wise guys holdings llc peter j forster tax_matters_partner petitioner v commissioner of internal revenue respondent docket no filed date r mailed to p as w’s tax_matters_partner tmp a notice of final_partnership_administrative_adjustment fpaa for w’s taxable_year approximately nine months later r through an office different from the office that mailed the fpaa mailed to p as w’s tmp a second fpaa for w’s taxable_year the first fpaa and the second fpaa are similar in content but are different in the contact information and a few other minor items shown on the face p filed his petition in response to the second fpaa but after the statu- tory deadline for challenging the first fpaa had expired held the second fpaa is invalid and thus disregarded because sec_6223 precluded r from properly mailing the second fpaa to p the court lacks jurisdiction to decide this case because the petition was not filed timely as to the first fpaa peter j forster pro_se joy e gerdy zogby and paul t butler for respondent opinion thornton judge this is a partnership-level proceeding under the tax equity and fiscal responsibility act of tefra pub_l_no sec_402 stat pincite petitioner commenced this case on date by filing with the court a petition allegedly pursuant to sec_6226 or b petitioner is the tax_matters_partner tmp of wise guys holdings llc wgh and this case concerns wgh’s taxable_year respondent moves to dismiss this case for lack of jurisdic- tion asserting that the petition was not filed timely within subsequent section references are to the applicable versions of the in- ternal revenue code pursuant to an order of this court dated date petitioner subsequently filed an amended petition on date verdate nov jul jkt po frm fmt sfmt v files bound vol without crop marks b v wise guys holdings jamie united_states tax_court reports the 90-day or 60-day period of sec_6226 and b respectively respondent notes that on date a notice of final_partnership_administrative_adjustment fpaa for wgh’s taxable_year was mailed to petitioner in his capacity as wgh’s tmp and that the petition was not filed until approximately one year later petitioner objects to respondent’s motion petitioner asserts that the petition was filed timely in response to a second fpaa for wgh’s taxable_year mailed to petitioner in his capacity as wgh’s tmp on date neither party asserts nor does the record show that the second fpaa was mailed on account of fraud malfeasance or misrepresentation of a material fact within the meaning of sec_6223 we hold that the second fpaa is invalid and thus dis- regarded because sec_6223 precluded respondent from properly mailing the second fpaa to petitioner because the petition was not filed timely as to the first fpaa the court lacks jurisdiction to decide the case and accordingly will dis- miss it i introduction background neither party requested a hearing and we conclude that none is necessary to decide respondent’s motion to dismiss for the sole purpose of deciding that motion we draw the fol- lowing background information from petitioner’s allegations in the amended petition from the uncontroverted statements in respondent’s motion to dismiss including the exhibits attached thereto and from the exhibits attached to peti- tioner’s objection to respondent’s motion to dismiss the record does not definitively establish the location of wgh’s principal_place_of_business when the petition was filed petitioner alleged in his amended petition that wgh’s principal_place_of_business was in virginia apparently at the time of the amended petition ii background information on date an internal_revenue_service irs office in hartford connecticut mailed to petitioner in his capacity as wgh’s tmp two copies of an fpaa first fpaa relating to wgh’s taxable_year one copy was sent by verdate nov jul jkt po frm fmt sfmt v files bound vol without crop marks b v wise guys holdings jamie wise guys holdings llc v commissioner certified mail to petitioner at wgh’s last_known_address in manassas virginia and was delivered there three days later the other copy was sent by certified mail to petitioner at his last_known_address in great falls virginia and was deliv- ered there on date the face of the first fpaa lists date in a section entitled date fpaa mailed to tax_matters_partner and states that questions may be directed to a named irs employee k m p at a listed address or phone number in connecticut the mailing to the manassas address included a five-page examination_report not included in the mailing to the great falls address the face of the first fpaa explains that the commissioner sends an examination_report only to the tmp and that any other partner should contact the tmp to get a copy of the examination_report on date an irs office other than the hart- ford office mailed to petitioner in his capacity as wgh’s tmp a copy of another fpaa second fpaa relating to wgh’s taxable_year this copy was addressed to peti- tioner at the same great falls address mentioned above and unlike the first fpaa bears no certified mail stamp or cer- tified mail number also on date a revenue_agent k d in an irs office in fairfax virginia mailed to petitioner’s representative at his address pursuant to a power_of_attorney or other authorization that the irs had on file another copy of the second fpaa k d included in the mailing to the representative a one-page cover letter stating that a report was enclosed and that the representative could call k d at her listed virginia phone number with any question the face of the second fpaa lists no date in the section entitled date fpaa mailed to tax_matters_partner and states that questions may be directed to a named irs employee l s b at his listed address or phone number in pennsylvania the first fpaa and the second fpaa are similar in con- tent but are different in the contact information and a few the first fpaa specifically lists the mailing address of the irs office which mailed that fpaa the second fpaa does not do similarly the faces of the fpaas indicate that they were mailed by different irs offices while the second fpaa states that questions may be directed in writ- ing to l s b at his address listed on the heading of the fpaa no such address is listed verdate nov jul jkt po frm fmt sfmt v files bound vol without crop marks b v wise guys holdings jamie united_states tax_court reports other minor items shown on the face the second fpaa does not set forth any partnership-level adjustment or determina- tion that is not listed in the first fpaa petitioner attached the second fpaa to his petition under- lying this case petitioner also attached the second fpaa to his amended petition discussion petitioner seeks through his petition as amended to pursue in this court a partnership-level proceeding under tefra this court’s jurisdiction over a tefra partnership- level proceeding is invoked upon the commissioner’s mailing of a valid fpaa and the proper filing of a petition_for_readjustment of partnership items for the year or years to which the fpaa pertains see 123_tc_64 a tmp gen- erally ha sec_90 days after the mailing of a valid fpaa to file a petition_for_readjustment of the partnership items covered by the fpaa see sec_6226 131_tc_206 if the tmp does not timely file such a petition within that 90-day period then any notice_partner and any 5-percent group may file a petition_for_readjustment of the partnership items within the 60-day period that follows the close of the 90-day period see sec_6226 pcmg trading partners xx l p v commissioner t c pincite see also sec_6231 respectively defining the terms notice_partner and percent group the court lacks jurisdiction to decide a tefra proceeding that is commenced after the 150-day period consisting of the just-mentioned 90-day and 60-day periods see 85_tc_900 the parties do not dispute that petitioner’s petition was not filed timely as to the first fpaa or that it was filed timely as to the second fpaa they dispute whether the second fpaa was valid so that a petition could be properly filed with respect to it respondent argues that the second fpaa was invalid pursuant to sec_6223 under that section if the secretary mails a notice of final_partnership_administrative_adjustment for a partnership taxable_year with respect to a partner the secretary may not mail verdate nov jul jkt po frm fmt sfmt v files bound vol without crop marks b v wise guys holdings jamie wise guys holdings llc v commissioner another such notice to such partner with respect to the same taxable_year of the same partnership in the absence of a showing of fraud malfeasance or misrepresentation of a material fact sec_6223 petitioner counters in his objec- tion to respondent’s motion that he filed his petition in good_faith in response to the second fpaa and he cannot be faulted for respondent’s mailing of that document or for relying on that document as presumably valid petitioner adds in his objection to respondent’s motion that the audit underlying this case was an arduous process that he has been frustrated throughout this process due to the lack of communication with respondent and that fairness and jus- tice dictate that the court not dismiss this case on a tech- nicality that the second fpaa was not valid because one had already been sent we agree with respondent that the court must dismiss this case for lack of jurisdiction because of the absence of a timely petition while neither party has cited any case directly on point we are mindful of the related law applicable to the mailing of two notices of deficiency sec_6212 generally provides that if the secretary has mailed to the taxpayer a notice_of_deficiency and the taxpayer timely petitions the court with respect thereto the secretary shall have no right to mail a further notice_of_deficiency to the tax- payer for the same taxable_year in 1_tc_986 the court construed a predecessor of that section namely sec_272 of the internal_revenue_code_of_1939 there the commissioner mailed a notice of trans- feree liability to a taxpayer and the taxpayer timely peti- tioned the court with respect to the notice see mccue v commissioner t c pincite before the petition was filed former sec_272 provided in relevant part sec_272 procedure in general f further deficiency letters restricted -if the commissioner has mailed to the taxpayer notice of a deficiency as provided in subsection a of this section and the taxpayer files a petition with the board with- in the time prescribed in such subsection the commissioner shall have no right to determine any additional deficiency in respect of the same taxable_year except in the case of fraud and except as provided in sub- section e of this section relating to assertion of greater deficiencies be- fore the board or in sec_273 relating to the making of jeopardy assessments verdate nov jul jkt po frm fmt sfmt v files bound vol without crop marks b v wise guys holdings jamie united_states