department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n date number release date se t eo ra t uniform issue list number contact person identification_number telephone number legend g dear ------------------ this is in reply to g’s request for a ruling that it is excepted from filing annual information returns on form_990 return of organization exempt from income_tax by revproc_95_48 1995_2_cb_418 g is recognized as exempt from federal_income_tax under sec_501 of the code relating to workmen’s compensation g was created by its state government a majority of g’s governing body is appointed by its state governor g must file a public annual report with its state’s insurance commissioner and is subject_to audit by that state office if g is dissolved its state will determine the disposition of g’s assets sec_6033 of the code generally requires the filing of annual information returns such as form_990 by organizations exempt from federal_income_tax under sec_501 of the code sec_6033 of the code and sec_1_6033-2 of the income_tax regulations provide that the commissioner may relieve any organization or class of organizations from filing in whole or in part the annual return required by sec_6033 where the commissioner determines that such returns are not necessary for the efficient administration of the internal revenue laws revproc_95_48 1995_2_cb_418 provides that an organization is not required to file the annual form_990 if it meets sec_4 b i through iii of that procedure first under sec_4 b i of the procedure the organization must be either operated supervised or controlled by governmental units or by organizations that are affiliates of governmental units within the meaning of sec_1_509_a_-4 of the regulations or the members of the organization's governing body must be elected by the public at large pursuant to local statute or ordinance under sec_1_509_a_-4 there must be a substantial degree of direction over the organization’s policies programs and activities by one or more publicly supported organizations the relationship is comparable to that of a parent and a subsidiary where the subsidiary is under the direction of and accountable or responsible to its parent organization this relationship can be established by the fact that a majority of the officers directors or trustees of the organization are appointed or elected by the governing body members of the governing body officers acting in their official capacity or the membership of one or more publicly supported organizations second under sec_4 b ii of the procedure the organization must two or more of the following five affiliation factors a through e of section dollar_figure of the procedure a the organization was created by one or more governmental units organizations that are affiliates of governmental units or public officials acting in their official capacity b the organization's support is received principally from taxes tolls fines government appropriations or fees collected pursuant to statutory authority amounts received as government grants or other contract payments are not qualifying support under this paragraph c the organization is financially accountable to one or more governmental units this factor is present if the organization is i required to report to governmental_unit s at least annually information comparable to that required by form_990 and ii is subject_to financial audit by the governmental_unit s to which it reports a report submitted voluntarily by the organization does not satisfy clause i also reports and audits pursuant to government grants or other contracts do not alone satisfy thi sec_4 c d one or more governmental units or organizations that are affiliates of governmental units exercise control_over or oversee some or all of the organization's expenditures although it is not financially accountable to governmental units as described in c e if the organization is dissolved its assets will by reason of a provision in its articles of organization or by operation of law be distributed to one or more governmental units or organizations that are affiliates of governmental units within the meaning of this procedure third under sec_4 b iii of the procedure the organization’s filing of form_990 is not otherwise necessary to the efficient administration of the internal revenue laws in this case under sec_4 b i of the procedure g meets sec_509 -4 g i of the regulations because g has a majority of the persons on its governing body appointed by a state government under sec_4 b ii g meets two or more of the section dollar_figure factors namely at least a and c under sec_4 b iii given that g files annual public information with its state insurance commissioner g’s filing of a form_990 is not otherwise necessary to administration of the internal revenue laws accordingly based on the information submitted we rule that you g have met the requirements of sec_4 b of revproc_95_48 1995_2_cb_418 and thus filing of form_990 is not required no opinion is expressed regarding whether you have unrelated_business_taxable_income under sec_511 of the internal_revenue_code and therefore must file a form 990-t return because this ruling could help to resolve any questions please keep it in your permanent records this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as precedent jane baniewicz manager exempt_organizations technical group sincerely


internal_revenue_service number release date index number ------------------------- ------------------ --------------------------- department of the treasury washington dc person to contact ------------------------ id no ------------ telephone number --------------------- refer reply to cc fip b02 plr-105297-10 date date legend taxpayer ------------------------------------------------------------------------------ -------------------------- employer ------------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------- -------------------------------------------------------------- parent company a company b company c law firm state year year year year year ------------------------------------------------- ------------------------------- ----------------------------- ---------------------------------- --------------------------- ----------- ------- ------- ------- ------- ------- plr-105297-10 year year year dear --------------- ------- ------- ------- this is in reply to a letter dated date and supplemental correspondence dated date requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations for taxpayer to file a written representation under sec_1_7872-15 of the income_tax regulations if this written representation under sec_1_7872-15 is considered timely filed and the other requirements under sec_1_7872-15 are satisfied then an otherwise noncontingent payment on a split-dollar loan that is nonrecourse to the borrower is not a contingent payment under sec_1_7872-15 facts employer and parent employer’s parent_corporation are state non-profit corporations exempt from taxation under sec_501 of the internal_revenue_code as organizations described in sec_501 and are classified as public_charities under sec_509 since year parent has had a split-dollar_life_insurance program for certain of its executive level employees and employees of its subsidiary corporations including employer in year parent hired company a to consult on matters relating to the split- dollar program and to administer the program company a recommended revising the split-dollar plan and in year parent implemented a new split-dollar_life_insurance program company b subsequently acquired company a and became parent’s consultant and administrator of the split-dollar program in year parent implemented a new split-dollar_life_insurance program current sdp upon the recommendation of company b the current sdp was entered into after the treasury department’s issuance of final regulations under sec_1_61-22 and sec_1_7872-15 pertaining to split-dollar_life_insurance arrangements the split-dollar regulations under the current sdp employer pays the premiums on a life_insurance_policy owned by taxpayer the premium payments made by employer are treated as loans pursuant to the split-dollar regulations whereby employer is the lender and the taxpayer is the borrower the parties to the loan taxpayer represents that the loans were to each have a stated_interest rate equal to the applicable_federal_rate so as not to be below-market split-dollar loans under the split-dollar regulations employer made the first loan under the current sdp to taxpayer in year taxpayer represents that a plr-105297-10 reasonable person would expect that all payments under the loans will be made as described in sec_1_7872-15 company b was instrumental in implementing the current sdp for parent employer and employee participants including taxpayer collectively plan participants company b was responsible for advising plan participants regarding the set-up of the current sdp determining the type of life_insurance policies associated with the current sdp and administering the current sdp taxpayer represents that taxpayer lacked knowledge and experience with regards to split-dollar_life_insurance arrangements and the split-dollar regulations and therefore relied on employer’s guidance representations conclusions and information regarding the current sdp employer in turn relied on company b’s guidance in developing implementing and administering the current sdp company b provided employer’s tax_return_preparer with a governing document pertaining to the current sdp but did not provide the preparer with a copy of the plan’s participation_agreement due to some confusing language in the governing document the tax_return_preparer erroneously concluded that the loans involved in the current sdp were recourse loans the tax_return_preparer has provided an affidavit stating that discussions with company b representatives regarding the current sdp confirmed his conclusion that the loans were recourse in nature therefore employer did not execute or file the written representations for nonrecourse split-dollar loans pursuant to sec_1_7872-15 and neither did taxpayer in year company b ceased administering the current sdp and employer hired company c to administer the current sdp due to the decline in the value of common stocks and many bonds from year to early year the cash surrender values of the life_insurance policies under the current sdp declined employer employed counsel from law firm to review the current sdp and advise employer on options to revise or terminate the plan counsel from law firm determined that under applicable state law the loans under the current sdp were not recourse loans but rather nonrecourse loans secured_by the life_insurance policies subsequently employer informed taxpayer that the loans were nonrecourse loans and that a written representation should have been filed by both taxpayer and employer to ensure that payments on the loans were not treated as contingent payments employer further explained that the written representation should have been made in year when the first loan was made to taxpayer under the plan and asked that taxpayer file a request for an extension of time to make the written representations under sec_1 d i and ii taxpayer makes the following representations the granting of relief under sec_301_9100-3 would not result in taxpayer having a lower tax_liability in the aggregate for all years to which the election applies than it would have had if the election had been plr-105297-10 timely made taking into account the time_value_of_money taxpayer did not knowingly choose not to file the election taxpayer did not use hindsight in requesting relief finally taxpayer represents that it is not seeking to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 in support of its ruling_request