectly reported by canyon state chiropractic and other entities it is determined that this income from services performed by you in connection with canyon state chiropractic and other entities is taxable to you see enclosed audit report taxable_income for the taxable_period ended date is increased dollar_figure the attached audit report showed the unreported gross_receipts or sales of canyon state chiropractic for were determined as the deposits into three bank accounts less the amounts reported on the return as filed and a total of - - dollar_figure in deductions claimed on the canyon state chiropractic return was disallowed the notice_of_deficiency for was addressed only to petitioner it explained the primary_adjustment as follows 1a sch c-canyon state it is determined that you received income or other distributions from your chiropractic business in the amount of dollar_figure for the taxable_period ended date this amount is taxable to you because you have not established that the income is excluded from gross_receipts under the provisions of the internal_revenue_code in the absence of adequate_records this income has been determined on the basis of available information and by analyzing bank_deposits the addition_to_tax was based on petitioner’s failure_to_file a tax_return for at the time that she filed the petition petitioner resided in salem new hampshire in the petition petitioner claimed that the determinations in the notices of deficiency were based on brror in attributing income to the petitioner that she did not receive petitioner also alleged that she did not receive any of the income alleged in the notices of deficiency froma taxable source petitioner designated phoenix arizona as the place of trial of this case by notice served date the case was set for trial in phoenix on date attached to the notice of trial was a standing pre-trial order that provided among other things - - ordered that all facts shall be stipulated to the maximum extent possible all documentary and written evidence shall be marked and stipulated in accordance with rule b unless the evidence is to be used to impeach the credibility of a witness objections may be preserved in the stipulation if a complete stipulation of facts is not ready for submission at trial and if the court determines that this is the result of either party’s failure to fully cooperate in the preparation thereof the court may order sanctions against the uncooperative party any documents or materials which a party expects to utilize in the event of trial except for impeachment but which are not stipulated shall be identified in writing and exchanged by the parties at least days before the first day of the trial session the court may refuse to receive in evidence any document or material not so stipulated or exchanged unless otherwise agreed by the parties or allowed by the court for good cause shown xk kek on date respondent’s counsel sent a letter to petitioner seeking informal exchange of documents expressing the government’s position and advising petitioner as follows enclosed are copies of some materials for your review notice_97_24 and the opinion in the case george v commissioner tcmemo_1999_381 both describe the government’s position in cases involving trusts similar to yours i am also enclosing copies of the following additional cases universal trust v commissioner tcmemo_2000_390 lipari v commissioner tcmemo_2000_280 and johnston v commissioner tcmemo_2000_315 you will note that the tax_court has taken a very dim view of mr chisum and his clients for the positions they have taken as you have not met with service during the examination and consideration by the appeals_office this matter has not been developed and your position on the issues in this case is not known it is not possible for either of us to prepare adequately for trial this wastes our time and the court’s time and resources as i mentioned to you on the telephone if your claims prove to be frivolous you should be aware of sec_6673 which provides a procedures instituted primarily for delay etc --whenever it appears to the tax_court that-- a proceedings before it have been instituted or maintained by the taxpayer primarily for delay b the taxpayer’s position in such proceeding is frivolous or groundless or c the taxpayer unreasonably failed to pursue available administrative remedies the tax_court in its decision may require the taxpayer to pay to the united_states a penalty not in excess of dollar_figure emphasis added we routinely pursue sanctions under this section in cases of non-cooperation and we may do so in your case as well a copy of that letter was attached to respondent’s pending motion to dismiss on date respondent filed a motion to show cause why proposed facts in evidence should not be accepted as established motion to show cause attached to respondent’s motion to show cause wass a proposed stipulation that among other things set forth facts for and that included the following petitioner was married to storks petitioner and storks resided in arizona and petitioner was licensed as a chiropractor by the state of arizona prior to petitioner practiced her profession at canyon state chiropractic prior to - - canyon state chiropractic was operated as a sole_proprietorship canyon state chiropractic llc was created on or about date canyon state chiropractic llc had three named members storks petitioner and taurus enterprises storks and petitioner continued to control the business operations of canyon state chiropractic after the creation of the llc the proposed stipulation stated that petitioner filed a joint form_1040 u s individual_income_tax_return with storks for but did not file an income_tax return for a copy of a form_1065 u s partnership return of income filed by canyon state chiropractic llc for and a notice of final_partnership_administrative_adjustment fpaa sent to the partnership for were attached to the proposed stipulation the proposed stipulation also stated that there was no petition filed with the tax_court in response to the fpaa canyon state chiropractic llc did not file a return for and taurus enterprises did not file any_tax returns for or finally copies of various records of the bank accounts that were used by respondent in determining petitioner’s gross_receipts for and were attached to the proposed stipulation among the records were bank statements addressed to canyon state chiropractic clinic petitioner and storks and signature cards for two of the three bank accounts one of the signature cards - bore the signature of petitioner and another bore the signature of j c chisum on date the court’s order to show cause under rule f was issued and petitioner was directed to show cause on or before date why the facts set forth in respondent’s motion paper should not be accepted as established for purposes of the pending case the order further stated if no response is filed within the period specified above with respect to any matter or portion thereof or if the response is evasive or not fairly directed to the proposed stipulation or portion thereof that matter or portion thereof will be deemed stipulated for purposes of the pending case and an order will be entered accordingly pursuant to rule f on date the court received from petitioner a motion for a date and time set certain for trial dated date on date the court instituted a conference telephone call with the parties the court explained that petitioner’s motion for a date and time certain for trial could not be granted because it conflicted with a trial previously set the court also advised petitioner that her response to the order to show cause had not been received the nature of petitioner’s response which apparently had been mailed but not delivered to the court was described petitioner’s response a copy of which was attached to respondent’s motion to dismiss was not fairly directed to the proposed stipulation or any portion thereof but raised frivolous legal objections and --- - asserted that the tax_court rule regarding stipulation runs afoul of the fifth_amendment during the conference