tax_court reports however the commissioner mailed the taxpayer a second notice of transferee_liability with respect to the same liability see id the taxpayer petitioned the court with respect to the second notice see id the court dismissed the second action stating that the taxpayer had no right to file the second petition because former sec_272 precluded the commissioner from mailing the second notice as a valid notice see id pincite cf 218_f2d_389 4th cir stating that a second deficiency_notice issued for a taxable_year was not invalid under former sec_272 because among other reasons it determined an additional deficiency on account of fraud 140_f2d_277 4th cir holding that a second deficiency_notice issued for a taxable_year was valid where it determined a deficiency in a different type of tax than did the earlier deficiency_notice aff ’g on this issue 1_tc_865 later in 84_tc_248 the court cited mccue in support of the court’s conclusion that a valid peti- tion is the basis of the tax court’s jurisdiction to be valid a petition must be filed from a valid statutory notice accord lone star life ins co v commissioner tcmemo_1997_465 holding that a notice_of_deficiency was invalid where it was the second notice mailed for that year and the taxpayer timely petitioned the court as to the first notice petitioner seeks to invoke the court’s jurisdiction to decide this case which means that he bears the burden of proving that the court has jurisdiction to decide the case see 114_tc_268 aff ’d 22_fedappx_837 9th cir fehrs v the cases cited supra pp involve sec_6212 or its prede- cessor former sec_272 both of which are textually similar to sec_6223 one notable difference however is that sec_6212 and former sec_272 generally prohibit the commissioner from mailing an additional deficiency_notice for a taxable_year for which the taxpayer has timely peti- tioned the court with respect to a previous deficiency_notice cf gmelin v commissioner tcmemo_1988_338 holding that former sec_272 does not require that the commissioner wait until the period for filing a petition as to a deficiency_notice expires before issuing another deficiency_notice as to the same taxable_year aff ’d without published opinion 891_f2d_280 3d cir sec_6223 on the other hand generally bars the commissioner from mailing a second fpaa to a particular partner without regard to whether a petition has been filed in this court verdate nov jul jkt po frm fmt sfmt v files bound vol without crop marks b v wise guys holdings jamie wise guys holdings llc v commissioner commissioner 65_tc_346 in order to meet his burden_of_proof petitioner must establish affirmatively all facts giving rise to the court’s jurisdiction see david dung le m d inc v commissioner t c pincite 35_tc_177 the court’s jurisdiction is set explicitly by statute see 94_tc_1 85_tc_527 see also sec_7442 and the court lacks authority to apply equitable principles eg estoppel to acquire jurisdiction over a matter that the statute does not authorize the court to decide see 110_tc_285 see also 95_tc_617 and cases cited thereat petitioner does not allege that he failed to receive timely notice of the beginning of the administrative_proceeding underlying this case see generally sec_6223 nor does petitioner allege that the first fpaa was issued improp- erly or that the first fpaa was otherwise invalid petitioner also does not advance any reason he did not timely petition the court in response to the first fpaa petitioner essen- tially points the court to the second fpaa and asks the court to apply equitable principles to exercise jurisdiction on the basis of the second fpaa we decline to do so as we have stated whether the court has jurisdiction to decide a tefra case such as this one turns not on our consideration of equitable principles but on our finding that a petition was properly filed in response to a valid fpaa respondent having mailed a valid fpaa the second fpaa mailed for that same year is invalid pursuant to sec_6223 absent a showing of fraud malfeasance or misrepresentation of a material fact petitioner has failed to make such a showing in fact petitioner does not even assert that respondent mailed the second fpaa on account of fraud malfeasance or misrepresentation of a material fact the lack of such an assertion is not surprising given the resemblance of the first fpaa to the second fpaa and the fact that the second fpaa contains no adjustment or determination other than those set forth in the first fpaa it would seem that the mailing of the second fpaa was more the result of a mistake or a lack of communication on the part of the irs than of verdate nov jul jkt po frm fmt sfmt v files bound vol without crop marks b v wise guys holdings jamie united_states tax_court reports fraud malfeasance or a misrepresentation of a material fact we conclude that the second fpaa is invalid and we disregard it for purposes of deciding whether petitioner’s petition was timely filed to invoke the court’s jurisdiction to decide this case the petition was not filed timely as to the first fpaa accordingly we will grant respondent’s motion and dismiss this case for lack of jurisdiction on the ground that a timely petition was not filed as required by sec_6226 or b we have considered all arguments petitioner made for a contrary decision and to the extent not discussed we have rejected those arguments as without merit to reflect the foregoing an appropriate order of dismissal will be entered f while the first fpaa and the second fpaa are similar in content nei- ther is a duplicate copy of the other within the meaning of sec_301_6223_f_-1 proced admin regs the regulations generally allow the commissioner to issue a duplicate copy of an fpaa where for exam- ple the original is lost see id verdate nov jul jkt po frm fmt sfmt v files bound vol without crop marks b v wise guys holdings jamie


internal revenue serivce index no number release date cc ebeo 4-plr-116718-98 december taxpayer this is in reply to a request for a ruling concerning the deduction limitation of sec_162 of the internal_revenue_code and its application to taxpayer with respect to remuneration paid to certain individuals who resign their positions as officers of taxpayer the facts as represented by taxpayer are as follows taxpayer is a publicly-held corporation and a calendar_year taxpayer several of taxpayer’s corporate officers either have or intend to resign their positions as officers and all of their duties as such these individuals may continue to perform services as taxpayer employees for the remainder of the year of resignation and possibly in future years but it not their or taxpayer’s intent that these individuals resume their duties as officers at any time in the foreseeable future these officers however may be listed pursuant to the executive compensation disclosure rules under the securities exchange act as chief_executive_officer or one of the highest compensated officers of taxpayer for the year of resignation sec_162 of the code allows as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business including a reasonable allowance for salaries or other compensation_for_personal_services actually rendered sec_162 of the code provides that in the case of any publicly_held_corporation no deduction is allowed for applicable_employee_remuneration with respect to any covered_employee to the extent that the amount of the remuneration for the taxable_year exceeds dollar_figure sec_162 of the code defines covered_employee to mean any employee of the taxpayer if as of the close of the taxable_year such employee is the chief_executive_officer of the taxpayer or is an individual acting in such capacity or the total compensation of such employee for the taxable_year is required to be reported to shareholders under the securities exchange act of by reason of such employee being among the highest compensated officers for the taxable_year other than the chief_executive_officer sec_1_162-27 of the income_tax regulations provides the general_rule for who is a covered_employee under the regulations a covered_employee means any individual who on the last day of the taxable_year is a the chief_executive_officer of the corporation or is acting in such capacity or b among the four highest compensated officers other than the chief_executive_officer whether an individual is the chief_executive_officer or one of the four highest compensated officers is determined pursuant to the executive compensation disclosure rules under the exchange act in the notice of proposed rulemaking containing the proposed_regulations under sec_162 the preamble contains the following language concerning the identification of covered_employee the regulations clarify which employees are covered employees for purposes of sec_162 the legislative_history to sec_162 provides that covered employees are defined by reference to the sec rules governing executive compensation disclosure under the exchange act under the regulations an individual generally is a covered_employee if the individual’s compensation is reported on the summary compensation table under the sec’s executive compensation disclosure rules as set forth in item of regulation s-k cfr under the exchange act however the regulations specifically provide that in order to be a covered_employee for sec_162 purposes an individual must be employed as an executive officer on the last day of the taxable_year thus only those employees who appear on the summary compensation table and who are also employed on the last day of the taxable_year are covered employees therefore based on the facts as outlined above officers of taxpayer who resign their positions before the last day of the taxable_year with no intent to resume their duties as officers at any time in the foreseeable future will not be covered employees for that year and no compensation paid to them with respect to that year will be subject_to the sec_162 deduction limitation this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent except as specifically ruled above no opinion is expressed as to the federal tax consequences of the transaction described above under any other provisions of the code sincerely yours _________________________ robert b misner assistant chief branch office of the associate chief_counsel employee_benefits and exempt_organizations enclosure copy for sec_6110 purposes