taxpayer has submitted the affidavits of taxpayer employer’s chief_executive_officer employer’s tax_return_preparer and employer’s counsel from law firm regarding the events that led to taxpayer’s failure to make the regulatory election pursuant to sec_1_7872-15 and ii law and analysis sec_1_7872-15 of the regulations provides that except as provided in sec_1_7872-15 if a payment on a split-dollar loan is nonrecourse to the borrower the payment is a contingent payment for purposes of sec_1_7872-15 sec_1_7872-15 provides that an otherwise noncontingent payment on a split-dollar loan that is nonrecourse to the borrower is not a contingent payment under sec_1_7872-15 if the parties to the split-dollar_life_insurance arrangement represent in writing that a reasonable person would expect that all payments under the loan will be made sec_1_7872-15 describes the time and manner requirements for providing the written representation required by sec_1_7872-15 sec_1 d ii provides in part that the written representation be signed by both the borrower and lender not later than the last day including extensions for filing the federal_income_tax return of the borrower or lender whichever is earlier for the taxable_year in which the lender makes the first split-dollar loan under the split-dollar_life_insurance arrangement sec_301_9100-1 defines election to include an application_for relief in respect of tax a request to adopt change or retain an accounting_method or accounting_period the term does not include an application_for an extension of time for filing a return under sec_6081 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election defined in sec_301_9100-1 as an election whose due_date is prescribed by regulation or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 sets forth parameters for determining whether under particular facts and circumstances the commissioner will grant an extension of time for regulatory elections that do not meet the requirements for an automatic_extension under sec_301_9100-2 sec_301_9100-3 provides that when a taxpayer does not meet the plr-105297-10 requirements for an automatic_extension under sec_301_9100-2 the taxpayer must provide evidence satisfactorily establishing that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the government sec_301_9100-3 provides that subject_to sec_301_9100-3 a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer satisfies at least one of the following five criteria i the request for relief was made before the service discovered the failure to make the regulatory election ii the failure to make the election was due to intervening events beyond the taxpayer’s control iii after exercising reasonable diligence the taxpayer was unaware of the necessity for the election iv the taxpayer reasonably relied on the written advice of the service or v the taxpayer reasonably relied upon a qualified_tax professional including a tax professional employed by the taxpayer and that tax professional failed to make or failed to advise the taxpayer to make the election sec_301_9100-3 provides that a taxpayer has not reasonably relied on a qualified_tax professional if the taxpayer knew or should have known that the professional was either i not competent to render advice on the regulatory election or ii not aware of all relevant facts sec_301_9100-3 provides that a taxpayer will not be deemed to have acted reasonably and in good_faith if taxpayer does one of the following i seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested ii was informed in all material respects of the required election and the subsequent tax consequences but chose not to make the election or iii uses hindsight in requesting relief sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money conclusion based on the information submitted and taxpayer’s representations we conclude that taxpayer has satisfied the requirements for granting a reasonable extension of time to file the written representation as required under sec_1 d i and ii taxpayer is therefore granted a period of time not to exceed days from the date of this letter to prepare and have both parties to the loan sign the written representation provided that the written representation is timely signed by both parties to the loan as required by this letter and filed with the taxpayer’s tax_return for year plr-105297-10 the written representation will be deemed effective for all years in which the arrangement has been in effect in accordance with sec_1_7872-15 a copy of the written representation should be attached to taxpayer’s tax_return for any subsequent taxable_year in which employer makes a split-dollar loan to taxpayer to which the representation applies except as specifically ruled upon above no opinion is expressed concerning any federal_income_tax consequences relating to the facts herein under any other provision of the code this ruling is limited to the timeliness of the filing requirement of the written representation under sec_1_7872-15 and ii no opinion is expressed with regard to whether taxpayer satisfied the other requirements under sec_1_7872-15 and ii the loan treatment requirements under sec_1_7872-15 or whether payments under the loan are otherwise noncontingent payments for purposes of sec_1_7872-15 no opinion is expressed with regard to whether the tax_liability of taxpayer is not lower in the aggregate for all years to which the election applies than such tax_liability would have been if the election had been timely made taking into account the time_value_of_money upon audit of the federal_income_tax returns involved the director’s office will determine such tax_liability for the years involved if the director’s office determines that such tax_liability is lower that office will determine the federal_income_tax effect this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely david b silber david b silber chief branch office of associate chief_counsel financial institutions and products


t c memo united_states tax_court ronald f and cynthia g van scoten petitioners v commissioner of internal revenue respondent docket no filed date wendy s pearson terri a merriam and jennifer a gellner for petitioners nhi t luu-sanders and alan e staines for respondent memorandum findings_of_fact and opinion goldberg special_trial_judge respondent determined that petitioners are liable for a sec_6662 accuracy-related_penalty of dollar_figure for the taxable_year unless otherwise indicated section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure the sole issue before this court is whether petitioners are liable for the sec_6662 accuracy-related_penalty for negligence or disregard of rules or regulations in the year in issue findings_of_fact some of the facts have been stipulated and are so found the first second third and fourth stipulations of facts and the attached exhibits are incorporated herein by this reference petitioners resided in sandy utah on the date the petition was filed in this case i walter j hoyt iii and the hoyt partnerships the accuracy-related_penalty at issue in this case arises from adjustments of partnership items on petitioners’ federal_income_tax return the adjustments are the result of petitioners’ involvement in a partnership organized and promoted by walter j hoyt iii mr hoyt mr hoyt’s father was a prominent breeder of shorthorn cattle one of the three major breeds of cattle in the united_states in order to expand his business and attract investors mr hoyt’s father had started organizing and promoting cattle breeding partnerships by the late 1960s before and after his father’s death in early mr hoyt and other members of the hoyt family were extensively involved in organizing and operating numerous cattle breeding partnerships from about through mr hoyt organized promoted to thousands of investors and operated as a general_partner more than cattle breeding partnerships mr hoyt also organized and operated sheep breeding partnerships in essentially the same fashion as the cattle breeding partnerships collectively the investor partnerships or hoyt partnerships each of the investor partnerships was marketed and promoted in the same manner beginning in and until removed by this court due to a criminal conviction mr hoyt was the tax_matters_partner of each of the investor partnerships that are subject_to the provisions of the tax equity fiscal responsibility act of publaw_97_248 96_stat_324 as the general_partner managing each partnership mr hoyt was responsible for and directed the preparation of the tax returns of each partnership and he typically signed and filed each return mr hoyt also operated tax_return preparation companies variously called tax office of w j hoyt sons agri-tax and laguna tax service that prepared most of the investors’ individual tax returns during the years of their investments petitioners’ return was prepared in this manner and was signed by mr hoyt from approximately through mr hoyt was a licensed enrolled_agent and as such he represented many of the investor-partners before the internal_revenue_service irs until he was disenrolled as an enrolled_agent in beginning in date respondent generally froze and stopped issuing income_tax refunds to partners in the investor partnerships the irs issued prefiling notices to the investor- partners advising them that starting with the taxable_year the irs would disallow the tax benefits that the partners claimed on their individual returns from the investor partnerships and the irs would not issue any_tax refunds these partners might claim attributable to such partnership tax benefits also beginning in an increasing number of investor- partners were becoming disgruntled with mr hoyt and the hoyt organization many partners stopped making their partnership payments and withdrew from their partnerships due in part to respondent’s tax enforcement mr hoyt urged the partners to support and remain loyal to the organization in challenging the irs’s actions the hoyt organization warned that partners who stopped making their partnership payments and withdrew from their partnerships would be reported to the irs as having substantial debt relief income and that they would have to deal with the irs on their own on date a bankruptcy court entered an order for relief in effect finding that w j hoyt sons management company and w j hoyt sons mlp were both bankrupt in these bankruptcy cases the u s trustee moved in to have the bankruptcy court substantively consolidate all assets and liabilities of almost all hoyt organization entities and all of the investor partnerships on date the bankruptcy court entered its judgment for substantive consolidation consolidating all the above-mentioned entities for bankruptcy purposes the trustee then sold off what livestock the hoyt organization owned or managed on behalf of the investor partnerships mr hoyt and others were indicted for certain federal crimes and a trial was conducted in the u s district_court for the district of oregon the district_court described mr hoyt’s actions as the most egregious white collar crime committed in the history of the state of oregon mr hoyt was found guilty on all counts and as part of his sentence in the criminal case he was required to pay restitution in the amount of dollar_figure million this amount represented the total amount that the united_states determined using hoyt organization records was paid to the hoyt organization from through by investor-partners in various investor partnerships ii petitioners and their investment petitioner husband mr van scoten has an associate’s degree and petitioner wife ms van scoten completed year of a college education during the year in issue mr van scoten worked as an equipment salesman and ms van scoten was a respiratory therapist mr van scoten’s father edward