telephone call with the parties the court advised petitioner that she faced several problems in this case including the necessity of showing that the bank_deposits in issue were not payment for her services and that income received by the chiropractic clinic should be treated as community_property the court further advised her that business deductions to which she might be entitled had not been allowed and that penalties were likely to be imposed because this case appeared to be similar to other recent cases involving similar facts petitioner insisted that respondent had the burden_of_proof the court indicated that respondent could satisfy his burden by introducing the bank records into evidence petitioner stated that the records relating to the deductions were in storage the court suggested that if petitioner made a good_faith attempt to secure the records and to abandon the meritless arguments previously made by her then and only then the court would consider a continuance of the case petitioner stated that she would contact respondent’s counsel concerning the matters discussed after the conference telephone call the court’s order to show cause was made absolute on date the court received from petitioner a motion to continue in which petitioner repeated her erroneous legal arguments in addition --- - petitioner asserted that the court had incorrectly concluded who has the burden_of_proof in this case and complained that the court’s comments during the conference telephone call were indicative of bias and incompetence the motion to continue was denied there is no explanation in the record why the documents that petitioner wishes the court to have such as the motion for a date and time set certain for trial and the motion to continue are timely delivered to the court while other documents such as petitioner’s trial memorandum and her response to the order to show cause are delayed due to problems with receipt of the court’s mail on date petitioner’s motion to recuse was filed petitioner also filed a motion in limine seeking to preclude respondent’s attributing income to petitioner either from the limited_liability_company or from a_trust that respondent characterized as sham or as a grantor_trust ‘substantially identical motions to recuse based on this conference telephone call were filed in other cases on the phoenix calendar in the same cases other substantially identical documents had repeatedly been filed those cases include broderick v commissioner docket nos and burke v commissioner docket no cahill v commissioner docket no frentheway v commissioner docket no lehmann v commissioner docket no all of these cases appear to involve trusts of the sort that have been consistently held ineffective to avoid tax on services rendered by taxpayers see eg johnston v commissioner tcmemo_2000_315 n lipari v commissioner tcmemo_2000_280 george v commissioner tcmemo_1999_381 -- - petitioner also filed a motion to dismiss and a motion to reconsider the court’s order to show cause in her various motions and in her trial memorandum petitioner contends that respondent has the burden of proving unreported income that certain issues are not properly before the court and that the court’s stated position on burden_of_proof 1s so erroneous as to show bias and prejudice petitioner’s motions were denied when the case was called for trial respondent’s counsel acknowledged that after the conference telephone call he had received a list of checks for that purportedly supported deductions claimed by petitioner the list a copy of which is attached to respondent’s motion to dismiss includes payments for things such as student loans a wedding present and aquarium supplies that are patently personal and not deductible because petitioner was not prepared to proceed to trial the court stated that she would be held in default but that she could move to set_aside the default in days upon making an offer of proof repeating her position that the government has the burden_of_proof petitioner requested that the trial proceed the case was set for trial on date at the time of trial respondent’s motion to dismiss was filed and respondent reported that no progress had been made with respect to potential deductions petitioner restated her position that the government has the burden_of_proof notwithstanding the court’s previous statement respondent’s counsel stated that he was not relying on any alternative theories and would proceed on the assignment_of_income theory reflected in the notices of deficiency in response to the court’s inquiry respondent declined to make any concession based on community_property income because it’s not uncommon in this state for professionals to have some arrangement with respect to community_property petitioner declined to present evidence after being advised again by the court that the stipulated bank records satisfied the government’s burden petitioner declined to testify or to identify the person advising her on the erroneous legalistic arguments set forth in her filings citing the fifth_amendment petitioner did however identify her and renewal applications for her license with the arizona state board_of chiropractic examiners which reflected her office address as canyon state chiropractic respondent’s motion to dismiss was taken under advisement and petitioner was advised that while the court was awaiting the transcripts to be used in preparing this opinion she might respond to the motion make an offer of proof and present records dealing with deductions to respondent’s counsel nothing has been received from petitioner indicating that she has abandoned her erroneous and frivolous positions in this case discussion petitioner contends that the court’s statements in the conference telephone call concerning burden_of_proof indicate bias in favor of respondent and prejudice against petitioner she apparently draws this inference because the court’s statements coincided with statements made by respondent in letters that were sent to petitioner by respondent during the course of trial preparation those letters were not seen by the court until respondent’s motion to dismiss was filed both respondent’s letters and the court’s statement were based on well established law and are thus not grounds for recusal see g 860_f2d_1521 9th cir 545_f2d_257 lst cir 80_tc_1111 and cases cited in n petitioner’s unrelenting view of the burden_of_proof in this case has no merit that contention made in indistinguishable circumstances was thoroughly discussed in johnston v commissioner tcmemo_2000_315 cited in respondent’s date letter to petitioner as follows it is clear that the commissioner may satisfy the predicate evidence requirement in unreported income cases by introducing evidence linking the taxpayer to tax-generating acts see 85_tc_1 alternatively respondent may satisfy the predicate evidence requirement by showing the taxpayer was connected to unexplained bank_deposits or cash see 87_tc_609 discussing court_of_appeals for the ninth circuit authorities 87_tc_74 fn ref omitted the record contains ample evidence linking petitioner both to tax-generating acts and to bank_deposits of the income generated by those acts once respondent has shown evidence of gross_receipts even in the criminal or civil_fraud context petitioner has the burden of showing offsets or deductions reducing the taxable_income see eg 320_f2d_308 7th cir 231_f2d_928 9th cir 82_tc_413 affd without published opinion 772_f2d_910 9th cir petitioner’s obligation with respect to deductions is indisputable see 503_us_79 512_f2d_882 9th cir affg tcmemo_1972_133 she presented no credible_evidence on any issue of fact see sec_7491 the stipulated facts satisfy respondent’s burden of production with respect to the penalties see sec_7491 116_tc_438 petitioner’s motion to recuse as well as the various other motions filed shortly before or at the calendar call were patently designed to delay and obstruct the determination of petitioner’s correct_tax liability the thrust of some of petitioner’s motions is that the internal_revenue_service irs would be required to proceed