internal_revenue_service number release date index number ------------------------------- -------------------------------------------------- --------------------------- --------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b1 plr-139548-07 date date ------------------------------- legend x -------------------------------------------------- a date state dear ------------------ ----------------------- ------------------- ------------------------------ this responds to a letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts the information submitted states that x was incorporated on date under the laws of state a the president of x represents that the shareholders of x intended that x elect to be an s_corporation effective on date but the election to be an s_corporation was not timely filed accordingly x requests a ruling that it will be treated as an s_corporation effective date law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation plr-139548-07 sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months of a corporation's taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply x did not timely file an election to be treated as an s_corporation under sec_1362 x has however established reasonable_cause for not making a timely s election and is entitled to relief under sec_1362 conclusion based solely on the facts and representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation effective date accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 effective date along with a copy of this letter with the appropriate service_center within days from the date of this letter then such election will be treated as timely made for date except as specifically set forth above no opinion is expressed or implied as to this ruling is directed only to the taxpayer s requesting it sec_6110 of the federal_income_tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes the code provides that it may not be used or cited as precedent plr-139548-07 letter is being mailed to your authorized representative in accordance with the power_of_attorney on file with this office a copy of this sincerely dianna k miosi chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court john j burke and vivian burke petitioners v commissioner of internal revenue respondent docket no filed date michael n balsamo for petitioner john j burke vincent r barrella for petitioner vivian burke catherine chastanet and mark a ericson for respondent memorandum findings_of_fact and opinion ruwe judge respondent determined deficiencies in petitioners' federal income taxes and additions to tax as follows additions to tax_year deficiency sec_6653 sec_6653 sec_6661 dollar_figure dollar_figure percent of dollar_figure the interest due on dollar_figure additions to tax_year deficiency sec_6651 sec_6653 sec_6653 sec_6661 dollar_figure dollar_figure dollar_figure percent of the dollar_figure interest due on dollar_figure dollar_figure -- dollar_figure percent of the dollar_figure interest due on dollar_figure the issues for decision are whether petitioners failed to report income of dollar_figure dollar_figure and dollar_figure on delinquent returns filed for the years and respectively whether petitioners are entitled to deduct embezzlement losses of dollar_figure and dollar_figure in and respectively whether petitioners are entitled to deductions of dollar_figure dollar_figure and dollar_figure in and respectively for ordinary losses allegedly incurred by ard rhei inc a small_business_corporation s_corporation under sec_1366 whether petitioner john j burke is liable for an addition_to_tax for fraud3 under sec_6653 whether petitioner vivian burke tacitly consented to the filing of a joint federal 1in her answer respondent determined an increased deficiency against petitioners for in order to reflect an additional dollar_figure of funds allegedly embezzled by mr burke and transferred to ard rhei inc as a result of this increased deficiency respondent also increased the amounts of the additions to tax against petitioners for fraud delinquent filing and substantial_understatement_of_income_tax this court has jurisdiction to redetermine the correct amount of a taxpayer's deficiency even when the amount so redetermined is greater than the amount listed by respondent in her notice_of_deficiency sec_6214 i r c respondent bears the burden_of_proof however with respect to any new_matter increases in deficiency and affirmative defenses pleaded in the answer rule a tax_court rules_of_practice and procedure 2unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable years in issue and all rule references are to the tax_court rules_of_practice and procedure 3respondent concedes the addition_to_tax for fraud against petitioner vivian burke for each of the years in issue see sec_6653 4as an alternative to the additions to tax for fraud respondent asserts additions to tax for negligence against petitioners for each of the taxable years in issue because of our resolution of the fraud issue infra it is unnecessary for us to consider respondent's alternative arguments income_tax return for each of the years in issue and if so whether mrs burke is entitled to innocent spouse protection pursuant to sec_6013 whether petitioners are liable for an addition_to_tax under sec_6651 for delinquent filing of their federal_income_tax returns for and whether petitioners are liable for an addition_to_tax for a substantial_understatement_of_income_tax under sec_6661 for each of the taxable years in issue findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and attached exhibits are incorporated herein by this reference at the