van scoten has a bachelor’s degree he served in the air force for approximately years after which time he taught at a community college and worked for an electronics corporation he also had limited experience with dairy farms--he spent his childhood living on or near dairy farms and as a teenager and for year amidst his air force career he worked on a dairy farm edward van scoten invested in a hoyt partnership in date he first learned about the hoyt organization from his nephew who had already invested in a hoyt partnership in making his own investment edward van scoten relied upon information obtained from his nephew and from the hoyt organization he did not seek outside advice such as advice from an attorney or accountant after making his investment edward van scoten spent one summer working on a hoyt ranch where he drove a truck hauling hay bales he also attended monthly hoyt partner meetings over a period of several years starting in the early 1990s petitioners first learned of the hoyt partnership investments from mr van scoten’s father in mr van scoten knew that his father had been in it for quite a number of years 1on the and federal_income_tax returns signed by ms van scoten both state that she was a receptionist didn’t appear to have a problem with or any issues about it so my wife and i had talked about it and about two years later we decided that we would invest during the time between and petitioners’ investment in early mr van scoten spoke to his father about the hoyt partnerships on a regular basis his father told him that the partnership involved cattle in particular what he called borrow-a-bull that entailed investing money into the partnership buying what i presumed was a percentage of a group of cattle and from there after a number of years or after the initial investment then we would receive a return on our investment mr van scoten’s father also told him that he had seen cattle and numerous trucks with the walter j hoyt logo and insignia on them mr van scoten trusted his father’s advice to invest in a hoyt partnership because his father had attended partnership meetings and had seen hoyt cattle and trucks when giving his son advice concerning the investment edward van scoten relied partially on the information he had received from the hoyt organization and also answered yes to his son’s inquiry does this makes sense petitioners first invested in a hoyt partnership in date at the time that petitioners invested in the partnership 2while the record is clear that ms van scoten was an investor in the hoyt partnership because she did not testify at trial there is no evidence in the record with respect to her understanding of the investment or her decision to invest 3although mr van scoten testified at trial that i believe continued mr van scoten had no investment experience although mr van scoten had lived on a family farm for approximately years neither petitioner had experience in cattle ranching because he trusted his father’s advice mr van scoten did not personally investigate the partnership while mr van scoten relied on his father’s advice concerning the hoyt investment he did not review his father’s partnership documents and he was unaware in which partnership his father had invested at the time that petitioners initially made their investment mr van scoten believed that the investment would produce a profit and provide retirement income mr van scoten understood that the investment generally required petitioners to remit percent of the federal_income_tax refunds that they received and that petitioners were to retain the remaining percent before investing in the hoyt partnerships petitioners did not consult with anyone other than members of the hoyt organization and investors in hoyt partnerships--for example they did not consult with cattle ranchers independent investment consultants or independent tax advisers--concerning either the partnerships or the tax claims made by the partnerships prior to investing petitioners received promotional materials prepared by the hoyt organization petitioners relied continued the first year we invested was the documentary_evidence shows that the investment was in fact made in date on these promotional materials which in general purported to provide rationales for why the partnerships were good investments and why the purported tax savings were legitimate one document on which petitioners relied entitled hoyt and sons -- the big_number lb tax_shelter provided information concerning the hoyt investment partnerships and how they purportedly would provide profits to investors over time the document emphasized that the primary return on an investment in a hoyt partnership would be from tax savings but that the u s congress had enacted the tax laws to encourage investment in partnerships such as those promoted by mr hoyt the document stated that an investment in cattle is arranged so the cash required to keep it going is only about seventy five percent of an investor’s tax savings while the other twenty-five percent of the tax savings is a thirty percent return on investment this arrangement purportedly provided protection to investors if the cows do die and the sky falls in you have still made a return on the investment and no matter what happens you are always better off than if you paid taxes after an explanation of the tax benefits the document asked now can you feel good about not paying taxes and feeling like you were not somehow abusing the system or doing something illegal a section of the big_number lb tax_shelter document that was devoted to a discussion of audits by the irs stated that the partnerships would be branded an ‘abuse’ by the internal_revenue_service and will be subject_to automatic and constant audit statements in the document compared the irs to children stating that irs employees did not have the proper experience and training and working knowledge of concepts required by the internal_revenue_code to evaluate the partnerships in a section of the document titled tax aspects the following warning was given out here tax accountants don’t read brands and our cowboys don’t read tax law if you don’t have a tax man who knows you well enough to give you specific personal advice as to whether or not you belong in the cattle business stay out the cattle business today cannot be separated from tax law any more than cattle can be separated from grass and water don’t have anything to do with any aspect of the cattle business without thorough tax_advice and don’t waste much time trying to learn tax law from an offering circular despite this warning the document spent numerous pages explaining the tax benefits of investing in a hoyt partnership and explaining why investors should trust only mr hoyt’s organization to prepare their individual tax returns it is the recommendation of the general_partner as outlined in the private_placement offering circular that a prospective partner seek independent advice and counsel concerning this investment the limited partners should then authorize the tax office of w j hoyt sons to prepare their personal returns then you have an affiliate of the partnership preparing all personal and partnership returns and controlling all audit activity with the internal_revenue_service then all partners are able to benefit from the concept of circle the wagons and no individual partner can be isolated and have his tax losses disallowed because of the incompetence or lack of knowledge of a tax preparer who is not familiar with the law regulations format procedures and operations concerning the partnership that are required to protect the limited partners from internal revenue audits if a partner needs more or less partnership loss any year it is arranged quickly within the office without the partner having to pay a higher fee while an outside preparer spends more time to make the arrangements finally the document warned that there remained a chance that a change in tax law or an audit and disallowance by the irs could take away all or part of the tax benefits plus the possibility of having to pay back the tax savings with penalties and interest prior to petitioners’ investment in the partnership mr van scoten also received from the hoyt organization a copy of this court’s opinion in bales v commissioner tcmemo_1989_568 mr hoyt touted the bales opinion as proof that the hoyt partnerships were legal and that the irs was incorrect in challenging their tax claims mr van scoten believed that the bales opinion meant basically that a partnership either similar to ours or like it was--it had gone to court and the bales had won the case as far as the details about it i don’t know on date petitioners signed a document comprised of four sections in order to invest in the hoyt partnership known as durham shorthorn breed syndicate 1987-c dsbs 87-c the first section was titled subscription agreement -- durham shorthorn breed syndicate 1987-c j v -- series ‘a’ units this section expressed petitioners’ intent to make a capital_contribution to and become a limited_partner of dsbs 87-c with respect to certain series ‘a’ units included in this section was a power_of_attorney form which provided in relevant part the undersigned hereby constitutes and appoints walter j hoyt iii his her true and lawful attorney with power and authority to act in the undersigneds’ behalf in the execution acknowledging and filing of the documents as follows the partnership certificates for filing and any document which may be required to effect the restructuring amending or continuation of the partnership the admission of any substituted or added partner or the dissolution and termination of the partnership provided such restructuring continuation admission or dissolution and termination are in accordance with the terms of the partnership_agreement and any and all documents required to be executed by a substituted substituting or added partner to effectuate the transfer of a partner’s interest in the partnership and any other instrument application certificate or affidavit which may be required to be filed by the partnership under the laws of any state or any federal or local agency or authority and any promissory notes bills-of-sale or other instruments required for the conduct of the partnership business including an assumption of primary liability form attached to promissory notes for which the undersigned becomes personally liable for operating deficits of the partnership up to a maximum of five thousand dollars dollar_figure per series a unit if needed to meet the business goals of the partnership the second section of the document was a partnership_agreement purportedly affirming certain oral partnership agreements that were made on or about date the third section was titled subscription agreement -- durham shorthorn breed syndicate 1987-c j v -- series ‘b’ units and was similar to the first section without a power_of_attorney form the fourth section was titled subscription agreement -- durham shorthorn breed syndicate 1987-c j v -- series ‘c’ units this section was similar to the first section and it included a debt assumption provision to memorialize affirm and set out the oral debt assumption_agreement along with another power_of_attorney form with similar provisions as those detailed above paragraph of the power_of_attorney form which differed from the prior form provided mr hoyt with the authority to execute any promissory notes bills-of-sale or other instruments required for the conduct of the partnership business including a certificate of assumption of primary liability form attached to promissory notes and held by the lender for which the undersigned becomes personally liable directly to the lender for recourse_debt of the partnership in order to pay his initial capital_contribution to the