against either a_trust or a limited_liability_company rather than proceeding against petitioner directly the notices of deficiency however determined that the deposits into specific bank accounts were income for services performed by petitioner petitioner raised the entity_theory and respondent’s arguments that the entities should be disregarded as sham or that the trust was in the alternative a grantor_trust were raised in defense of petitioner’s arguments in any event the irs may proceed on alternative theories and alternative notices in the circumstances indicated by the record in this case see 875_f2d_1396 9th cir criss v commissioner tcmemo_2002_62 universal trust v commissioner tcmemo_2000_390 the stipulation proposed by respondent the motion for order to show cause under rule the order to show cause and the order deeming facts stipulated for purposes of this case were all consistent with rule the statements made in the stipulation and the documents attached to it were all matters which fairly should not be in dispute see rule a petitioner did not raise at any time a dispute as to the factual accuracy of the stipulation her objections related solely to her erroneous -- - theory about respondent’s burden_of_proof and her fifth_amendment privilege petitioner’s assertion that the other party has the burden_of_proof is not a sufficient objection to a proposed stipulation rule a specifically states that the requirement of stipulation applies under this rule without regard to where the burden_of_proof may lie with respect to the matters involved see eg console v commissioner tcmemo_2001_232 petitioner’s argument that rule f could not be applied without violating her fifth_amendment privilege must be rejected the phrase that comes readily to mind was first used by the u s supreme court in 274_us_259 to wit a taxpayer may not draw a conjurer’s circle around the whole matter of his or her tax_liability see also 712_f2d_195 5th cir affg tcmemo_1983_12 696_f2d_1234 9th cir affg 76_tc_1027 680_f2d_1268 9th cir affg an unreported decision of this court 617_f2d_518 9th cir ina civil tax case the taxpayer must accept the consequences of asserting the fifth_amendment and cannot avoid the burden_of_proof by claiming the privilege and attempting to convert the shield which it was intended to -- - be into a sword 460_us_752 see steinbrecher v commissioner supra 89_tc_501 affd 884_f2d_258 6th cir the matters deemed stipulated in this case in addition to satisfying respondent’s burden of presenting predicate evidence connecting petitioner to the income determined by respondent lead us to conclude that the income in question was community_property only half of which is taxable to petitioner the stipulated facts and exhibits establish that the amounts deposited went into accounts controlled by petitioner and her former husband both of whom were performing services for canyon state chiropractic whether the services were performed by petitioner or by her former husband payments received for those services constituted community_property see ariz rev stat sec although respondent’s counsel speculated that there might be an agreement between the parties with respect to community_income such agreement would be unlikely to allocate all of the income to petitioner we conclude therefore that the decision to be entered in this case should reflect recomputation of petitioner’s tax_liability based on attributing to her one-half of the bank_deposits originally determined to be income to her see 403_us_190 112_tc_183 rule provides a default if any party has failed to plead or otherwise proceed as provided by these rules or as required by the court then such party may be held in default by the court either on motion of another party or on the initiative of the court thereafter the court may enter a decision against the defaulting party upon such terms and conditions as the court may deem proper or may impose such sanctions see eg rule as the court may deem appropriate the court may in its discretion conduct hearings to ascertain whether a default has been committed to determine the decision to be entered or the sanctions to be imposed or to ascertain the truth of any matter ob dismissal for failure of a petitioner properly to prosecute or to comply with these rules or any order of the court or for other cause which the court deems sufficient the court may dismiss a case at any time and enter a decision against the petitioner the court may for similar reasons decide against any party any issue as to which such party has the burden_of_proof and such decision shall be treated as a dismissal for purposes of paragraphs c and d of this rule c setting aside default or dismissal for reasons deemed sufficient by the court and upon motion expeditiously made the court may set_aside a default or dismissal or the decision rendered thereon d effect of decision on default or dismissal a decision rendered upon a default or in consequence of a dismissal other than a dismissal for lack of jurisdiction shall operate as an adjudication on the merits see also rule b we conclude that respondent’s motion to dismiss should be granted however the decision to be entered -- - will reflect recomputation of the deficiencies to reduce the unreported income attributed to petitioner in accordance with this opinion even though petitioner’s tax_liability will be reduced from that determined in the notices of deficiency we conclude that a penalty under sec_6673 should be imposed the reduction in petitioner’s tax_liability is not based on any evidence produced or arguments made by petitioner the arguments made by petitioner have long been discredited and were asserted only for purposes of delay petitioner was warned in correspondence from respondent’s counsel and in the conference telephone call with the court prior to trial that her arguments lacked merit and had been the basis for sanctions in prior cases she nonetheless persisted in making them and failed to take advantage of opportunities provided to her to establish her correct_tax liability based on the record in this case a penalty is appropriate in the amount of dollar_figure see lipari v commissioner tcmemo_2000_280 to reflect the foregoing an appropriate order will be issued


t c memo united_states tax_court nora e keating and richard l shearer petitioners v commissioner of internal revenue respondent docket no filed date jon j jensen for petitioners melissa j hedtke for respondent memorandum findings_of_fact and opinion swift judge respondent determined deficiencies in petitioners’ joint and in petitioner nora keating’s individual federal income taxes as follows joint deficiency dollar_figure big_number big_number big_number big_number nora keating’s deficiency dollar_figure big_number year unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure all references to petitioner in the singular are to petitioner nora keating the issue for decision is whether petitioner’s arabian horse-breeding activity horse activity constituted an activity carried on for profit under sec_183 findings_of_fact some of the facts have been stipulated and are so found at the time of filing the petition petitioners resided in williston north dakota in petitioner moved to williston north dakota began work as an emergency room physician in a local hospital and purchased a home on a 10-acre farm throughout the years in issue petitioner worked approximately hours a week as a physician--typically two hour shifts and one 12-hour shift petitioner preferred this work schedule because she felt burned out from medical school and because it gave her more full days to spend with her six children for the years in issue petitioner’s average annual income from her medical practice was dollar_figure petitioner’s husband richard shearer was employed as a firefighter-medic in north dakota and did not participate in any meaningful way in petitioner’s horse activity throughout her life petitioner admired horses while in high school petitioner worked part time in a veterinary clinic and was a member of several riding clubs petitioner