internal_revenue_service department of the treasury index numbers washington dc number release date person to contact telephone number refer reply to cc dom corp plr-103743-99 date date mutual bank state x y dear this letter responds to your date request for rulings on certain federal_income_tax consequences of a proposed transaction the information in that request is summarized below summary of facts mutual bank is a federally chartered mutual savings association engaged in banking and banking related business in state x as a mutual entity mutual bank does not have authorized capital stock instead holders of mutual bank deposit accounts the depositors have mutual ownership interests consisting of liquidation and voting rights in mutual bank for what are represented to be valid business purposes mutual bank’s board_of directors has decided mutual bank should convert to a federally chartered mutual holding_company structure proposed transaction plr-103743-99 mutual bank proposes the following steps all of which will be undertaken pursuant to a plan and occur sequentially on approximately the same date i mutual bank will form a federal stock savings association interim as its wholly owned subsidiary ii interim will form a federal stock corporation shc and an interim federal stock savings association interim each as its wholly owned subsidiary iii mutual bank will exchange its federal mutual savings association charter for that of a federal stock savings association to become stock bank the conversion in the conversion the depositors will constructively exchange their mutual ownership interests in mutual bank for shares of stock in stock bank iv interim will cancel its outstanding_stock and exchange its charter for that of a federal mutual holding_company to become mhc v interim will merge with and into stock bank with stock bank surviving as a wholly owned subsidiary of mhc the merger in the merger the depositors will exchange the stock of stock bank constructively received in the conversion for mutual ownership interests in mhc vi mhc will transfer the stock of stock bank to shc the contribution vii shc will offer for sale up to y percent of its common_stock with priority subscription rights granted in descending order to certain depositors in the former mutual bank to certain employee stock benefit plans of stock bank to other members of mutual bank and to certain members of the general_public the offering as a result of the transaction stock bank will be a wholly owned subsidiary of shc which will be until step vii above a wholly owned subsidiary of mhc mhc will not have authorized capital stock rather mutual ownership interests in mhc will consist solely of liquidation and voting rights the depositors will retain interests in mhc as long as they maintain their deposit accounts in stock bank you propose that the transaction be treated as in substance the conversion of mutual bank to stock bank followed by the contribution of stock bank by its owners to mhc in exchange for mutual ownership interests in mhc followed by the contribution of stock bank to shc you further propose that the conversion be treated as a reorganization described in sec_368 of the internal_revenue_code and that the merger and contribution be treated as transfers of property solely in exchange for stock described in sec_351 sec_3 of revproc_99_3 1999_1_irb_103 provides that the plr-103743-99 internal_revenue_service will not rule on the qualification of a transaction as a reorganization under sec_368 additionally sec_3 of revproc_99_3 provides that the service will not rule on the application of sec_351 to an exchange of stock for stock in the formation of a holding_company although revproc_99_3 provides a general no-rule policy concerning sec_368 and sec_351 it also provides that the service has discretion to rule on significant subissues that must be resolved to determine whether a transaction qualifies under either of those sections the service will only rule on such subissues if they are significant and not clearly and adequately addressed by a statute regulation decision of the supreme court tax_treaty revenue_ruling revenue_procedure notice or other authority published in the internal_revenue_bulletin representation to the best of the taxpayer’s knowledge and belief and but for the resolution of the requested rulings below i the conversion is a reorganization described in sec_368 and ii the merger in which the exchange occurs and the contribution are transfers of property solely in exchange for stock described in sec_351 rulings based solely on the information submitted and the representation set forth above we rule as follows the requirement sec_1_368-1 and e of the income_tax regulations that there be a continuity_of_interest in a reorganization is satisfied by the depositors’ constructive exchange of mutual ownership interests in mutual bank for stock in stock bank in the conversion notwithstanding the depositors’ constructive exchange of that stock for mutual ownership interests in mhc immediately thereafter see revrul_80_105 1980_1_cb_78 revrul_69_646 1969_2_cb_54 neither the exchange the contribution nor the offering will prevent the conversion from qualifying as a reorganization under sec_368 see sec_1 e revrul_96_29 1996_1_cb_50 revrul_80_105 1980_1_cb_78 revrul_69_516 1969_2_cb_56 the merger in which the exchange occurs will be treated as the depositors’ contribution of stock bank to mhc in exchange for mutual ownership interests in mhc see revrul_90_95 1990_2_cb_67 revrul_67_448 1967_2_cb_144 the mutual ownership interests in mhc received by the depositors will be treated as stock within the meaning of sec_351 see revrul_78_286 1978_2_cb_145 revrul_69_3 1969_1_cb_103 plr-103743-99 a determination of whether the conversion qualifies as a reorganization under sec_368 and whether the exchange and contribution are described in sec_351 will be made by the district director’s office upon audit of the federal_income_tax returns of mutual bank stock bank shc and mhc we express no opinion on the tax treatment of the transaction under other provisions of the code and regulations or the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above rulings the rulings in this letter are based on the facts and representations submitted under penalties of perjury in support of the request for rulings verification of that information may be required as part of the audit process procedural matters this letter has no effect on any earlier document and is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter should be attached to the federal_income_tax return of each affected taxpayer for the tax_year in which the transaction covered by this letter is completed under a power_of_attorney on file in this office copies of this letter are being sent to your authorized representatives sincerely assistant chief_counsel corporate by robert t hawkes assistant to the chief branch


internal_revenue_service number release date index number ---------------------------- -------------------------------------- -------------------------------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b1 plr-128797-07 date date ----------------------------- legend x -------------------------------------------------- state date dear ---------------- ----------------------- -------------- this letter responds to your letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts the information submitted states that x was incorporated on date under the laws of state the shareholder of x intended that x be treated as an s_corporation effective date but the election to be treated as an s_corporation was not timely filed law and analysis corporation sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be sec_1362 provides that a small_business_corporation may elect to be an s sec_1362 provides the rule on when an s election will be effective plr-128797-07 treated as an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed sec_1362 provides that if no sec_1362 election is made for any x did not timely file an election to be treated as an s_corporation under sec_1362 except as specifically set forth above no opinion is expressed or implied as to taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply as of date x has however established reasonable_cause for not making a timely s election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective date within days from the date of this letter x should submit a properly completed form_2553 effective date with a copy of this letter attached to the relevant service_center the federal_income_tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes the code provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer s requesting it sec_6110 of in accordance with the power_of_attorney on file with this office a copy of this plr-128797-07 letter will be sent to your authorized representative sincerely dianna k miosi chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service national_office technical_advice_memorandum jan mis no index uil no 0o oo case men pse b07 fam taxpayer’s name taxpayer’s address taxpayer's identification no years involved date of conference legend o l t i issue s does a have an economic_interest in the minerals in place conclusion a does have an economic_interest facts b an electric utility had plans to build an electric power plant as part of their plans b acquired nearby lignite reserves through a combination of ownership and leases b then entered into two agreements with a under the grant of operating rights a had the exclusive right to mine the property a would pay a royalty to b a was entitled to sell the lignite to third parties but b retained the right_of_first_refusal on any lignite mined the grant of operating rights states that the purpose of the grant is to transfer an economic_interest to a b claims depletion or treatment under sec_631 of the internal_revenue_code with respect to royalty amounts it receives from a a claims depletion with respect to amounts received from sale of lignite to b excluding amounts paid to b as royalties under the lignite mining agreement a agreed to mine and sell lignite to b under the agreement the price of the lignite was determined by a formula b determined the tonnage of lignite it would buy each year subject_to upper and lower limits prescribed by the agreement on what that tonnage would be the mining agreement also had a clause that in the event that b was unable to accept delivery of the lignite because of force majeure b after a specified lapse of time and for the duration of the existence of the force majeure would pay to a o of the current selling_price of the lignite contracted for but not accepted z law and analysis sec_611 of the code provides that in the case of a lease the allowance for depletion shall be equitably apportioned between the lessor and lessee sec_1_611-1 of the income_tax regulations provides that an economic_interest is possessed in every case in which the taxpayer has acquired by investment any interest in mineral in place and secures by any form of legal relationship income derived from the extraction of the mineral to which the taxpayer must look for a return of the taxpayer's capital sec_1_614-1 provides that the term_interest means an economic_interest in a mineral deposit within the meaning of sec_1_611-1 the term includes working or operating interests royalties overriding royalties net profits