partnership on date mr van scoten signed a document titled subscription agreement and signature page for limited partners this document contained provisions similar to those in the prior document and it included another power_of_attorney form the document purported to evidence a financial institution’s purchase of four units of the partnership hoyt sons ranch properties ltd at a cost of dollar_figure to be held in trust for the benefit of mr van scoten when mr van scoten signed the various partnership documents and power_of_attorney forms he believed that petitioners would be required to repay the promissory notes signed on their behalf by mr hoyt petitioners made substantial cash payments to the hoyt organization during the years through in a summary of such payments prepared by petitioners they estimate that the total amount of these payments exceeds dollar_figure these payments included the remittance of their tax refunds the payment of quarterly and monthly installments on their promissory notes special_assessments imposed by the partnership and contributions to purported individual_retirement_account plans maintained by the hoyt organization petitioners continued contributing to the partnership even after they stopped receiving refunds from respondent during and after the year in issue petitioners received numerous documents purporting to show both the legitimacy of the hoyt partnerships and the legality of the tax claims being made by the hoyt organization the hoyt organization also portrayed employees of the irs as incompetent and claimed that they were engaging in unjust harassment of hoyt investors petitioners trusted these documents and believed and relied upon what the hoyt organization told them iii petitioners’ federal tax claims on date petitioners filed a joint federal_income_tax return for on which they reported the following wage income dollar_figure interest_income pension and annuity income big_number loss from dsbs 87-c big_number ira contribution big_number adjusted_gross_income big_number tax_liability overpayment big_number upon filing their return petitioners also filed a form_1045 application_for tentative refund on this form petitioners claimed a net_operating_loss nol_carryback from in the amount of dollar_figure petitioners reported the following after application of the carryback to the respective taxable years agi on return dollar_figure dollar_figure dollar_figure tax_liability on return big_number big_number big_number corrected tax_liability -0- -0- -0- overpayment big_number big_number big_number the return and the form_1045 were prepared by individuals affiliated with the hoyt organization the refund and tentative refunds requested by petitioners with respect to the return and the carryback years totaled dollar_figure petitioners remitted two payments to the hoyt organization during in the form of two cashier’s checks dated date and date in the respective amounts of dollar_figure and dollar_figure in date prior to the time petitioners signed their return respondent mailed hoyt investors including petitioners a letter regarding the application of sec_469 relating to passive_activity_loss limitations that same month mr hoyt mailed a letter to investors including petitioners setting forth arguments that hoyt investors materially participated in their investments within the meaning of sec_469 in this letter mr hoyt stated that respondent’s assertions in the preceding letter were incorrect and that the investors should do what was necessary to participate in their investment at least or hours per year depending upon the circumstances in order to meet the sec_469 requirements mr hoyt stated that the time investors spent in recruiting new investors as well as reading and thinking about these letters would count toward the material_participation hourly requirements finally in this letter mr hoyt emphasized that the position of your partnership is that it is not a tax_shelter because tax_shelters are never recognized for federal_income_tax purposes by letter dated date respondent mailed petitioners a notice stating in mr hoyt’s letter misleading and or inaccurate premises were made which may directly affect you and your decision-making process in filing your individual tax_return first a tax_shelter is not necessarily synonymous with a sham investment low_income_housing credits your personal_residence and real_estate rentals are examples of tax_shelters it is an oversimplification to state tax_shelters are never recognized for federal_income_tax purposes the letter stated that i failed to include number seven of the regulations which addresses the facts_and_circumstances_test enclosed is the exact wording of this test regulation 469-5t a and example which refers to this regulation also enclosed is paragraph b that is referred to in paragraph a sec_1402 noted in paragraph b defines income subject_to self-employment_tax in the past and currently mr hoyt has used revenue rulings and as authorities for investors having met the material_participation requirement these rulings and the court cases he has cited are prior to the enactment of sec_469 and all refer to sec_1402 please note in b that meeting the material_participation requirement of sec_1402 is specifically excluded from being taken into account for having met the material_participation requirement of sec_469 in using the facts_and_circumstances_test of a whether a person meets the material_participation requirement of sec_469 is a factual determination the reg 469-5t f ii defines investors’ activities that are not considered in meeting the hourly requirement simply signing a statement or making an election are not a means in meeting the requirement although sec_469 may not have existed at the time of your initial investment it is law that investors have to address in claiming investment losses today contrary to mr hoyt’s statement time spent reading and thinking about this issue should not be considered as material_participation hours for if this letter is somewhat confusing or you are questioning the accuracy of this letter i recommend you consider having an independent accountant or attorney review this matter with you in addition to the above correspondence petitioners received a letter dated date that informed them that respondent was beginning an examination of dsbs 87-c with respect to its taxable_year ending in when petitioners received any correspondence from respondent petitioners would mail or fax copies to the hoyt organization but they would take no further action and they sought no advice concerning the information that they were receiving from respondent petitioners filed a joint federal_income_tax return for taxable_year the year in issue reporting the following wage income dollar_figure interest_income state tax refunds big_number loss from dsbs 87-c big_number farm income big_number ira contribution big_number self-employment_tax deduction adjusted_gross_income big_number tax_liability big_number overpayment big_number the schedule_k-1 partner’s share of income credits deductions etc attached to petitioners’ return indicates that the dsbs c loss comprised of a nonpassive activity deduction of dollar_figure and a special_allocation deduction of dollar_figure the schedule k- also lists farm income of dollar_figure as nonemployee compensation earned by petitioners and the schedule lists this amount as a contribution to the partnership a statement attached to the return indicates that petitioners contributed dollar_figure in cash to the partnership as part of his sic total cash contribution and that petitioners should claim dollar_figure as an i r a contribution for if they qualify another statement separately signed by petitioners indicates that petitioners materially participated in partnership-related activities--on the blank line following the numbers sic of hours we spent working in our business activity in was petitioners filled in all that was needed to be done the return was prepared by one of mr hoyt’s tax preparation services and was signed by mr hoyt mr hoyt signed the return on date and petitioners signed the return on date petitioners remitted two payments to the hoyt organization during one in the form of a cashier’s check dated date in the amount of dollar_figure and a second payment in date in the amount of dollar_figure upon signing the returns and forms prepared by the hoyt organization mr van scoten did not know how the hoyt-related items were derived he knew only that mr hoyt or a member of his organization had entered the items on the returns and he assumed the items were therefore correct mr van scoten did not question any of the amounts shown on the return and petitioners did not have the returns reviewed by an accountant or anyone else outside the hoyt organization prior to signing them respondent issued a notice of final_partnership_administrative_adjustment fpaa to petitioners with respect to dsbs 87-c that reflected the disallowance of various deductions claimed on the partnership return for its taxable_year ending in because a timely petition to this court was not filed in response to the fpaa issued for dsbs 87-c respondent made a computational adjustment assessment against petitioners with respect to the fpaa the computational adjustments changed petitioners’ claimed dsbs 87-c loss of dollar_figure to income of dollar_figure disallowed the partnership-related ira contribution deduction of dollar_figure and made computational adjustments to petitioners’ itemized_deductions and self-employment_tax deduction based on the above two changes these changes increased petitioners’ tax_liability to dollar_figure an increase of dollar_figure above petitioners’ reported tax_liability of dollar_figure in the notice_of_deficiency underlying this case respondent 4the amount of the farm income reported by petitioners on their return was not changed by respondent pursuant to the computational adjustment assessment presumably because the farm income was not a partnership_item determined that petitioners are liable for the sec_6662 accuracy-related_penalty for negligence or disregard of rules or regulations with respect to dollar_figure of the underpayment resulting from the dsbs 87-c computational adjustment i evidentiary issues opinion as a preliminary matter we address evidentiary issues raised by the parties in the stipulations of facts the parties reserved objections to a number of the exhibits and paragraphs contained in the stipulations all on the grounds of relevancy federal rule_of evidence provides the general_rule that all relevant evidence is admissible while evidence which is not relevant is not admissible federal rule_of evidence provides that ‘relevant evidence’ means evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence while certain of the exhibits and stipulated facts are given little to no weight in our finding of ultimate facts in this case we hold that the exhibits and stipulated facts meet the threshold definition of relevant evidence under federal rule_of evidence and that the exhibits and stipulated facts therefore are admissible under federal rule_of evidence accordingly to the extent that 5the federal rules of evidence are applicable in this court pursuant to sec_7453 and rule a the court did not overrule the relevancy objections at trial we do so here ii the sec_6662 accuracy-related_penalty sec_6662 imposes an addition_to_tax of percent on the portion of an underpayment attributable to any one of various factors one of which is negligence or disregard of rules or regulations sec_6662 and b negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code and disregard of rules or regulations includes any careless reckless or intentional disregard sec_6662 the regulations under sec_6662 provide that negligence is