purchased and boarded her first horse when she wa sec_15 years old in when petitioner began her horse activity petitioner realized a lifelong dream of working with horses petitioner was particularly interested in raising arabian horses petitioner considers arabian horses the ballerinas of the horse world prior to petitioner had no experience in the business of buying selling or showing horses petitioner did have experience in owning caring for and riding horses and petitioner possessed the knowledge and skill to perform basic veterinary tasks in starting up her horse activity petitioner spoke with several individuals about training and breeding and about veterinary issues relating to horses in particular petitioner spoke with an award-winning breeder of arabian horses two horse trainers and a veterinarian petitioner consulted these individuals regarding breeding horses selecting stallions and mares feed training methods artificial insemination of mares and factors that could result in early termination of pregnancy petitioner also spoke with individuals affiliated with horse breeding and training who had been audited by respondent who recommended to petitioner that she keep good expense records and that she keep track of receipts aware that as a physician her horse activity would be under the microscope petitioner consulted a c p a to learn how to keep track of receipts and to maintain records petitioner did not discuss with anyone the economic or business aspects of breeding training and showing horses the following schedule indicates when petitioner acquired each of her horses the purchase_price the type of horse if in the record the purpose for purchasing the horse and the horse’s physical condition year acquired purchase_price horse santana sun benjy bey honey michaela angelette mariah supreme design lady trouble sheer energy khat ballou doc wilder links fame river freedom sabrinakov secret link rico de angelo tony montana dakota catalyst aw fames ovation type of horse gelding gelding gelding mare mare mare mare pony pony dollar_figure big_number big_number big_number big_number big_number big_number big_number home-foaled gelding home-foaled home-foaled home-foaled mare gelding gelding purpose of purchase physical condition crippled riding breeding breeding breeding riding riding riding crippled home-foaled gelding riding respiratory disease mare mare home-foaled home-foaled gelding gelding gelding big_number gelding at trial we asked the parties to include in their posttrial briefs a schedule detailing purchase sale and condition of each of the horses involved in petitioner’s horse activity neither party produced such a schedule information in the schedule here provided is derived from the record some of the dates and amounts indicated are not completely clear in the record during through petitioner sold only two of her horses--each for less than its purchase_price in lady was sold for dollar_figure and trouble was sold for dollar_figure throughout the years in issue petitioner received and read publications and materials regarding horse breeding and horse training several of the publications discussed tax issues relating to horse breeding once petitioner began her horse activity petitioner retained her emergency room work schedule to allow more time in her horse activity on days not scheduled to work at the hospital petitioner spent approximately to hours working in her horse activity petitioner’s horse activity involved training and feeding the horses cleaning horse stalls riding recreationally competing in shows performing basic veterinary work and a host of other activities petitioner received much enjoyment and satisfaction from her horse activity petitioner’s favorite time of day was working with the horses and petitioner even found cleaning the stalls to be a stress reliever ongoing care and training of the horses were performed by petitioner and her family before showing petitioner hired a professional trainer to finish training the horses petitioner’s daughter often rode in horse shows and petitioner was extremely proud of her daughter’s and her horses’ successes in the shows on four occasions petitioner’s horses participated in national competitive horse shows in petitioner began building a barn to shelter the horses during the breeding months and thereby to improve breeding in petitioner began boarding horses for and leasing horses to other individuals and providing horse clinics during the years in issue in an effort to reduce horse activity expenses petitioner changed types of feed and sought out alternate sources of hay and specials on stud fees during through petitioner advertised that her horses were for sale by word of mouth by showing horses at horse shows by placing advertisements on three internet web sites and by posting notices at a saddle shop petitioner did not advertise any of her horses for sale in any written publications in none of the years in issue did petitioner advertise the boarding and leasing of horses during through from two checking accounts petitioner paid both personal and horse activity expenses during from three different checking accounts petitioner paid both personal and horse activity expenses in petitioner opened a checking account in the name of nora ellen keating stony creek arabians and two new personal checking accounts from all three of which petitioner paid both personal and horse activity expenses in proceeds received from the sale of lady and trouble were deposited into one of petitioner’s personal checking accounts not into the nora ellen keating stony creek arabians bank account petitioner recorded horse activity expenses on a ledger by category and retained receipts relating to her horse activity in a folder by month of transaction petitioner kept records of training ovulatory cycles and vaccinations relating to each horse petitioner did not associate her horse activity expenses with individual horses during the years in issue petitioner did not prepare or have prepared a written business plan or financial projections relating to her horse activity for through petitioners timely filed joint federal_income_tax returns and for and petitioner timely filed an individual federal_income_tax return petitioners’ joint federal_income_tax returns for through and petitioner’s individual federal_income_tax returns for and included a schedule f profit or loss from farming on which it was indicated that the principal activity was horses on schedule f of the above respective tax returns the following gross_income expenses and net losses were reported relating to petitioner’s horse activity year gross_income dollar_figure big_number big_number dollar_figure total expenses dollar_figure big_number big_number big_number big_number big_number big_number dollar_figure net losses dollar_figure big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number petitioner’s horse activity losses reduced petitioners’ reported taxable_income and resulted in claimed tax savings in the amount of the tax deficiencies involved herein opinion the deductibility under sec_162 or sec_212 of taxpayer expenses attributable to an activity depends upon whether the activity is carried on for profit see sec_162 sec_183 sec_212 sec_183 specifically precludes deductions for expenses relating to an activity not carried on for profit except to the extent allowed by sec_183 for example deductions are not allowable under sec_162 or sec_212 for expenses of an activity that a taxpayer carries on primarily as a hobby or for recreation sec_1_183-2 income_tax regs for a taxpayer’s expenses of an activity to be deductible under sec_162 or sec_212 and not subject_to the limitations of sec_183 the activity must be carried on with an actual and honest profit objective e g 78_tc_642 affd without opinion 702_f2d_1205 d c cir the regulations under sec_183 provide a nonexclusive list of nine factors to consider in determining whether an activity is carried on for profit as follows the manner in which the activity is carried on the expertise of the taxpayer or his advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activity the taxpayer’s history of income or losses with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayer and whether elements of personal pleasure or recreation are involved see sec_1_183-2 income_tax regs neither a single factor nor the existence of even a majority of the factors is controlling but rather an evaluation of all the facts and circumstances is necessary 72_tc_411 affd without opinion 647_f2d_170 9th cir greater weight is given to objective facts than to a taxpayer’s mere statement of intent dreicer v commissioner supra pincite we consider each of these factors in turn manner in which petitioner carried on her horse activity the regulations under sec_183 provide that carrying on an activity in a businesslike manner indicates a profit objective sec_1_183-2 income_tax regs the regulations explain that businesslike operations typically would involve the maintenance of complete and accurate books_and_records the conduct of the activity in a manner similar to profitable businesses of the same nature and changes to improve operations and profitability see id numerous court opinions mention that a businesslike operation often would involve a business plan see eg wesinger v commissioner tcmemo_1999_372 with respect to books_and_records we have held that the maintenance of mere lists of and receipts for expenses without any further cost accounting or analysis would not reflect good business practices see wesinger v commissioner supra dodge v commissioner tcmemo_1998_89 affd without published opinion 188_f3d_507 6th cir burger v commissioner tcmemo_1985_523 affd 809_f2d_355 7th cir the term businesslike manner contemplates the use of cost accounting techniques that provide the taxpayer with information required to make informed business decisions burger v commissioner supra the purpose of maintaining business books_and_records is more than to memorialize for tax purposes the existence of the subject transactions and includes providing a means of periodically determining profitability and analyzing expenses id see also dodge v commissioner supra minimal records used to prepare tax returns not adequate to support a finding that activity was carried on for profit the mere ability to substantiate expenses does not establish that the records were kept in a businesslike manner in the context of animal-breeding activities we have indicated that the absence of detailed monthly expense records for each animal may indicate a lack of profit objective see mckeever v commissioner tcmemo_2000_288 dodge v commissioner supra petitioner failed to keep track of expenses on a per-horse basis and failed to prepare any financial projections which would have aided her in evaluating the economic_performance of her horse activity the financial records maintained by petitioner appear to have been maintained primarily for tax purposes petitioner emphasizes that she maintained detailed records for each horse relating to vaccinations training and ovulatory cycles the maintenance of these types of records however is as consistent with a hobby as with a business see golanty v commissioner supra pincite giles v commissioner tcmemo_2006_15 burger v commissioner supra petitioner contends that her methods of advertising were similar to other horse-breeding operations and evidence her profit objective while we recognize that participation in horse shows provides some advertising see 72_tc_659 we find in this case that petitioner’s advertising efforts were minimal where we have found that an animal breeder operated in a businesslike manner generally the breeder not only participated in shows but engaged in other forms of substantial advertising see engdahl v commissioner supra pincite advertised in horse publications rinehart v commissioner tcmemo_2002_9 advertised in horse publications and gave out promotional materials routon v commissioner tcmemo_2002_7 advertised in trade publications and mailed promotional videos strickland v commissioner tcmemo_2000_ advertised in local newspaper davis v commissioner tcmemo_2000_101 advertised in newspapers and distributed promotional clothing phillips v commissioner tcmemo_1997_ distributed promotional videos and participated in horse associations for the purpose of advertising burrow v commissioner tcmemo_1990_621 prepared promotional videos and advertised in horse publications as we have found petitioner’s advertising and promotion of her horse activity were limited to word of mouth participation in shows placement of advertisements on three web sites and posting of notices at a saddle shop during the years in issue petitioner did not advertise in any trade magazines journals or written publications the commingling of personal and activity funds is not indicative of businesslike practices burrow v commissioner supra ballich v commissioner tcmemo_1978_497 as indicated petitioner did not have a separate bank account for her horse activity but instead paid horse-related and personal expenses out of several personal accounts with regard to changes in operating methods small improvements over several years may not reflect a businesslike operation wesinger v commissioner supra the various changes to petitioner’s horse activity appear to us to have been relatively insignificant while construction of barns and other facilities may demonstrate a profit objective strickland v commissioner supra phillips v commissioner supra we note that petitioner’s primary purpose for constructing the barn was to improve horse breeding and it is as consistent with a hobby as with a business petitioner’s testimony that she had a simple and concise business plan to raise good quality horses well-trained horses horses that will give petitioner a good reputation horses that will do well in the market is inadequate for us to conclude that petitioner had an established business plan see wesinger v commissioner tcmemo_1999_372 sanders v commissioner tcmemo_1999_208 finding similar testimony inadequate the fact that petitioner hired a professional trainer to finish training her horses is not particularly helpful to petitioner a hobby breeder who enters horses in shows to enhance her reputation and to participate in competition also may hire a professional trainer to finish training the horses we conclude that petitioner did not operate her horse activity in a businesslike manner this factor weighs in favor of respondent expertise of petitioner and her advisers in considering this factor the focus is upon expertise and preparation with regard to the economic aspects of a particular business see eg golanty v commissioner t c pincite while petitioner may have developed an expertise in the breeding and training of horses her expertise did not extend to the economics thereof petitioner testified that she consulted with a successful breeder several professional trainers and a veterinarian but the discussions focused primarily on the scientific and practical aspects of breeding and training and not on the business aspects thereof petitioner’s discussions with a c p a amounted to little more than how to keep track of and to maintain expense receipts for tax purposes we conclude that petitioner was not an expert and did not seek out expert advice regarding the economic aspects of carrying on a horse activity for profit this factor weighs in favor of respondent time and effort petitioner expended in carrying on the activity sec_1_183-2 income_tax regs specifies that devotion of much personal time to an activity and withdrawal from another occupation may evidence a profit objective this is particularly true where the activity does not have substantial personal or recreational aspects id petitioner contends that this factor weighs in her favor because she voluntarily opted to work fewer shifts at the hospital to spend more time on her horse activity however petitioner’s initial reason for working at the hospital only and days a week was because she felt burned out and wanted to spend more time with her children we recognize that feeding and watering horses and cleaning stalls may be unpleasant