interests and to the extent not treated as loans under sec_636 production payments in 310_us_404 the oklahoma city co occ conveyed various mineral_interests to anderson for a total of dollar_figure in return for a cash payment of dollar_figure and dollar_figure payable from one-half of the production from the property with one-half of any proceeds from the sale of the land itself to be applied in repayment of any unpaid balance otherwise payable from production anderson attempted to exclude from its taxable_income the share of income from production paid to occ under the theory that occ had retained an economic_interest in the minerals and therefore occ should be taxable on its share of the production from the property the court ruled that anderson should report all of the income and that the payments to occ were payments for the purchase of the property from occ the court held that occ’s reservation of an interest in the land where it had reserved the right to receive a portion of the proceeds of any sale of the fee interest in the land changed the character of the interest it retained therefore occ did not have an economic_interest in the mineral_interests conveyed to anderson because occ had reserved the right to look to a source_of_income other than from the extraction and sale of the minerals in place in 436_f2d_1216 sth cir the fifth circuit held that the holder of a production_payment did not have an economic_interest in the minerals because he had the option of having proceeds from the sale of equipment applied to repay any outstanding balance on the production_payment the anderson and christie cases thus lead to the conclusion that where a taxpayer acquires a mineral_property but can look to a source_of_income other than the extractior of mineral for recovery_of the taxpayer’s investment the taxpayer does not have an economic_interest in contrast sec_1_612-3 and sec_1_631-3 of the regulations provide for a restoration to ordinary_income of amounts taken as depletion capital_gains in the case of coal and iron ore on advanced_royalties when units paid for are not extracted before termination of the lease although the regulations do not allow depletion on income from mineral not extracted the regulations do not void the taxpayer’s economic_interest for having received income not directly attributable to those units in 864_f2d_671 10th cir the purchaser agreed to pay for a specified minimum quantity of gas each year without regard to whether it took physical delivery of the gas if the amount of gas paid for under the take-or-pay provision exceeded the amount of gas actually taken from freede’s wells the purchaser had the right to credit the excess payment against extra gas taken in later periods the purchaser however would lose the benefit from any excess payments that it did not recoup by taking extra gas within the required period the court likened the excess payments to pre-determined damages payable to the producer for gas that was not taken as expected the court refused to hold that payments made pursuant to a sales contract created production payments for purposes of sec_636 of the code instead the court required the taxpayer receiving the excess payments which are the amounts attributable to volumes paid for but not taken le amounts received by the holder of the economic_interest other than for the production of minerals to report such amounts as income there was no question raised as to whether receipt of payments under the take-or-pay contract negated the seller’s retained economic_interest considering the provisions of the regulations regarding advanced_royalties and the conclusion of the court in freede we conclude that anderson and christie may not be interpreted a234 as necessarily voiding an economic_interest in every case where the owner of a mineral_property may receive payment not directly attributable to extraction an economic_interest is not voided for instance where the taxpayer is merely selling mineral under a requirement that the buyer make specified minimum payments in revrul_72_477 1972_2_cb_310 a taxpayer leased coal land from a utility and entered into a contract to sell coal to that utility in a situation very similar to the present case the service ruled that the taxpayer had acquired an economic_interest unlike the present case the situation described in the revenue_ruling does not mention a force majeure clause nevertheless the revenue_ruling recognizes that a lessee may enter into a contract for sale of mineral to the lessor without voiding the lessee’s economic_interest if the grant of operating rights and the lignite mining agreement are considered as parts of one transaction the potential for income from implementation of the force majeure clause could be viewed as an alternate source_of_income and following anderson and christie a would not have an economic_interest if the two transactions are viewed as separate or if a had contracted to sell lignite to a third party a would be in a situation similar to the taxpayer in freede that is being paid for units of mineral not produced under the facts and circumstances of this case we conclude that the grant of operating rights and the lignite mining agreement provide for a fair apportionment of the depletion_allowance between lessor and lessee within the meaning of sec_611 of the code in a manner similar to the situation described in revrul_72_477 in which the lessee merely contracted for the sale of mineral to the lessor accordingly we conclude that a has acquired an economic_interest with respect to the subject mineral_property caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent 3s


t c memo united_states tax_court james m rankin and shirley rankin petitioners v commissioner of internal revenue respondent docket no filed date david m kirsch for petitioners thomas g schleier and elaine sierra for respondent memorandum findings_of_fact and opinion wells judge respondent determined the following deficiency in and additions to petitioners' federal_income_tax deficiency dollar_figure additions to tax sec_6651 sec_6653 dollar_figure dollar_figure unless otherwise indicated all section references are to the internal_revenue_code as in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure after concessions the principal issue we must decide centers around whether a change in the practice of offsetting against the gross_receipts of petitioner james m rankin's petitioner bail bond business payments made into certain accounts maintained for him as part of that business is a change in a method_of_accounting if the change in the practice is a change in a method_of_accounting then respondent may pursuant to sec_481 make an adjustment increasing petitioners' income in connection with the change findings_of_fact some of the facts have been stipulated for trial pursuant to rule and are incorporated herein by reference we find as facts herein the facts stipulated by the parties at the time of filing the petition in the instant case petitioners resided in union city california petitioner shirley rankin is a petitioner solely by reason of having filed joint returns with petitioner petitioner maintained his books and filed his federal_income_tax returns using the cash_receipts_and_disbursements_method of accounting petitioner is licensed as a bail bond agent by the california department of insurance and since has been engaged in the bail bond business in that state during petitioner operated his bail bond business at five different locations in california redwood city san jose oakland hayward and vallejo on petitioners' federal_income_tax return petitioner reported income from his bail bond business on four schedules c from the beginning of his bail bond business petitioner's primary surety company has been associated bond insurance agency associated and during petitioner executed bail bonds as an agent of associated the terms of petitioner's agency for the period from date through the time of trial are set out in a written_agreement with associated agreement in prior years petitioner had a similar agreement with associated a bail bond is a performance bond requiring the appearance of a criminal defendant at judicial proceedings the principal on the bond is the defendant the obligee is california which requires the defendant's appearance and the surety is the insurance_company writing the bond which guarantees performance as a bail bond agent petitioner is permitted to solicit negotiate and execute bail bonds on behalf of a surety company an insurance_company with which he is affiliated and which he represents when he executes a bond petitioner functions as the agent of the surety company executing bonds collecting premiums and attempting to assure performance of the bonds on behalf of the surety when petitioner writes a bond he collects percent of the face_amount of the bond from a defendant as his earned premium pursuant to the agreement petitioner pays percent of the premium collected to associated the surety as a bond cost pays an additional percent of the premium collected or percent of the face_amount of the bond to an indemnity fund known as a build up fund buf and keeps the remainder of the premium the surety company that issues a bond is principally liable to california for assuring a defendant's court appearance in the event a defendant fails to appear the surety company has to pay a late surrender fee or forfeiture to california if a defendant is not brought to court within days of a failure to appear the court issues a summary_judgment in the amount of the bond resulting in a loss on the bond the agreement however shifts ultimate liability for expenses and forfeitures on each bond from associated to petitioner who is personally liable for during petitioner executed bonds in the amount of dollar_figure earning premiums on such bonds in the amount of dollar_figure petitioner collected dollar_figure of the earned premiums during that year petitioner paid bond costs to associated in the amount of dollar_figure representing percent of the premiums earned on the bonds sold and paid dollar_figure into his buf accounts representing percent of the premiums earned on the bonds sold the amount of the loss in the agreement petitioner agrees to bring a defendant to court as required by the bond or if he fails to indemnify the surety for any expenses_incurred including a forfeiture if petitioner brings the defendant to court within the required time the bond is exonerated and there is no loss a loss occurs only when petitioner is unable to bring the defendant to court petitioner's liability for expenses associated with a bond forfeiture does not arise prior to his obligation to indemnify associated as security for petitioner's promise to indemnify associated the agreement requires petitioner to contribute to a buf account and amounts paid into the buf accounts are derived from