strongly indicated where a taxpayer fails to make a reasonable attempt to ascertain the correctness of a deduction credit or exclusion on a return which would seem to a reasonable and prudent person to be too good to be true under the circumstances sec_1_6662-3 income_tax regs negligence is defined as the ‘lack of due care or failure to do what a reasonable or ordinarily prudent person would do under the circumstances ’ 85_tc_934 quoting marcello v commissioner 380_f2d_499 5th cir affg in part and remanding in part on another ground 43_tc_168 see 62_f3d_1266 10th cir affg tcmemo_1993_607 negligence is determined by testing a taxpayer’s conduct against that of a reasonable prudent person anderson v commissioner supra pincite3 courts generally look both to the underlying investment and to the taxpayer’s position taken on the return in evaluating whether a taxpayer was negligent id 243_f3d_1212 10th cir affg leema enters inc v commissioner tcmemo_1999_18 82_f3d_918 9th cir affg tcmemo_1994_217 when an investment has such obviously suspect tax claims as to put a reasonable taxpayer under a duty_of inquiry a good_faith investigation of the underlying viability financial structure and economics of the investment is required roberson v commissioner tcmemo_1996_335 affd without published opinion 142_f3d_435 6th cir citing 94_tc_637 affd without published opinion sub nom cowles v commissioner 949_f2d_401 10th cir affd without published opinion 956_f2d_274 9th cir 90_tc_908 the commissioner’s decision to impose the negligence_penalty is presumptively correct rule a anderson v commissioner supra pincite a taxpayer has the burden of proving that respondent’s determination is erroneous and that he 6while sec_7491 shifts the burden of production and or burden_of_proof to the commissioner in certain circumstances this section is not applicable in this case because respondent’s examination of petitioners’ return did not commence after date see internal_revenue_service restructuring and reform act of publaw_105_206 sec c 112_stat_727 did what a reasonably prudent person would have done under the circumstances 58_tc_757 iii application of the negligence standard although petitioners had no background in cattle ranching and petitioners did not consult any independent investment advisers petitioners made the decision to invest in a cattle ranching activity as a means to provide for their retirement as part of their initial investment in the hoyt partnerships petitioners provided mr hoyt with the authority to sign promissory notes on their behalf the power_of_attorney forms which petitioners signed granted mr hoyt the authority to incur personal debts on petitioners’ behalf debt that mr van scoten believed petitioners would be required to repay in the event something went wrong with the partnership in addition to the promissory notes the power_of_attorney forms granted mr hoyt the power to control numerous aspects of petitioners’ investment without prior consultation with petitioners nevertheless petitioners placed their trust entirely with the hoyt organization and they did not investigate the legitimacy of the partnerships with anyone not employed by or invested in the hoyt organization we conclude that petitioners were negligent in signing the power_of_attorney forms and in entering into the investment furthermore we note that we do not accept mr van scoten’s testimony that he did not intend to invest in a tax_shelter and that he never intended not to pay his taxes the promotional materials received by petitioners specifically called the hoyt investment a tax_shelter and specifically stated that the primary return on any investment would be from tax savings in the years preceding their investment through petitioners reported adjusted_gross_income agi averaging approximately dollar_figure each year in each of these years petitioners paid federal income taxes in an amount averaging approximately dollar_figure after making their investment in dsbs 87-c in date petitioners filed a return on which they claimed a deduction for a partnership loss of dollar_figure reducing their tax_liability on dollar_figure of wage income to only dollar_figure petitioners then filed the form_1045 on which they used the partnership loss to reduce their tax_liability to zero in each of and finally for the year in issue petitioners claimed an additional partnership loss deduction of dollar_figure resulting in a tax_liability of dollar_figure while this loss was partially offset by the farm income reported on the return petitioners’ tax_liability was nevertheless less than half of petitioners’ average tax_liability before application of the carryback in the years prior to their investment petitioners claimed the tax benefits from the partnership losses based solely on the advice that they received from the promoters of the investment and from other hoyt investors furthermore the promotional materials that petitioners received had clearly indicated that there were substantial tax risks in making an investment nevertheless petitioners did not investigate the tax claims being made by the hoyt organization with anyone who was not involved with the organization when it came time to prepare petitioners’ tax returns and claim the losses being reported by the hoyt partnerships petitioners relied on the very people who were receiving the bulk of the tax savings generated by the claims thus the same individuals who sold petitioners an interest in the hoyt partnerships and who ran the purported ranching operations also prepared the partnerships’ tax returns prepared petitioners’ tax returns and received from petitioners most of the tax savings that resulted from the positions taken on petitioners’ returns when petitioners filed their return mr van scoten did not know and there is no evidence that ms van scoten knew how the loss or other_amounts were derived he knew only that the hoyt organization had reported the amounts on petitioners’ tax_return petitioners claimed the loss despite the fact that respondent had warned petitioners as well mr van scoten’s father that there were potential problems with the tax claims being made on both the partnership returns and on petitioners’ returns prior to signing their return petitioners had received at least two separate letters from respondent alerting petitioners to suspected problems or alerting petitioners to reviews that had been commenced with respect to their partnership despite these letters petitioners did not further investigate the partnership losses such as by consulting an independent tax adviser before claiming the losses as deductions on their return instead petitioners essentially ignored the letters merely sending copies of them to the hoyt organization as petitioners had been instructed to do finally petitioners’ actions with respect to the return reflect a nonchalant attitude with respect thereto rather than a reasonable attempt to ascertain their proper tax_liability for example on the statement attached to petitioners’ return regarding material_participation petitioners merely stated that they worked all that was needed to be done rather than specifying an accurate number of hours when questioned at trial concerning a partnership-related_item appearing on the return mr van scoten testified twice that he probably looked at it and did not pay any attention to the amount appearing on the return petitioner further testified that in reviewing the return like most naive people i’d look for the smiley face at the end not the numbers that got to it upon the basis of the record before the court we conclude that petitioners were negligent in in deducting the dollar_figure partnership loss from dsbs 87-c iv alleged defenses to the accuracy-related_penalty sec_6664 provides that the sec_6662 accuracy-related_penalty is not imposed with respect to any portion of an underpayment if it is shown that there was a reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances sec_1_6664-4 income_tax regs the extent of the taxpayer’s effort to ascertain his proper tax_liability is generally the most important factor id a reliance on the hoyt organization and edward van scoten petitioners first argue that they should escape the negligence_penalty because they relied in good_faith on various individuals with respect to the hoyt investment mr hoyt and other members of the hoyt organization tax professionals hired by the hoyt organization and mr van scoten’s father edward van scoten good_faith reliance on professional advice concerning tax laws may be a defense to the negligence penalties 469_us_241 see also sec_1 b income_tax regs however reliance on professional advice standing alone is not an absolute defense to negligence but rather a factor to be considered 89_tc_849 affd 904_f2d_1011 5th cir affd 501_us_868 in order to be considered as such the reliance must be reasonable id to be objectively reasonable the advice generally must be from competent and independent parties unburdened with an inherent conflict of interest not from the promoters of the investment 39_f3d_402 2d cir affg tcmemo_1993_480 laverne v commissioner t c pincite 91_tc_524 edwards v commissioner tcmemo_2002_169 it is clear in this case that petitioners’ reliance on the hoyt organization to prepare their tax returns was not objectively reasonable we note that petitioners did not receive any specific advice concerning the deduction of the partnership loss--they simply accepted whatever numbers were placed on the return by the hoyt organization and signed the returns as they were presented to them petitioners’ reliance on the hoyt organization to prepare the returns was not objectively reasonable because mr hoyt and his organization created and promoted the partnership they completed petitioners’ tax_return and they received the bulk of the tax benefits from doing so for petitioners to trust mr hoyt or members of his organization to prepare their return under these circumstances was inherently unreasonable in addition to members of the hoyt organization itself petitioners argue that they relied on tax professionals hired by the hoyt organization petitioners however have only established that they believed that the hoyt organization had consulted with tax professionals petitioners have not established in what manner they personally relied upon any such professionals or even the details of what advice the professionals provided that would be applicable to petitioners’ situation with respect to the year in issue furthermore because all of these individuals were affiliated with the hoyt organization it would have been objectively unreasonable for petitioners to rely upon them in claiming the tax benefits advertised by that very organization we reach a similar conclusion with respect to petitioners’ reliance on mr van scoten’s father edward van scoten while mr van scoten trusted edward van scoten because of their relationship edward van scoten lacked the expertise necessary to provide objectively reasonable advice concerning an investment in a hoyt partnership although he had experience working on dairy farms this experience was not directly transferable to a purportedly vast cattle ranching operation with a complex financial and ownership structure furthermore edward van scoten’s information pertaining to the tax benefits of an investment in the hoyt organization was derived from the same source as mr van scoten’s information--from the promotional materials and newsletters issued by the hoyt organization ultimately petitioners’ reliance on mr van scoten’s father for advice concerning the hoyt partnership investment does not absolve petitioner from the negligence_penalty b deception and fraud by mr hoyt petitioners next argue that they should not be liable for the negligence_penalty because they were