tasks but they are involved in caring for horses regardless of whether an activity is pursued as a hobby or as a business giles v commissioner tcmemo_2006_ see sullivan v commissioner tcmemo_1998_367 affd without opinion 202_f3d_264 5th cir it is evident that petitioner received much satisfaction from raising and training horses since childhood petitioner has dreamed of owning horses and petitioner clearly enjoyed riding in and entering horse shows while petitioner may have spent a significant amount of time with her horse activity because the horse activity had significant personal and recreational components this factor is neutral expectation of appreciation in value no evidence is before us as to the value of petitioner’s horses and it is not possible for us to determine the extent to which petitioner’s significant losses from her horse activity someday may be offset by appreciation in value see wesinger v commissioner supra this factor weighs in favor of respondent success in carrying on other activity petitioner has not engaged in any activity similar to her horse activity this factor is neutral history of income or losses a history of substantial losses may indicate that an activity is not conducted for profit see golanty v commissioner supra pincite sec_1_183-2 income_tax regs however if the losses occur during the startup phase of an activity the losses do not necessarily indicate a lack of profit objective see engdahl v commissioner t c pincite we have found that the startup phase of a horse-breeding activity may be to years see id davis v commissioner tcmemo_2000_101 phillips v commissioner tcmemo_1997_ because petitioner began her horse activity in the losses petitioner incurred during the years in issue may still be considered part of the startup phase we treat this factor as neutral the amount of occasional profits the amount of occasional profits a taxpayer earns from an activity may show that the taxpayer has a profit objective sec_1_183-2 income_tax regs while petitioner realized no profits we treat this factor as neutral because as stated losses are not unreasonable during the startup phase of a horse- breeding activity see strickland v commissioner tcmemo_2000_309 financial status substantial income from sources other than an activity may indicate that the activity is not carried on for profit especially if losses from the activity generate substantial tax benefits sec_1_183-2 income_tax regs during the years in issue petitioner’s average annual salary was dollar_figure as a result of the losses in her horse activity petitioner claimed significant reductions in her taxable_income in each year in issue and a total of dollar_figure in claimed tax savings over years this factor weighs in favor of respondent elements of personal pleasure personal or recreational aspects of an activity may indicate that the activity was not conducted with a profit objective mckeever v commissioner tcmemo_2000_288 sec_1 b income_tax regs however the sole fact that a taxpayer derives pleasure from an activity does not show lack of a profit objective if the activity is in fact conducted for profit as evidenced by other factors sec_1_183-2 income_tax regs see also 59_tc_312 a business will not be turned into a hobby merely because the owner enjoys the activity in the context of horse breeding a particularly relevant fact is whether a taxpayer or the taxpayer’s family rides the horses for pleasure or recreation see montagne v commissioner tcmemo_2004_252 affd 166_fedappx_265 8th cir bunney v commissioner tcmemo_2003_233 on the facts of this case the recreational aspects of petitioner’s horse activity suggest an activity without a profit objective this factor weighs in favor of respondent conclusion of the above factors five weigh in favor of respondent four are neutral while none weighs in favor of petitioner we hold that petitioner’s horse activity during the years in issue was an activity not carried on for profit within the meaning of sec_183 this case is decided on the preponderance_of_the_evidence and is unaffected by sec_7491 see 124_tc_95 to reflect the foregoing decision will be entered for respondent this opinion only applies to the years in issue and petitioner is not precluded from establishing a for-profit objective in later years see rinehart v commissioner tcmemo_2002_9


t c memo united_states tax_court james lawton robertson and lillian janette humber robertson petitioners v commissioner of internal revenue respondent docket no filed date richard d gamblin james lawton robertson and louis h watson for petitioners robert w west for respondent memorandum findings_of_fact and opinion jacobs judge respondent determined the following deficiencies in petitioners' federal income taxes deficiency dollar_figure dollar_figure dollar_figure year the issue for decision is whether reimbursement by the state of mississippi for certain travel lodging and meal expenses_incurred by james lawton robertson petitioner during his term as a justice of the mississippi supreme court is excludable from petitioners' income to the extent petitioner incurred unreimbursed travel lodging and meal expenses we must also decide whether those expenses are deductible from petitioners' income unless otherwise indicated all section references are to the internal_revenue_code as in effect for the years in issue all rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time the petition was filed petitioner resided in jackson mississippi and petitioner's wife lillian janette humber robertson mrs robertson resided in oxford mississippi petitioner's appointment and election as a justice to the mississippi supreme court in petitioner began practicing law in greenville mississippi in petitioner became a full-time law professor at the university of mississippi school of law the law school in university mississippi which is adjacent to oxford mississippi and which we will refer to as oxford at that time mrs robertson started to work as the news director in the public relations department at the university of mississippi in oxford on date the governor of mississippi appointed petitioner a justice on the mississippi supreme court mississippi's highest court petitioner was appointed to fill a retired justice's unexpired term which was to end on date in date because there were more than months left in the unexpired term petitioner was required under mississippi law to stand for election for the remainder of the term petitioner was elected without opposition in petitioner ran for reelection with opposition and won a full 8-year term that expired on date the mississippi supreme court which is situated in jackson mississippi consists of nine justices and is divided into three districts northern central and southern three justices are elected to each of the three districts petitioner was elected to the third northern district which included oxford after petitioner's appointment and subsequent election to the mississippi supreme court he continued to teach one course each semester except during the summer at the law school in oxford as an adjunct professor petitioner was given an office at the law school he taught his course on friday afternoons and participated in other law school functions including moot court judging law review writing and teaching continuing legal education courses at all relevant times petitioners owned a home in oxford petitioners were registered to vote in oxford conducted their banking in oxford registered their automobiles in oxford had their three sons in public schools in oxford paid real_estate_taxes and claimed a homestead_exemption for their home in oxford attended church in oxford and were involved in several civic organizations in oxford because the distance between oxford and jackson is miles one way petitioner developed a weekly schedule to accommodate his two employment positions on sunday afternoons petitioner drove from oxford to jackson from monday through thursday petitioner remained in jackson and attended to his duties on the mississippi supreme court on thursday afternoons petitioner drove back to