bond premiums collected associated established and maintained buf accounts for petitioner with the bank of america and functioned as trustee for petitioner with respect to the buf accounts the buf accounts are required as a necessary condition of petitioner's doing business as a bail bondsman in accordance with the agreement the funds in the buf accounts were accumulated in proportion to the volume of outstanding bonds executed by petitioner on behalf of associated accrued because of his potential liability to associated in the event of a loss petitioner's normal practice is to attempt to obtain collateral from his customers as security for such liability when he is able to obtain collateral petitioner's normal custom is to accept only cash or a deed_of_trust on real_property if the collateral is inadequate to pay a loss petitioner is required to pay the difference from either personal resources or the buf accounts interest which belonged to petitioner was accumulated in the accounts although associated is not required to give petitioner notice of any draw on the buf accounts petitioner typically received quarterly or semiannual reports and periodically inquired about the status of his accounts only associated and not petitioner or california had the right to withdraw funds from the buf accounts maintained for petitioner although associated had the right to draw on the buf accounts those funds could be used only to satisfy petitioner's obligation to indemnify it and so its control of the funds' disposition was very restricted when associated became liable for a bond forfeiture it could but was not required to draw from a buf account to pay its obligation to california pursuant to the agreement associated could forgo indemnity from the buf account when a loss occurred associated would customarily ask petitioner whether he wanted it to be paid from one of the buf accounts or from other sources if petitioner elected to pay the loss from other sources the buf account would not be drawn upon and petitioner would reimburse the surety directly historically petitioner has had a very low rate of payments for forfeitures made from his buf accounts during associated drew only the amount of dollar_figure from the buf accounts maintained for petitioner to satisfy any of petitioner's liabilities pursuant to the agreement petitioner paid all of his other expenses associated with bond forfeitures in from sources other than the buf accounts petitioner does not have access to his buf accounts until the agreement is terminated and all outstanding bonds and all other liabilities petitioner may have to associated are satisfied either petitioner or associated may terminate the agreement with or without cause subject_to certain notice requirements upon termination of the agreement and satisfaction of all liabilities secured_by the buf accounts the balance in the buf accounts is required to be released to petitioner on his tax returns since petitioner offset his gross_receipts by the amount contributed to his buf accounts as a portion of cost_of_goods_sold however the parties have stipulated that the offsets claimed by petitioner for payments to the buf accounts are not properly claimable in any taxable_period rather if a forfeiture occurs and associated is paid out of a buf account the amount so paid is properly deductible in the year payment is made petitioner reported most but not all of the interest accumulated on his buf accounts on his federal_income_tax returns for the taxable years through pursuant to the practice used by petitioner for accounting for his buf accounts from through petitioner did not claim as deductions on petitioners’ tax returns forfeitures or summary judgments paid from the buf accounts maintained for him rather the deductions claimed for forfeitures or summary judgments represented only those amounts paid from other sources pursuant to that practice petitioner did not intend to report as income the balances remaining in the accounts upon termination of the agreement and satisfaction of all liabilities secured_by them as of date associated maintained seven separate buf accounts for petitioner as of that date the surety's ledgers for petitioner's buf accounts reflected the following balances account rankin-johnson rankin-vallejo james m rankin ann james m rankin-hayward james m rankin rankin-carter rankin-williams balance dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure the opening balance of petitioner's buf accounts as of that date shown in the surety's ledgers was dollar_figure rounded the amount of accumulated interest on the buf accounts as of date shown in the surety's ledgers was dollar_figure rounded for purposes of calculating the adjustment of petitioners' income to be made pursuant to sec_481 the opening balance of the buf accounts as of date is considered to be dollar_figure rounded which does not include the amount of dollar_figure rounded that represents interest accumulated on the buf accounts as of that date as of date petitioner wholly owned the following buf accounts james m rankin ann james m rankin-hayward and james m rankin opinion because sec_481 a applies only if there is a change in a method_of_accounting the parties’ dispute in the instant case centers on whether the change in the treatment for tax purposes of payments into and disbursements from the buf accounts maintained in the course of petitioner’s bail bond business is a change in method_of_accounting if so respondent may make an sec_481 provides sec_481 adjustments required by changes in method_of_accounting a general_rule --in computing the taxpayer’s taxable_income for any taxable_year referred to in this section as the year_of_change -- if such computation is under a method_of_accounting different from the method under which the taxpayer’s taxable_income for the preceding_taxable_year was computed then there shall be taken into account those adjustments which are determined to be necessary solely by reason of the change in order to prevent amounts from being duplicated or omitted except there shall not be taken into account any adjustment in respect of any taxable_year to which this section does not apply unless the adjustment is attributable to a change in the method_of_accounting initiated by the taxpayer adjustment4 increasing petitioners’ income pursuant to sec_481 as set forth in our findings above from through petitioner treated the payments made into the buf accounts as a cost_of_goods_sold offsetting the gross_receipts of his business petitioner did not deduct from his taxable_income disbursements from those accounts to reimburse associated for losses_and_expenses incurred as a result of bond forfeitures in 93_tc_220 we held that payments into buf accounts were not deductible when made and that deductions are allowed only for disbursements made to satisfy liabilities we reasoned that payments into the accounts were in the nature of a security deposit held for payment of future liabilities id pincite petitioners concede that sebring controls the tax treatment of payments into and disbursements from petitioner’s buf accounts and that petitioner’s prior practice of offsetting payments made into the buf accounts against gross_receipts was incorrect we must accordingly consider whether the change that was required by respondent for purposes of bringing the tax treatment the amount of the adjustment dollar_figure essentially represents the date opening balances of the buf accounts maintained in connection with petitioner’s bail bond business less interest accumulations the taxpayer in that case like petitioner used the cash receipts and disbursements method_of_accounting 93_tc_220 of petitioner’s buf accounts into conformity with our holding in sebring constitutes a change in petitioner's method_of_accounting for those accounts a change in method_of_accounting is defined as a change in the overall plan of accounting for gross_income or deductions or a change in the treatment of any material_item used in such overall plan sec_1_446-1 income_tax regs a material_item is any item which involves the proper time for the inclusion of the item in income or the taking of a deduction sec_1_446-1 income_tax regs the regulations further provide that a change in method_of_accounting does not include adjustment of any item_of_income or deduction which does not involve the proper time for the inclusion of the item in income or the taking of a deduction sec_1_446-1 income_tax regs accordingly where a taxpayer’s practice permanently avoids reporting of income and therefore distorts its lifetime income the practice is not a method_of_accounting and sec_481 is inapplicable to a change_of the practice 66_tc_588 affd without published opinion 562_f2d_39 2d cir petitioners attempt to bring themselves within the rule_of schuster’s express by arguing that petitioner's practice of offsetting payments into the buf accounts against gross_receipts was not a method_of_accounting but simply involved the claim of offsets not allowable in any period petitioners argue that because payments into the buf accounts were not offsettable against gross_receipts or deductible in any year and petitioner had no intention of including those amounts in his income in any future year the offsets claimed with respect to the payments into the accounts effected a permanent avoidance of reporting of income and a distortion of petitioner’s lifetime income in response to petitioners’ arguments regarding schuster’s express respondent argues that the change in petitioner’s practice of offsetting payments into the buf accounts against gross_receipts involves the appropriate time for taking those amounts into account and therefore constitutes a change in accounting_method respondent contends that the offsets claimed with respect to the payments into the buf accounts would eventually be matched by payments of actual liabilities from the accounts and the receipt by petitioner of the remaining balances of the accounts when they were terminated by associated petitioner’s surety thus according to respondent any balances refunded would be required to be included in petitioner’s income pursuant to the relevant case law and the tax_benefit_rule petitioners argue that respondent has raised the issue of the tax_benefit_rule for the first time on brief they have been denied the opportunity to present evidence concerning its applicability such as evidence concerning the extent to which prior deductions did not result in a tax_benefit and expert testimony concerning whether a recovery would occur on the termination of petitioner’s relationship with associated and respondent should bear the burden_of_proof with respect to the applicability of the tax_benefit_rule we do not consider petitioners to be prejudiced by respondent’s limited and responsive reliance on the tax_benefit_rule we note that petitioners have placed in