defrauded and otherwise deceived by mr hoyt with respect to their investment in the hoyt partnerships in this regard petitioners first argue that the doctrine_of judicial estoppel bars application of the negligence_penalty because the u s government successfully prosecuted mr hoyt for in general terms defrauding petitioners judicial estoppel is a doctrine that prevents parties in subsequent judicial proceedings from asserting positions contradictory to those they previously have affirmatively persuaded a court to accept 944_f2d_253 5th cir 690_f2d_595 6th cir while this court has accepted the doctrine_of judicial estoppel see 100_tc_17 the court_of_appeals for the tenth circuit to which appeal lies in this case has expressly rejected the doctrine 231_f3d_713 10th cir consequently the doctrine_of judicial estoppel is not applicable in this case see 54_tc_742 holding that this court must follow a court_of_appeals decision which is squarely in point where appeal from our decision lies to that court_of_appeals and to that court alone despite the inapplicability of the judicial estoppel doctrine in this case we note that respondent’s position herein is in no manner contradictory to the position taken by the united_states in the criminal conviction of mr hoyt see eg goldman v commissioner f 3d pincite taxpayer-appellants’ argument that an investment_partnership constituted a fraud on the irs as found by a civil jury and by the tax_court cannot justify appellants’ own failure to exercise reasonable care in claiming the losses derived from their investment to the contrary this court has sustained a finding of negligence with respect to investors who had been victims of deception by tax_shelter promoters for example in klieger v commissioner tcmemo_1992_734 this court held that taxpayers in a situation similar to that of petitioners were negligent in klieger we addressed taxpayers’ involvement in certain investments that were sham transactions that lacked economic_substance petitioners are taxpayers of modest means who were euchred by graham a typical shifty promoter graham sold petitioners worthless investments by giving spurious tax_advice that induced them to reduce their withholding and turn their excess pay over to graham as initial payments to acquire interests in investment programs that did not produce any economic return and apparently never had any prospects of doing so graham purported to fulfill his prophecies about the tax treatment of the programs by preparing petitioners’ tax returns and claiming deductions and credits that have been disallowed in full with resulting deficiencies when a tax_shelter is a sham devoid of economic_substance and a taxpayer relies solely on the tax_shelter promoter to prepare his income_tax return or advise him how to prepare the return with respect to the items attributable to the shelter that the promoter has sold him it will be difficult for the taxpayer to carry his burden of proving that he acted reasonably or prudently although a tax_shelter participant as a taxpayer has a duty to use reasonable care in reporting his tax_liability the promoter who prepares the participant’s tax_return can be expected to report large tax deductions and credits to show a relatively low amount of tax due and thereby fulfill the prophecies incorporated in his sales pitch in a vein similar to their judicial estoppel argument petitioners further argue that mr hoyt’s deception resulted in an honest mistake of fact by petitioners when they entered into their investment more specifically petitioners assert that they had insufficient information concerning the losses and that all tangible evidence available to the hoyt partners supported jay hoyt’s statements reasonable_cause and good_faith under sec_6664 may be indicated where there is an honest misunderstanding of fact or law that is reasonable in light of all the facts and circumstances including the experience knowledge and education of the taxpayer sec_1_6664-4 income_tax regs however reasonable_cause and good_faith is not necessarily indicated by reliance on facts that unknown to the taxpayer are incorrect id for the reasons discussed above in applying the negligence standard whether or not petitioners had a mistake of fact does not alter our conclusion that petitioners’ actions in relation to their investment and the tax claims were objectively unreasonable furthermore and again for the reasons discussed above petitioners’ failure to investigate further--beyond what was made available to them by mr hoyt and his organization--was also not an objectively reasonable course of action c petitioners’ investigation petitioners further argue that they had reasonable_cause for the underpayment because they made a reasonable investigation into the partnership taking into account the level of their sophistication petitioners assert that this investigation yielded no indication of wrongdoing by mr hoyt and petitioners further assert that an average taxpayer would have been unable to uncover mr hoyt’s fraud as we have held petitioners’ investigation into the partnership went no further than members of the hoyt organization and mr van scoten’s father who was another hoyt investor and who in turn was relying on the hoyt organization relying on these individuals as a source of objective information concerning the partnerships was not reasonable furthermore petitioners were negligent in not further investigating the partnership and or seeking independent advice concerning it d the bales opinion petitioners next argue that they had reasonable_cause for the underpayment because of this court’s opinion in bales v commissioner tcmemo_1989_568 bales involved deficiencies asserted against various investors in several different cattle partnerships marketed by mr hoyt this court found in favor of the investors on several issues stating that the transaction in issue should be respected for federal_income_tax purposes the bales case involved different investors different partnerships different taxable years and different issues than those underlying the present case first petitioners argue they relied on bales in claiming the deduction for the partnership loss we find that petitioners have not established that they relied on bales in this manner while petitioners received the opinion there is no evidence that they without any background in law or accounting personally relied upon the opinion in claiming the relevant partnership loss to the contrary mr van scoten testified at trial that he 7petitioners also argue that the bales opinion provided substantial_authority for the positions taken on petitioners’ income_tax return there is no explicit substantial_authority exception to the sec_6662 accuracy-related_penalty for negligence hillman v commissioner tcmemo_1999_255 ndollar_figure citing wheeler v commissioner t c memo while petitioners refer to the reasonable basis exception to the negligence_penalty set forth in sec_1_6662-3 income_tax regs they do not specifically argue that the exception applies in this case nevertheless we note that the record does not establish that petitioners had a reasonable basis for claiming the partnership loss at issue in this case did not know any details concerning the opinion and when questioned about a letter from the hoyt organization regarding another case in this court he further testified that he didn’t care about the portions of the letter pertaining to the tax_court writing stuff in short the record shows that if petitioners relied on bales to any degree they relied only on the interpretation of bales provided by mr hoyt and members of his organization who repeatedly claimed that bales was proof that the partnerships and the tax positions were legitimate we have already found that petitioners’ reliance on mr hoyt and his organization was objectively unreasonable and as such not a defense to the negligence_penalty accepting mr hoyt’s assurances that bales was a wholesale affirmation of his partnerships and his tax claims was no less unreasonable second petitioners argue that because this court was unable to uncover the fraud or deception by mr hoyt in bales petitioners as individual taxpayers were in no position to evaluate the legitimacy of their partnership or the tax benefits claimed with respect thereto this argument employs the bales case as a red herring bales involved different investors different partnerships different taxable years and different issues furthermore adopting petitioners’ position would imply that taxpayers should have been given carte blanche to invest in partnerships promoted by mr hoyt merely because mr hoyt had previously engaged in activities which withstood one type of challenge by the commissioner no matter how illegitimate the partnerships had become or how unreasonable the taxpayers were in making investments therein and claiming the tax benefits that mr hoyt promised would ensue e fairness considerations petitioners’ final arguments concerning application of the accuracy-related_penalty are in essence arguments that imposition of the penalty would be unfair or unjust in this case petitioners argue that the application of penalties in the present case does not comport with the underlying purpose of penalties to this effect petitioners argue that in this case the problem was not petitioners’ disregard of the tax laws but was jay hoyt’s fraud and deception petitioners did not engage in noncompliant behavior instead they were the victims of a complex fraud that it took respondent years to completely unravel petitioner ron van scoten made a good_faith effort to comply with the tax laws and punishing him by imposing penalties does not encourage voluntary compliance but instead has the opposite effect of the appearance of unfairness by punishing the victim we are mindful of the fact that petitioners were victims of mr hoyt’s fraudulent actions petitioners ultimately lost the bulk of the tax savings that they received which they had remitted to mr hoyt as part of their investment nevertheless petitioners believed that this money was being used for their own personal benefit--at the time that they claimed the tax savings they believed that they would eventually benefit from them mr hoyt’s conduct does not alter our conclusion that petitioners were negligent with respect to entering the hoyt investment and that they were negligent with respect to the position that they took on their tax_return despite mr hoyt’s actions the positions taken on the return signed by petitioners were ultimately the positions of petitioners not of mr hoyt v conclusion upon the basis of the record before the court we conclude that petitioners’ actions in relation to the hoyt investment constituted a lack of due care and a failure to do what reasonable or ordinarily prudent persons would do under the circumstances first petitioners entered into an investment in which they gave mr hoyt authority to incur personal debts on their behalf and control petitioners’ interest in their partnership without investigating the legitimacy of the partnerships beyond the advice of mr van scoten’s father second and foremost petitioners trusted individuals who told them that they effectively could escape paying federal income taxes for a number of years--petitioners reported a combined tax_liability of dollar_figure on dollar_figure of wage interest and pension income over years and reported zero tax_liability on dollar_figure of agi for the prior years--based solely upon the tax_advice of the individuals promoting the tax_shelter our conclusion is reinforced by the fact that petitioners received warnings from respondent warnings that petitioners chose to ignore we find that petitioners were negligent with respect to entering the hoyt investment and that they were negligent with respect to claiming the dsbs 87-c loss on their return to reflect the foregoing decision will be entered for respondent