oxford on friday afternoons petitioner taught one course at the law school during the weekend petitioner resided at his home in oxford petitioner completed round trips between oxford and jackson times during times during and times during while in jackson petitioner resided in an apartment and paid monthly rent while in oxford he resided with mrs robertson and their three sons as a justice petitioner had two primary duties in jackson first petitioner was assigned to a three-justice panel as designated by the chief justice to hear cases when the mississippi supreme court is in session each panel hears case sec_1 day during the week typically each panel hears cases for a 6-week period followed by a 3-week period for writing opinions second petitioner heard cases at en_banc conference sec_1 day per week the panel hearings and en_banc hearings were generally on separate days and thus as a matter of practicality the justices' presence in jackson was required at least days out of each week at the mississippi supreme court petitioner had an office staff and access to the state library however petitioner like other justices often preferred to conduct his research and draft opinions at home in his district petitioner completed much of his judicial work at the law school library in oxford during the weekends although not legally required to do so petitioner as well as most other justices performed various nonjudicial civic functions in his home district in oxford the purpose of participating in these civic activities was in part to secure reelection some of the activities included visiting local judges' and clerks' offices bar associations and colleges and universities giving speeches at civic organizations schools churches and public dedications and participating in continuing legal education programs and administering oaths of office of public officials in petitioner ran for reelection as a justice of the mississippi supreme court and was defeated petitioner resigned from the court on date and began teaching at fordham university school of law in new york in date as a visiting professor in date petitioner returned to jackson mississippi and entered private practice federal_income_tax returns for each of the years in issue petitioners filed a joint federal tax_return petitioners reported adjusted_gross_income of dollar_figure for dollar_figure for and dollar_figure for petitioner's wage and salary income before retirement contributions for the years in issue was as follows supreme court dollar_figure dollar_figure dollar_figure univ of miss big_number big_number big_number fordham univ --- --- big_number total big_number big_number big_number petitioner was reimbursed by the state of mississippi for travel lodging and meal expenses_incurred while attending mississippi supreme court sessions in jackson and returning to oxford at the end of each month petitioner prepared a schedule of expenses and submitted them to the financial officer of the court for reimbursement and a check would be issued in that amount to petitioner within to days petitioners did not report the amount of reimbursement petitioner received from the state of mississippi on their federal joint income_tax returns for and furthermore petitioners deducted travel lodging and meal expenses that were not reimbursed by the state of mississippi for petitioner's attendance at the court in jackson notice_of_deficiency in the notice_of_deficiency respondent determined that petitioners underreported their income for each of the years in issue by the amount of travel lodging and meal expense reimbursements petitioner received from the state of mississippi respondent further disallowed petitioners' deduction for unreimbursed travel lodging and meal expenses for the years in issue at trial respondent conceded that the transportation_expenses incurred by petitioner relating to his travel between jobs in jackson mississippi as a justice of the mississippi supreme court and oxford mississippi as an adjunct professor of law at the university of mississippi are deductible for those days in which petitioner traveled from jackson to oxford for the purpose of teaching classes see revrul_61_67 1961_1_cb_25 modified by revrul_76_453 1976_2_cb_86 opinion our task herein is to decide whether the travel lodging and meal expense reimbursements paid to petitioner for his attendance at the mississippi supreme court in jackson are includable in petitioners' income for and in addition we must decide whether any unreimbursed travel lodging and meal expenses for petitioner's attendance in jackson are deductible from petitioners' income for the years in issue petitioner asserts that his tax_home was oxford mississippi and therefore his travel to jackson for court hearings was travel away from home alternatively petitioner contends that even if it is determined that his tax_home was jackson he still can exclude the travel reimbursement and deduct unreimbursed travel_expenses because he was required to reside in oxford to fulfill his duties as a mississippi supreme court justice respondent counters that petitioner's tax_home was jackson not oxford and that mississippi law did not require petitioner to reside in oxford for the reasons that follow we agree with respondent gross_income means all income from whatever source derived sec_61 sec_1_61-1 income_tax regs see also 348_us_426 gross_income does not include the amount of reimbursed trade_or_business_expenses of employees that qualify under an accountable_plan sec_62 sec_1_62-2 income_tax regs an accountable_plan is one in which the reimbursed expenses would otherwise be allowable as a deduction to the employee under part vi of subchapter_b of the internal_revenue_code secs the reimbursed expenses are substantiated by the employee and the employee returns any amounts in excess of expenses sec_1_62-2 d - f income_tax regs the matter herein concerns only the first prong namely whether the reimbursed expenses have a business connection and would otherwise be deductible sec_162 allows as a deduction ordinary and necessary expenses_incurred during the taxable_year in carrying_on_a_trade_or_business such expenses include traveling expenses including meals_and_lodging while away from home in the pursuit of a trade_or_business sec_162 generally for federal tax purposes a taxpayer's home under sec_162 is his principal_place_of_business 74_tc_578 72_tc_190 affd 662_f2d_253 4th cir 49_tc_557 if a taxpayer maintains two businesses this court has determined the taxpayer's home from three objective factors the place where he spends more of his time the place where he engages in greater business activity and the place where he derives a greater proportion of his income hoeppner v commissioner tcmemo_1992_703 see also 64_tc_1079 64_tc_175 affd 532_f2d_1088 6th cir exclusions and deductions from income are a matter of legislative grace and are narrowly construed 503_us_79 292_us_435 consequently the taxpayer has the burden to show that an exclusion or deduction is allowable 319_us_590 we conclude that petitioner's tax_home was jackson mississippi rather than oxford mississippi see montgomery v commissioner supra thoma v commissioner tcmemo_1983_623 in a typical week petitioner spent days in jackson and days in oxford while he was in jackson all days were committed to petitioner's work as a justice on the mississippi supreme court while in oxford only day friday was committed to petitioner's work as an adjunct professor at the law school further petitioner earned dollar_figure per year from his work as a justice as opposed to dollar_figure per year from his work as a professor petitioner asserts that as a practical matter his work on the mississippi supreme court required him to be present in jackson only days out of every week--for panel day and en_banc day he also asserts that he did much of his substantive work as a justice namely research and opinion drafting while in oxford and particularly at the law school library accepting petitioner’s assertions nonetheless the fact remains that petitioner spent days in jackson every week further