evidence their tax returns from through petitioners could not produce copies of their and returns and the surety ledgers for the buf accounts in issue which permits as complete an evaluation as practical of the extent of any_tax benefit resulting from the deductions claimed by petitioners we also consider petitioners to have been aware of the relevance of the tax_benefit_rule to the instant case in their opening brief petitioners discuss whether the balances of petitioner’s buf accounts must be included in income when the accounts are closed and attempt to distinguish 743_f2d_781 11th cir which noted that the previously deducted balance of a reserve_account is to be included in income when the account ceases to be used the portion of knight-ridder newspapers that petitioners attempt to distinguish is based on an application of the tax_benefit_rule we further fail to see the value of expert testimony on the matter of whether a recovery would occur on the refunding of the buf account balances to petitioner finally by relying on the tax_benefit_rule respondent has not raised a new_matter for which respondent bears the burden_of_proof 91_tc_793 n we accordingly reject petitioners’ attempt to limit our consideration of the applicability of the tax_benefit_rule in the instant case we do not find merit in petitioner’s reliance on schuster’s express inc v commissioner supra in schuster’s express the taxpayer maintained insurance expense accounts on the basis of a predetermined percentage of gross_receipts and deducted the amount so computed even though its actual insurance expense was less than the estimated amount the difference between the estimated and actual expense was credited to a reserve_account the commissioner disallowed the deductions claimed for the amounts credited to the reserve_account in the taxpayer’s open years and sought pursuant to sec_481 to include in the taxpayer’s income for the earliest open_year the balance of the reserve_account as of the end of the preceding year which comprised additions made in closed years the court found that the applicability of sec_481 constituted a new_matter for which the commissioner bore the burden_of_proof stating the commissioner the party on whom the burden_of_proof rests has not established that under the sec_481 permits the making of an adjustment with respect to amounts that were omitted in closed years 343_f2d_568 5th cir taxpayer’s method of computing insurance expense there was any procedure or intention to restore the excessive deductions to income in future years so as to properly reflect the taxpayer’s total lifetime income t c pincite consequently the court concluded that the change in the taxpayer’s practice of deducting insurance expenses did not involve the question of the proper time for the taking of a deduction and therefore was not a change in a method_of_accounting id pincite accordingly the court concluded that no adjustment to the taxpayer’s income could be made pursuant to sec_481 with respect to the balance of the reserve_account attributable to closed years id pincite subsequent cases have distinguished schuster’s express inc v commissioner supra concluding that the practices in question involved issues of the timing of recognition of income rather than of the permanent avoidance of its reporting knight-ridder newspapers inc v united_states supra 92_tc_254 91_tc_26 78_tc_705 71_tc_913 although petitioners argue that those cases are not applicable to the situation presented in the instant case the circumstances noted by petitioners do not render the reasoning of those cases inapposite knight-ridder newspapers inc v for example certain of those cases involve accrual_method continued united_states supra involved a reserve for anticipated advertising rebate expenses the taxpayer added to the reserve and deducted an amount based on its estimated liability for rebates for the year rebates paid were charged against and reduced the reserve the court concluded that the rebate reserve was an item affecting the proper timing of a deduction because disbursements from the reserve would be deductible when made and the taxpayer’s practice simply accelerated those deductions knight-ridder newspapers inc v united_states supra pincite similarly in the instant case a disbursement from one of the buf accounts in issue would properly be deductible when made sebring v commissioner t c pincite and petitioner’s practice of offsetting payments into the buf accounts against the gross_receipts of his business in effect accelerated the deductions otherwise allowable the court in knight-ridder newspapers further analyzed whether the taxpayer's use of the reserve permanently avoided the reporting of income reasoning as follows though we talk about the timing of deductions the basic issue is whether income is reflected and taxed the reserve_method determines when income will be continued taxpayers and or claims of deductions based on estimates of expenses or reserve accounts petitioners point out that petitioner was a cash_method taxpayer during relevant times and further contend that the payments into the buf accounts were not based on estimates of expenses but on a percentage of bail bond premiums received and that the buf accounts were not reserves in an accounting sense taxed when deductions are taken early at the time money is added to the reserve an equal amount of income is obviously not taxed that income is taxed however at the later time when deductions would have been taken under a different system ie at the time rebates are paid the absence of deductions means that an equal amount of income is taxed most important at the time the company ceases to use the reserve eg when the company closes out its business any remaining balance in the reserve must be included in taxable_income thus no income is avoided altogether any excess_deductions in earlier years are offset by an equal amount of taxable_income in the final day the question becomes one of timing whether the income is taxed when the amounts are added to the reserve or when the reserve is abandoned on the day of armageddon f 2d pincite as noted above petitioner’s practice of offsetting against gross_receipts the payments into the buf accounts in issue reduced the income of his bail bond business earlier than otherwise would have been proper and concomitantly eliminated deductions at the proper time for claiming them ie when liabilities were paid from the buf accounts moreover petitioner’s practice did not avoid the reporting of income because notwithstanding his professed lack of intention to include any of the balances of his buf accounts in income when they were refunded to him at the termination of his association with the surety those balances to the extent they represented petitioner’s payments into those accounts which he treated as current offsets to the gross_receipts of his business would be includable in income knight-ridder newspapers inc v united_states supra pincite see also 68_tc_703 affd without published opinion 609_f2d_1007 5th cir the repayment of those balances to petitioner would constitute a recovery or an event fundamentally inconsistent with the premise of the original offsetting against gross_receipts of the payments into the buf accounts triggering application of the tax_benefit_rule 460_us_370 sec_1_111-1 income_tax regs consequently petitioner's practice of offsetting against gross_receipts payments into the buf accounts in issue constitutes a method_of_accounting and the change in that practice is a change in method_of_accounting accordingly an adjustment may be made pursuant to sec_481 to prevent we note that this court does not require a taxpayer to include in income the recovery_of an amount that was improperly deducted in a prior year for which the period of limitations has expired 95_tc_156 several circuit courts of appeals including the ninth to which an appeal of the instant case would lie barring stipulation to the contrary have rejected the so-called erroneous deduction exception to the tax_benefit_rule id accordingly pursuant to the rule_of 54_tc_742 affd 445_f2d_985 10th cir we apply the law as announced by the court_of_appeals for the ninth circuit consequently for purposes of the instant case the recovery_of the payments into the buf accounts would be included in petitioner's income pursuant to the tax_benefit_rule notwithstanding that the offsets against gross_receipts claimed for those payments were improper 656_f2d_483 9th cir affg 72_tc_807 the omission9 or duplication10 of amounts solely by reason of that change because we have decided that an adjustment to income pursuant to sec_481 is warranted we must consider two contentions advanced by petitioners concerning the amount of the adjustment petitioners contend that petitioner owned only a one-half interest in certain buf accounts and that therefore only one-half of the relevant balance of those accounts may be included in the sec_481 adjustment made with respect to the change in the method_of_accounting for those accounts at trial petitioner testified that he made agreements with certain of his office managers to share the profits and losses of their respective offices as well as the buf account for the office petitioner produced two agreements only one of which was in effect on date the relevant time for purposes of the although even if pursuant to the tax_benefit_rule the previously offset amounts in the buf accounts would be reportable in income at the time of their refund to petitioner respondent need not await that eventuality but may make the adjustment provided by sec_481 in the year of the accounting_method change 571_f2d_514 10th cir affg 65_tc_897 a duplication could occur when pursuant to the new method of accounting deductions are claimed when disbursements are made from the buf accounts in issue because the amounts disbursed to the extent they do not represent accumulated interest could have already been offset against gross_receipts at the time they were paid into the accounts pursuant to petitioner's old method_of_accounting those accounts are identified as rankin-johnson rankin- vallejo rankin-carter and rankin-williams sec_481 adjustmentdollar_figure petitioner contends that he made similar agreements with other office managers but is unable to provide copies of them petitioner did not produce any of the office managers as witnesses at trial to corroborate his testimony petitioners acknowledge that we are not bound to accept petitioner's uncorroborated testimony 338_f2d_602 9th cir affg 41_tc_593 the agreement in evidence that was in effect at the relevant times which pertains to the vallejo office of petitioner's business contains inter alia the following provisions a pledge of collateral by the office manager referred to in the agreement as a bail agent to secure payment to petitioner of losses_incurred by the manager an agreement to share