department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date o f f i c e o f t h e c h i e f c o u n s e l number info release date conex-110465-12 uil ------------------- ------------------------- -------------------------- dear ------------- this letter responds to your correspondence dated date to senator herb kohl you requested a clarification of the status of public charter schools as agencies or instrumentalities of a state for purposes of the definition of the term governmental_plan under sec_414 of the internal_revenue_code the code sec_414 of the code generally defines a governmental_plan as a plan that the government of the united_states the government of any state or its political subdivisions or any of their agencies or instrumentalities establishes or maintains for employees of the entity on date the treasury_department and the irs published an advance notice of proposed rulemaking anprm relating to the definition of a governmental_plan under sec_414 of the code copy enclosed an anprm which is typically issued early in the rulemaking process describes an anticipated regulatory approach and seeks input from the public about the guidance under consideration the anprm includes as an attachment draft proposed_regulations that in part define key terms in the definition of governmental_plan including the terms united_states states and political_subdivision of a state describe the multiple factors under consideration for determining whether an entity is an agency_or_instrumentality of the united_states or an agency_or_instrumentality of a state or a political_subdivision of a state provide rules for determining whether a governmental entity has established and maintained a plan for purposes of sec_414 of the code you wrote that the anprm provides that charter school employees would not be eligible to participate in a governmental_plan within the meaning of sec_414 of the code the anprm does not specifically exclude charter schools as governmental conex-110465-12 entities a facts_and_circumstances_test determines whether an entity is a governmental entity this test depends on all facts relating to the particular entity in question the preamble to the guidance under consideration specifically provides that no one factor will determine whether an entity is a governmental entity in addition the factors in the guidance under consideration are generally a compilation of factors from various revenue rulings and court cases dating back to in cooperation with the department of labor and pension_benefit_guaranty_corporation the treasury_department and the irs will review comments we received in response to the anprm as well as input from the general_public at the public hearings and town hall meetings the irs and the treasury_department as well as the department of education plan to meet with representatives from the charter school community to hear their concerns on the anprm this meeting has been scheduled for date after evaluating the comments the cooperative process for drafting a notice of proposed rulemaking nprm will begin after issuing the nprm the treasury_department and the irs will once again give the public an opportunity to submit comments recognizing that we have never issued regulations on the definition of governmental plans within the meaning of sec_414 of the code we anticipate that once issued the regulations will have transition_rules the anprm specifically requests comments on transitional relief we also anticipate that any regulations would not be effective any earlier than the plan_year beginning after the date of publication of the treasury_decision adopting the rules as final regulations i hope this information is helpful i am sending senator kohl a copy of this letter if you have any questions please call me at -------------------- or ----------------------------------------- ------- sincerely victoria a judson division counsel associate chief_counsel tax exempt government entities enclosure


t c memo united_states tax_court wayne clarke petitioner v commissioner of internal revenue respondent docket no 11538-11l filed date beverly l winstead for petitioner michael a raiken for respondent memorandum findings_of_fact and opinion goeke judge the petition in this case was filed in response to a notice_of_determination concerning collection action sustaining a final notice_of_intent_to_levy with respect to income_tax additions to tax and interest for and the issues for decision are whether the settlement officer so assigned to this case abused his discretion by not adequately considering petitioner’s installment_agreement request we hold the so did not abuse his discretion and whether the so abused his discretion in using national standards to determine petitioner’s reasonable collection potential rather than using petitioner’s actual expenses we hold the so did not abuse his discretion findings_of_fact at the time the petition was filed petitioner resided in maryland during and petitioner was self-employed as a consultant and operated his consulting activities through a limited_liability_company called clarke associates llc clarke associates was wholly owned by petitioner and was treated as a disregarded_entity during those years on date petitioner filed his federal_income_tax return reporting dollar_figure of taxable_income and self-assessed tax of dollar_figure respondent assessed the tax reported on the return on date petitioner made a payment of dollar_figure with the tax_return but made no estimated_tax payments or other advance_payment of his income_tax_liability 1all dollar amounts are rounded to the nearest dollar since filing the tax_return petitioner has made dollar_figure in additional payments toward the tax_liability on date petitioner filed his tax_return reporting dollar_figure of taxable_income and self-assessed tax of dollar_figure respondent assessed the tax reported on the return on date petitioner made no estimated_tax payments or other advance_payments of his tax_liability made no payments with his return and has made no payments toward the liability since the return was filed on date petitioner filed his return reporting dollar_figure of taxable_income and self-assessed tax of dollar_figure respondent assessed the tax reported on the return on date petitioner made no estimated_tax payments or other advance_payments of his tax_liability made no payments with his return and has made no payments toward the liability since the return was filed in addition to liability for the previously described unpaid tax as well certain additions to tax2 and interest petitioner also had a dollar_figure unpaid liability remaining from his tax as of date 2additions to tax assessed were the estimated_tax addition and the failure_to_pay_tax addition for both and it is not clear which additions to tax if any were assessed for on date petitioner purchased a home for dollar_figure in order to help pay for the home petitioner obtained a mortgage for dollar_figure to make the downpayment petitioner withdrew approximately dollar_figure from his brokerage account the home has at least big_number square feet of interior finished living space is on a lot of approximately two acres in a gated golf course community and has four bedrooms and five bathrooms petitioner lived there with his son and no one else before purchasing the home petitioner stayed in a rental petitioner’s work as a consultant involved convincing residential and commercial real_estate developers and executives to develop land in prince georges county maryland the county in which he lived petitioner set up an office in one of the rooms in his home where he would meet potential and existing business clients before buying the home petitioner did not have his own office and would often meet clients in restaurants or hotel lobbies the parties stipulated that on date petitioner requested an installment_agreement for the payment of his tax_liabilities for and this stipulation appears to be incorrect in part given that petitioner 3petitioner simply testified that he was renting he did not describe the place he was renting did not file his tax_return until date however the form_4340 certificate of assessments payments and other specified matters submitted into evidence does show a pending installment_agreement on date as well as on date the form_4340 reflects no payments made as a result of an installment_agreement and an entry for date states reverses pending installment_agreement the parties did not expand upon the facts regarding this requested installment_agreement on date petitioner submitted a form 433-a collection information statement for wage earners and self-employed individuals this form 433-a stated that petitioner’s total monthly income was dollar_figure and his total monthly living_expenses were dollar_figure the monthly living_expenses included dollar_figure for housing and utilities on date respondent mailed to petitioner a final notice notice_of_intent_to_levy and notice of your right to a hearing notice_of_intent_to_levy for petitioner’s and taxable years on date petitioner timely submitted a request for a collection_due_process cdp or equivalent_hearing in his cdp hearing request petitioner asked for an installment_agreement but not an offer-in-compromise oic and stated that his reasonable expenses exceeded his income petitioner did not dispute the underlying liabilities in his cdp hearing request there is no evidence and petitioner has not claimed that he followed through on his request for an installment_agreement instead on date petitioner submitted a dollar_figure oic on form_656 offer_in_compromise for his and tax_liabilities on the form_656 petitioner stated that the reason for the oic was doubt as to collectibility that he would borrow money from friends and family to pay the offered amount and that he would pay the dollar_figure in monthly installments of dollar_figure over the course of months when petitioner submitted the oic his remaining tax_liabilities were over dollar_figure for years and combined on date respondent received a second form 433-a from petitioner this form 433-a stated that petitioner had a total monthly income of dollar_figure and total monthly living_expenses of dollar_figure however petitioner’s math regarding the living_expenses appears to be incorrect as the sum of the individual expenses is only dollar_figure as with the first form 433-a one of the 4it appears petitioner believed this deferred periodic_payment oic was the same as an installment_agreement this would explain why petitioner asked for an installment_agreement and not an oic in his cdp hearing request only to then submit an oic but not a proposed installment_agreement expenses listed is dollar_figure for housing and utilities the form 433-a also listed a monthly expense of dollar_figure resulting from an installment_agreement with the state of maryland regarding state tax petitioner owed for while that installment_agreement had recently ended when the form 433-a was submitted petitioner was in the process of negotiating another installment_agreement with the state of maryland regarding dollar_figure in unpaid and state taxes finally the form 433-a states that petitioner had equity of dollar_figure in his home dollar_figure in one of his two automobiles and dollar_figure in his furniture petitioner had no significant liquid_assets when the form 433-a was submitted the so assigned to petitioner’s case reviewed the proposed oic but found that petitioner’s reasonable collection potential was dollar_figure as a result on date the so mailed petitioner a letter informing him that the oic would not be accepted the letter also scheduled a cdp hearing