petitioner's mississippi supreme court office and staff were in jackson not oxford even though petitioner could have apparently maintained both in oxford at his own expense if he had so chosen ultimately we are bound by what actually occurred not what might have happened 429_us_569 417_us_134 because we find that petitioner's tax_home for purposes of sec_162 was jackson and not oxford except as set forth below petitioner may not deduct the travel_expenses including transportation meals_and_lodging incurred for traveling between his residence in oxford and his principal_place_of_business in jackson in general these expenses are considered nondeductible personal commuting expenses under sec_262 see 413_us_838 326_us_465 however the transportation costs that petitioner incurred in traveling from jackson where he served as a mississippi supreme court justice to oxford on days in which petitioner taught classes at the law school are deductible as ordinary and necessary business_expenses as respondent concedes see 335_f2d_496 5th cir affg tcmemo_1962_233 40_tc_657 32_tc_947 affd 283_f2d_865 5th cir the u s court_of_appeals for the fifth circuit to which an appeal of this case would lie has addressed the deductibility of commuting expenses between dual residences and provided an exception to the general_rule denying deductibility of these expenses in 278_f2d_571 5th cir the court_of_appeals held that where a louisiana supreme court justice justice le blanc was required by the state constitution to maintain his district residence during his term in office he was allowed to deduct the rental expenses of an apartment in new orleans during his attendance on the court in the latter city justice le blanc's district residence was approximately miles from new orleans and after his work on the court was completed each week he returned to his home district for the weekend id pincite the state constitution required the justices to maintain residency in their district for the years prior to election and provided for the immediate vacating of the the u s court_of_appeals for the fourth circuit has also addressed this issue in 148_f2d_913 4th cir the court_of_appeals held that a north carolina supreme court justice who maintained his district residence while attending court sessions in the state capital could not deduct his travel_expenses the justice involved in that case maintained his district residence as a matter of personal choice while serving on the court id pincite his presence was required in the state capital while the court was in session but not otherwise id the court_of_appeals for the fifth circuit has distinguished barnhill v commissioner supra from 278_f2d_571 5th cir on the basis that in the latter the state required the justices to maintain their district residences 621_f2d_731 5th cir 335_f2d_496 5th cir affg and remanding tcmemo_1962_233 office where the justice changed his residence from the district to which he was elected id pincite with regard to the case before us the mississippi constitution provides that the legislature shall divide the state into three supreme court districts and there shall be elected one judge for and from each district miss const art vi sec_145 this section indicates as petitioner asserts on brief that the justices must reside in their respective districts as a prerequisite to election or appointment to the court however the section goes on to provide that the removal of a judge to the state capitol during his term of office shall not render him ineligible as his own successor for the districts from which he has removed id petitioner and other present and former justices testified that this latter phrase means that there is no legal requirement that justices maintain their residences in their home districts while serving on the mississippi supreme court their interpretation is supported by two different state statutes section of the mississippi code provides that state officers who must remove themselves to another county for official purposes will be deemed to maintain their home residence unless they choose to establish a new residence in the county where they are performing their official duties miss code ann sec section of the mississippi code provides that only circuit and county judges and chancellors must reside within their respective districts and counties there is no mention of such a requirement for supreme court justices miss code ann sec thus it is clear as admitted by petitioner that mississippi supreme court justices are not legally required to maintain their district residences while serving on the court this makes petitioner's case factually distinguishable from united_states v le blanc supra nonetheless petitioner requests us to expand the holding in le blanc to circumstances other than a legal compulsion to maintain a district residence petitioner argues that a legal compulsion is but an indicia of whether in fact an appellate miss code ann sec provides all public officers of this state who are required to or who for official reasons remove from the county of their actual household and residence to another county of this state for the purpose of performing the duties of their office shall be deemed in law in all respects to be householders and residents of the county from which they so remove unless such officer elects to become an actual householder and resident of the county to which he removed for official causes miss code ann sec provides the judges of the supreme circuit and county courts and chancellors shall be conservators of the peace for the state each with full power to do all acts which conservators of the peace may lawfully do and the circuit judges and chancellors shall reside within their respective districts and the county judges shall reside in their respective counties judge is away from home in the pursuit_of_trade_or_business thus petitioner contends that economic political and other practical necessities may also suffice to establish the fact that a taxpayer is away from home petitioner and other present and former mississippi supreme court justices testified regarding the political and practical necessity of maintaining a high profile in their respective districts while serving on the court they also testified regarding the state's public policy of encouraging such a profile through the passage of section of the mississippi code which provides for reimbursement of travel lodging and meal expenses of state employees who are required to travel in the performance of their official duties miss code ann sec this case is appealable to the court_of_appeals for the fifth circuit and consequently we are bound by its decisions 54_tc_742 affd 445_f2d_985 10th cir nothing in united_states v le blanc supra permits us to conclude that political economic or practical necessities can be a basis for permitting the deduction of travel_expenses between a residence and a principal_place_of_business see 621_f2d_731 5th cir 335_f2d_496 5th cir a state's public policy to the contrary cannot control the operation of federal tax laws unless otherwise expressly provided for by congress 287_us_103 even public policy designed to encourage the recall of federal judges cannot control the operation of the federal tax laws where the judges are not required_by_law to maintain two different residences 32_f3d_911 5th cir the relief petitioner seeks should be sought from congress not from the courts see 532_f2d_1088 6th cir affg 64_tc_175 we have considered all of petitioner's other arguments and find them to be without merit thus we hold that petitioner's travel lodging and meal expenses_incurred due to his attendance at the mississippi supreme court sessions in jackson are nondeductible expenses under sec_262 see 413_us_838 326_us_465 consequently those expenses reimbursed by the state of mississippi are includable in income putnam v united_states supra pincite sec_1_62-2 income_tax regs and those expenses not reimbursed by the state are not deductible sec_162 to reflect the foregoing and the concessions of the parties decision will be entered under rule