equally the profits of james rankin bail bonds between petitioner and the manager and an agreement that the two will share the separate reserve for the vallejo office the agreement does not further specify the nature of sharing intended by the parties or the manner in which it is to be effected the agreement is otherwise ambiguously drafted in that it suggests that all profits made by james rankin bail bonds which based upon the schedules c in petitioners' and returns appears to be a business operation different from the bail bond operation the other agreement was dated date and concern sec_12 the same office as the first agreement carried on at the vallejo office are to be shared equally between petitioner and the manager of that office petitioner testified however that he only shared the profits of the vallejo office with the other party to the agreement there is no further evidence in the record as to the arrangements concerning those purported partnerships other circumstances in the record are inconsistent with petitioners' contention the buf accounts were maintained by associated only for petitioner and would be refunded to him alone upon the termination of his association with that surety the full amount of those accounts was available to associated for the payment of any liabilities petitioner incurred to associated associated could draw on the buf accounts without giving notice to petitioner moreover the parties stipulated that the accrued interest on the buf accounts in issue belonged to petitioner as far as associated was concerned the buf accounts were not jointly owned we also note that petitioner's bail bond business is treated as one or more sole proprietorships and not partnerships on his income_tax returns statements in tax returns constitute admissions that may be overcome only by cogent evidence that they are wrong 412_f2d_800 3d cir affg per curiam tcmemo_1968_126 mooneyham v commissioner tcmemo_1991_178 estate of mcgill v commissioner tcmemo_1984_292 there is nothing in the record that suggests that the office managers reported on their tax returns a portion of the income and expense associated with their respective offices indeed petitioners assert that petitioners' income_tax returns and the surety's ledgers with respect to the buf accounts in issue contain all the information needed for purposes of the alternative method provided by sec_481 further discussed below for computing the amount of the additional tax to be paid as a result of the adjustment required due to the change in the method_of_accounting for the buf accounts petitioners' assertions and the record as a whole indicate that the full amount of the payments into the buf accounts were taken as offsets against the gross_receipts of petitioner's bail bond business reported on petitioners’ tax returns and petitioners do not contend otherwise we conclude that petitioners have not established that any of the buf accounts in issue were jointly owned accordingly no modification of the amount of the sec_481 adjustment is required for this reason petitioners also contend that in the event we decide that sec_481 applies in the instant case the amount of tax resulting from the adjustment should be limited to the amount computed pursuant to sec_481dollar_figure respondent contends petitioners do not rely on the limitation provided by sec b and we do not consider it that petitioners have not satisfied the conditions for employing that method where it applies sec_481 in general limits the increase in tax in the year_of_change attributable to a sec_481 adjustment to the net increase in income_tax that would result from allocating that portion of the adjustment to prior consecutive taxable years to which it is properly allocable pursuant to the new method_of_accounting with the balance of the sec_481 provides as follows sec_481 limitation on tax where adjustments are substantial -- allocation under new method_of_accounting --if-- a the increase in taxable_income for the year_of_the_change which results solely by reason of the adjustments required by subsection a exceeds dollar_figure and b the taxpayer establishes his taxable_income under the new method_of_accounting for one or more taxable years consecutively preceding the taxable_year of the change for which the taxpayer in computing taxable_income used the method_of_accounting from which the change is made then the tax under this chapter attributable to such increase in taxable_income shall not be greater than the net increase in the taxes under this chapter or under the corresponding provisions of prior revenue laws which would result if the adjustments required by subsection a were allocated to the taxable_year or years specified in subparagraph b to which they are properly allocable under the new method_of_accounting and the balance of the adjustments required by subsection a was allocated to the taxable_year of the change adjustment allocated to the year_of_change sec_1_481-2 income_tax regs a taxpayer must establish from its books of account and other records what its taxable_income would have been pursuant to the new method_of_accounting for one or more of the consecutive years immediately preceding the year_of_change sec_481 sec_1_481-2 income_tax regs the record contains petitioners’ federal_income_tax returns for the years through but not for the years and petitioners could not produce copies of their and returns and concede that the portion of the sec_481 adjustment allocable to those years is to be taken into account in the year_of_change the record also contains the surety's ledgers for each of the buf accounts in issue which reflect the payments into and disbursements from each account petitioners maintain that those documents contain sufficient information to perform the computations called for by sec_481 and that those computations may be performed as part of the rule computation for the instant case respondent maintains that such evidence is insufficient to verify the accuracy of any computation pursuant to sec_481 and to ascertain petitioners' correct_tax for the prior taxable years respondent argues that there might be errors in petitioners' prior year returns besides the incorrect method_of_accounting for the buf accounts that cannot be identified and that prevent computation of the correct_tax for those years respondent contends that petitioners also have failed to provide substantiation for the income and deductions claimed in their returns for those years we do not agree with respondent's suggestion that sec_481 requires a taxpayer to prove the accuracy of every item affecting its tax_liability in the years prior to the year of a change in accounting_method in order to qualify for the provision's benefits rather a taxpayer need show only what its taxable_income would have been in those years using the new method_of_accounting in order to obtain the benefit of that provision we however do not find that the record contains sufficient evidence to satisfy the requirements of sec_481 although we accept the evidence of the payments into and disbursements from the buf accounts in issue afforded by the surety's ledgers we do not accept petitioners' tax returns as proof of the gross_receipts of petitioner’s bail bond business for the years preceding it is well settled that a tax_return merely represents the claim of the taxpayer and does not establish the truth of the matters set forth therein 71_tc_633 62_tc_834 7_tc_245 affd 175_f2d_500 2d cir we construe the regulations pursuant to sec_481 which provide for the use by a taxpayer of its books of account and other records to establish its taxable_income using the new method as contemplating the use of accounting_records rather than tax returns to carry the taxpayer's burden sec_1 b income_tax regs we accordingly find that petitioners have failed to introduce sufficient evidence to establish their entitlement to the benefits of sec_481 to reflect the foregoing and concessions decision will be entered under rule


department of the treasury int ernal revenue service washington d c o f f i c e o f c h i e f c o u n s e l date number release date cc pa cbs br2 gl-804186-00 uilc memorandum for district_counsel rocky mountain district from subject kathryn a zuba chief branch collection bankruptcy summonses collection statute_of_limitations - offer_in_compromise pending as of date this memorandum responds to your request for advice dated date this document may not be cited as precedent by taxpayers issue how is the statute_of_limitations for collection under sec_6502 of the internal_revenue_code determined for liabilities named on offers in compromise accepted for processing on or before date and still pending with the service after that date conclusion if an offer_in_compromise was accepted for processing on or before date but remained pending after that date the statute_of_limitations for collection is determined by giving effect to both the waiver provision contained in the form_656 and the suspension of the collection statute provided by sec_6331 and sec_301_7122-1t background it has long been the policy of the internal_revenue_service to suspend enforced collection efforts when a taxpayer submits an offer_in_compromise unless collection of the tax would be jeopardized or the offer was made merely as a delay tactic see policy statement p-5-97 approved date sec_301_7122-1 to insure that the government’s eventual ability to collect was not harmed by withholding collection efforts consideration of an offer was conditioned upon the execution by the taxpayer of a waiver of the statute_of_limitations for collection for the gl-804186-00 period the offer was being considered while any term of an accepted offer was not completed and for one additional year see sec_301_7122-1 form_656 offer_in_compromise item e n rev the irs restructuring and reform act of rra required several changes to this scheme first rra section codified the practice of withholding collection while an offer to compromise is being considered by adding sec_6331 to the code see p l 112_stat_685 effective date that section prohibits levy while an offer is pending for thirty days after an offer is rejected and while a timely filed appeal of that rejection is pending with the irs office of appeals see sec_6331 temp sec_301_7122-1t f the section further provides that rules similar to those contained in paragraphs and of sec_6331 which prohibits levy during court proceedings for refund of a divisible_tax will apply see sec_6331 paragraph of sec_6331 provides that the statutory period for collection is suspended while levy is prohibited temporary sec_301_7122-1t h applies this rule to the period that levy is prohibited due to the pendency of an offer_in_compromise second rra section amended sec_6502 of the code also effective as of date to limit the service’s ability to secure from taxpayers agreements to extend the