for date in determining petitioner’s reasonable collection potential the so determined that petitioner’s allowable monthly expenses were only dollar_figure however just as petitioner had the so incorrectly added the various expenses and respondent now admits the allowable monthly expenses should have totaled dollar_figure the two most significant adjustments were to amounts petitioner had listed for the state tax installment_agreement and for housing and utilities expenses the so did not allow any amounts for the state tax installment_agreement apparently because petitioner did have an installment_agreement at the time the second form 433-a was submitted the so also found petitioner’s allowable housing and utilities expenses were only dollar_figure by using respondent’s local housing and utilities standard for petitioner’s area on date the so and petitioner’s representative held a telephone conference wherein they discussed petitioner’s reasonable collection potential and the so’s rejection of the oic the so stated that an installment_agreement under which petitioner would make monthly payments of dollar_figure to dollar_figure might be acceptable even though the requested oic was not however the representative stated that she did not want to enter into an installment_agreement on behalf of petitioner at that time the representative agreed that the underlying liabilities were not in dispute and that petitioner’s rights had not been violated on date the so issued a notice_of_determination sustaining the notice_of_intent_to_levy petitioner timely filed a petition contesting respondent’s determination opinion i cdp hearings in general and standard of review before proceeding with a levy the commissioner must issue a final notice_of_intent_to_levy and notify the taxpayer of the right to a hearing sec_6330 b during the hearing a taxpayer may raise any relevant issue including challenges to the appropriateness of the collection action and possible collection alternatives sec_6330 following the hearing the appeals_office must make a determination whether the lien filing was appropriate and is required to consider whether the secretary has met the requirements of applicable law and administrative procedure the relevant issues raised by the taxpayer and whether the proposed collection action appropriately balances the need for efficient collection_of_taxes with the taxpayer’s concerns that the collection action be no more intrusive than necessary sec_6330 the so considered each of these prongs in this case and found they should not prevent the collection action from proceeding petitioner agrees that the secretary has met the requirements of applicable law and administrative procedure and is not challenging the underlying liabilities 5unless otherwise indicated all section references are to the internal_revenue_code in effect at all relevant times however petitioner claims that the so otherwise erred in rejecting petitioner’s proposed collection alternatives where a taxpayer’s underlying tax_liability is not in dispute the court reviews the commissioner’s determination for abuse_of_discretion see 114_tc_604 114_tc_176 to establish an abuse_of_discretion the taxpayer must prove that the decision of the commissioner was arbitrary capricious or without sound basis in fact or in law 129_tc_107 citing sego v commissioner t c pincite and 112_tc_19 tinnerman v commissioner tcmemo_2010_150 aff’d 448_fedappx_73 d c cir in reviewing for abuse_of_discretion we generally consider only the arguments issues and other matters that were raised at the hearing or otherwise brought to the attention of the appeals_office giamelli v commissioner t c pincite tinnerman v commissioner tcmemo_2010_150 ii whether the so abused his discretion by not adequately considering petitioner’s installment_agreement request in his pretrial memo petitioner states that he initially proposed a collection alternative of an installment_agreement but that respondent did not consider his installment_agreement request petitioner claims that respondent’s failure to do so amounted to an abuse_of_discretion petitioner did not raise this argument in his posttrial brief but we will briefly address it although the parties stipulated that petitioner requested an installment_agreement for the payment of his tax_liabilities on date no payments were made as the result of any installment_agreement the form_4340 states that the pending installment_agreement was reversed on date and no other evidence regarding this proposed installment_agreement was presented we find petitioner failed to prove abuse_of_discretion regarding such an installment_agreement on his date cdp request petitioner asked for an installment_agreement but not an oic and stated that his reasonable expenses exceeded his income however there is no evidence that petitioner actually submitted a proposed installment_agreement after this date rather it appears petitioner meant to request an oic but confused an installment_agreement with the dollar_figure per month deferred periodic_payment oic he later proposed on form_656 at the cdp hearing the so stated that an installment_agreement under which petitioner would make monthly payments of dollar_figure to dollar_figure might be acceptable however petitioner’s representative stated she did not wish to enter into an installment_agreement on behalf of petitioner at that time no other evidence regarding any other proposed installment_agreement was produced given these facts we find petitioner failed to prove abuse_of_discretion regarding this potential installment_agreement iii whether the so abused his discretion in using national and local standards to determine petitioner’s collection potential rather than using petitioner’s actual expenses sec_7122 authorizes the secretary to compromise any civil case arising under the internal revenue laws generally speaking there are prescribe d guidelines for officers and employees of the internal_revenue_service to determine whether an offer-in-compromise is adequate and should be accepted to resolve a dispute sec_7122 in prescribing guidelines there are schedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living_expenses sec_7122 in every case internal_revenue_service officers and employees must determine whether the use of the schedules is appropriate and shall not use the schedules to the extent such use would result in the taxpayer not having adequate means to provide for basic living_expenses sec_7122 the commissioner will generally compromise a liability on the basis of doubt as to collectibility only if the liability exceeds the taxpayer’s reasonable collection potential 125_tc_301 aff’d 469_f3d_27 1st cir as we have previously stated-- a taxpayer’s reasonable collection potential is determined in part using published guidelines for certain national and local allowances for basic living_expenses and essentially treating income and assets in excess of those needed for basic living_expenses as available to satisfy federal_income_tax liabilities the foregoing formulaic approach is disregarded however upon a showing by the taxpayer of special circumstances including but not limited to advanced age poor health history of unemployment disability dependents with special needs or medical catastrophe that may cause an offer to be accepted notwithstanding that it is for less than the taxpayer’s reasonable collection potential lemann v commissioner tcmemo_2006_37 for purposes of the formulaic approach allowable basic living_expenses include reasonable expenses that are necessary to provide for a taxpayer’s and his or her family’s health and welfare and or production_of_income internal_revenue_manual pt date petitioner claims that he purchased his primary residence to help promote confidence among businesses that prince george’s county is still a booming community and that he used his home_office to meet prospective clients and the location of his office allowed him to produce income petitioner further claims that without the home_office he would be forced to rent outside space which would not be a viable option considering the unpredictable nature of his income petitioner thus argues that he has a special circumstance which should excuse him from the local standard housing and utilities allowance and alternatively that he should be allowed his claimed housing and utilities expenses because his home is necessary for the production of his income we disagree as stated supra p in reviewing for abuse_of_discretion we generally consider only the arguments issues and other matters that were raised at the hearing or otherwise brought to the attention of the appeals_office giamelli v commissioner t c pincite tinnerman v commissioner tcmemo_2010_150 while respondent was generally aware of petitioner’s business there was no evidence presented that petitioner made the appeals_office aware of the fact that one of the rooms in his home was used as an office for clarke associates indeed each form 433-a petitioner submitted listed an address for clarke associates that was different from his personal address listed there was no evidence presented that petitioner informed respondent’s appeals_office or the so that his housing_expenses may have helped him through clarke 6petitioner has not argued that the so abused his discretion in making other adjustments to petitioner’s stated monthly expenses 7an integrated collection system history transcript for petitioner showing respondent’s revenue officer’s collection actions against petitioner stated tp is a zoning consultant helps deal with governments when a store wants to open a store the transcript also stated that tp’s business is clark and associates llc associates to produce income because petitioner failed to prove this information was provided to the so we find that he failed to prove the so abused his discretion in using the local standard housing and utilities allowances instead of petitioner’s stated housing and utilities expenses even if petitioner had informed the so of the facts regarding his business and home_office we would still rule that the so did not abuse his discretion as we find that petitioner’s home was not a necessary expense for production of his income and that no special circumstance exists which would allow him to deduct his stated housing and utilities expenses apart from vague testimony petitioner offered no evidence that owning the home helped clarke associates generate business we also compare the size of the house as a whole big_number square feet on two acres of land with four bedrooms and five bathrooms with the size of the areas used for business petitioner testified he used one room as an office8 but that he also spread things out in the--off the kitchen sometimes we bring folks in and they sit in the living room and downstairs considering the cost of the house nearly four times the local standard housing and utilities allowance and the vague and unproven benefits to his business we find that petitioner was not 8petitioner estimated the size of the room pincite square feet but admitted he was not great at estimating square footage entitled to his claimed housing and utilities expenses of dollar_figure a month and that the so did not abuse his discretion in not allowing him this claimed monthly expense iv conclusion we hold that the so did not abuse his discretion in rejecting petitioner’s proposed oic and sustaining the proposed collection action regarding petitioner’s and tax_liabilities we therefore sustain the determination of the so to reflect the foregoing decision will be entered for respondent 9although petitioner’s proposed oic was for tax_liabilities for and the notice_of_intent_to_levy related only to the and tax_liabilities this opinion does not apply to collection of the and liabilities