statutory period for collection see p l 112_stat_685 the service and taxpayers can now only agree to an extension of the statute_of_limitations for collection under a in two circumstances the extension is agreed to at the same time as an installment_agreement between the taxpayer and the service or the extension is agreed to prior to a release_of_levy under sec_6343 which occurs after the expiration of the statutory ten year period for collection see sec_6502 thus effective date the service can no longer secure a waiver of the collection statute as a condition for consideration of the offer but can rely on the suspension of the statute provided by regulations sec_301_7122-1t h to keep the collection statute from expiring while the offer is being considered further the service can no longer extend the collection statute to allow a taxpayer more time to pay any compromise reached compromise agreements must now be structured so that all payments are received prior to the expiration of the collection_period see sec_6401 amounts collected after expiration of applicable_period for collection to be treated as overpayments finally rra contained a non-code sunset provision which governs the continued effect of waivers of the collection statute executed prior to date if a waiver was secured in conjunction with the granting of an installment_agreement the period for collection will expire ninety days after the date specified in the waiver if the waiver was not obtained at the same time as an installment_agreement the period for collection will expire not later than date or the end of the original collection statute if it would have occurred after that date see rra c gl-804186-00 the service’s policies and procedures for the consideration and disposition of offers in compromise have been revised to reflect these changes in the law however some confusion exists with respect to the effect these changes in the law will have on offers that were accepted for processing prior to date but remained pending after that date because the service was authorized to secure waivers of the statute_of_limitations at the time the forms in such cases were submitted and the statute_of_limitations for collection was suspended as a matter of law beginning on date it would appear that the service receives the benefit of both a waiver of the collection statute by agreement and an automatic suspension of the collection statute under the code you have been asked by your district how the collection statute is determined in such cases discussion as is discussed above prior to the enactment of rra the service could extend the statute_of_limitations under sec_6502 of the code by agreement with the taxpayer at any time prior to the expiration of the ten-year statutory period the statutory period once extended could be further extended by agreement at any time prior to the expiration date specified in the previous agreement these agreements took the form of a waiver of the collection statute by the taxpayer most often accomplished through a form_900 tax_collection_waiver although the statute refers to an extension by agreement the courts have uniformly held that since the statute_of_limitations is a defense available to the taxpayer in the event the service attempts to collect beyond the statutory time period extension of the time to collect is accomplished via a unilateral waiver of that defense by the taxpayer and that a tax_collection_waiver is not a contract see strange v united 282_us_270 280_us_453 the code also contains various provisions that operate to toll the period for collection upon the occurrence of certain events for example sec_6503 suspends the running of the statute_of_limitations for collection when the assets of the taxpayer are in the control or custody of a court when the taxpayer is outside of the united_states for more than six months or when the service is prohibited from collection because the taxpayer has filed bankruptcy see sec_6503 control or custody of court sec_6503 taxpayer outside of united_states sec_6503 bankruptcy such suspensions act to toll the collection statute even where it has been previously extended by agreement to a date certain see eg 147_f3d_526 6th cir applying sec_6503 cf 725_f2d_1183 9th cir applying to suspend previously extended statute_of_limitations for assessment in such cases the statute_of_limitations is established by the tax_collection_waiver and the suspension of the statute acts to further extend the period for collection from that date forward see 57_f3d_163 2d cir if the collection_period with respect to a particular liability has been waived or suspended on multiple occasions the collection_period is determined by giving effect to each suspension or waiver in the order in which gl-804186-00 they occurred counting periods during which suspensions overlapped only once see eg united_states v first midwest bank u s dist lexis n d ill date the suspension of the collection statute provided by regulations sec_301 1t h operates in the same manner as the suspension provisions of sec_6503 the statute_of_limitations for collection is first determined by giving effect to any prior waivers that extended the collection_period and that period is then regarded as suspended for any time an offer_in_compromise was pending after date example the taxpayer executed and the service accepted a waiver of the collection statute prior to date the waiver extended the collection statute until date on date the taxpayer submits an offer to compromise which the service recognizes as processable that same day the offer is rejected on date sixty days later the collection statute will have been suspended for the sixty days the offer was pending with the service and for thirty days thereafter for a total of ninety days assuming that the taxpayer does not appeal the rejection the period for collection will now expire on date the same analysis would apply in the case of an offer submitted on or before date but which remains pending after that date sec_301 1t h suspended the statute_of_limitations as previously extended by the parties effective date the first step in the analysis would be to interpret and give effect to the waiver in the form_656 courts have held that a tax_collection_waiver should be interpreted in a manner consistent with the intent of the taxpayer and the government see 101_f2d_161 8th cir and cases cited therein the language of the waiver provision indicates an intent to extend the statute for the length of time necessary to evaluate the offer for performance to be completed and for one additional year in this situation the intent of the parties is given effect by construing the waiver as being measured only with reference to periods during which the collection_period is not otherwise suspended by the pendency of the offer ie by ignoring periods named in the waiver to which sec_301_7122-1t h applies this is accomplished by starting with the collection_period as it existed at the time the offer was submitted and adding to that period any time that the offer remained pending prior to date plus one year example an offer_in_compromise was submitted on date and deemed processable by the service that same day the ten-year collection_period for the liability named on the offer was set to expire on date if the offer remains pending until date the waiver provision will extend the collection statute for a period equal to the four months the offer was pending in gl-804186-00 plus one year the new collection statute expiration date as extended by the waiver is date the next step in the analysis is to give effect to the suspension provided as a matter of law by sec_301_7122-1t h the collection statute having been extended to a date certain by the waiver is then suspended beginning on date for the time the offer is pending and if the offer is rejected for an additional thirty days or until an appeal of that rejection has been resolved example the offer in example above was rejected on date sec_301_7122-1t h acted to suspend the statute from january to date plus an additional thirty days assuming that the taxpayer does not appeal the rejection the collection_period resumed running on date and will expire on date arguably the period for collection in these cases should be further extended pursuant to the waiver executed prior to date by the period of time after acceptance of the offer but before completion of its terms or default by the taxpayer see 372_f2d_352 3d cir however interpreting the waiver as including periods after date would be inconsistent with the intent of congress in limiting the service’s authority to solicit and accept waivers of the collection statute under the revised statutory scheme the interests of the government are protected by suspending the statute_of_limitations for collection for the period that an offer is pending plus thirty days after a rejection and during an appeal of that rejection congress implicitly determined that this was sufficient protection to warrant withholding collection while an offer was being considered further if the waiver is interpreted as including the period after acceptance of the offer the waiver itself would continue to grow in length even after the service no longer had the authority to extend the collection statute in this manner finally interpreting the waiver as referring only to periods prior to date provides a rule_of construction which can be applied in all cases and will allow both the service and the taxpayer to know with certainty how much time remains on the collection statute at any given point in time because the waiver provision can be interpreted as of date the amount of time remaining on the collection statute for all pending offers in compromise can be determined without the uncertainty that would surround post-acceptance actions by the taxpayer or the service if this first step leads to the conclusion that the statute_of_limitations for collection was extended beyond date the waiver acted to extend the statute until that date only if the waiver would extend the statute beyond date but the original collection statute expiration date was itself beyond that date the waiver essentially had no effect see rra c gl-804186-00 example the offer in example above was accepted on date sec_301_7122-1t h acted to suspend the statute from january to date the collection_period resumed running on date and will expire on date if an offer_in_compromise was submitted prior to date and remains pending after that date the statute of limitation for collection under sec_6502 is determined by giving effect to both the waiver of the statute_of_limitations for collection contained on the form_656 and the suspension of the collection statute under sec_301_7122-1t h of the treasury regulations if you have any questions please contact the attorney assigned to this matter at cc assistant regional_counsel gl western region