time the petition was filed petitioners resided in setauket new york i background during the years in issue mr burke was a licensed insurance agent and the sole owner of two insurance brokerage agencies john j burke associates and burke-shepis co burke insurance agencies in mr burke acquired a 50-percent interest in a restaurant known as jury's of setauket jury's jury's was organized as an s_corporation pursuant to sec_1366 and operated under the name ard rhei inc ard rhei the remaining 50-percent interest in jury's was owned by bernard hillick mr burke eventually purchased mr hillick's interest in jury's during the years in issue mr burke frequently made large wagers at casinos and with bookmakers in addition mr burke used cocaine and marijuana ii john burke's agreement with u s life 5the names jury's and ard rhei are used interchangeably throughout this opinion a the terms of the agreement mr burke was an agent for and sold insurance policies issued by the u s life_insurance co u s life in early mr burke entered into an agreement under which u s life would issue group_life_insurance policies to the metropolitan police conference mpc which represented long island village police departments police officers' benevolent associations and other police and transit worker organizations pursuant to his agreement with u s life mr burke collected premiums from the mpc and deposited the funds into a premium account mpc premium account that he had established for the mpc at marine midland bank in setauket new york under his agreement with u s life mr burke was entitled to a 15-percent annualized commission which he was permitted to withdraw from the mpc premium account prior to the receipt of all premiums that were due commissions were transferred from the mpc premium account to the expense accounts of the burke insurance agencies after withdrawing his commission mr burke was required to remit the balance of the premiums in the mpc premium account to u s life mr burke had no authority to appropriate u s life premium funds in excess of his commissions between date and date mr burke collected more than dollar_figure million in premiums from the mpc b mr burke's misappropriation of mpc premium account funds during the years at issue joann romano was the office manager of the burke insurance agencies as such she supervised the administrative staff managed in-house property and casualty sales served as a liaison to representatives of police groups and insurance_companies and handled banking matters as well as the payroll accounts_payable and receivable and premiums that were received in the office both ms romano and mr burke had signature_authority over the mpc premium account and the burke insurance agencies' expense accounts when mr burke wanted cash he would usually arrange for office workers at the burke insurance agencies to cash checks and deliver the cash to him he would usually instruct ms romano to transfer funds from the mpc premium account to one of the burke insurance agencies' expense accounts she would then write a check that was drawn on one of these expense accounts made payable to an employee of the burke insurance agencies john j burke or cash checks payable to employees were cashed by the employee who would deliver the cash to mr burke or a person designated by him when mr burke needed funds in excess of dollar_figure he would usually instruct ms romano to write multiple checks in smaller amounts so that a currency transaction report would not be generated by the bank on some occasions mr burke ordered checks to be made payable to a bookmaker with whom mr burke gambled on several occasions mr burke instructed ms romano to write a check payable to don balsamo who supplied mr burke with cocaine on other occasions mr burke directed ms romano to transfer funds to ard rhei pursuant to mr burke's instructions ms romano falsely characterized these withdrawals from the burke insurance agencies' accounts as expenses commissions or premium refunds at some point kenneth s silver the accountant for the burke insurance agencies caused forms to be issued to employees to whom checks were issued in order to obtain cash for mr burke upon realizing this mr burke had the forms withdrawn on some occasions checks were drawn directly on the mpc account and either cashed made payable to ard rhei or paid to mr burke's bookmaker the proceeds of cashed checks which were drawn on the mpc premium account were delivered to mr burke ms romano withdrew funds from the mpc premium account and the burke insurance agencies' expense accounts only when instructed to do so by mr burke during and the following amounts were withdrawn from the mpc premium account by checks payable to the following payees payee total amount payable john burke dollar_figure burke associates dollar_figure burke associates premium account dollar_figure burke associates expense account dollar_figure burke-shepis dollar_figure burke-shepis premium account dollar_figure burke-shepis expense account dollar_figure cash dollar_figure evelyn coleman1 dollar_figure jury's dollar_figure lisa tobin2 dollar_figure rex wyon inc dollar_figure total dollar_figure 1ms coleman was an employee of the burke insurance agencies during the years in issue 2mrs tobin was the wife of steven tobin a bookmaker with whom mr burke gambled during the years in issue payee total amount payable burke associates dollar_figure burke associates premium account dollar_figure burke associates expense account dollar_figure burke associates c h i e account dollar_figure burke-shepis dollar_figure don balsamo3 dollar_figure north island express ltd don balsamo dollar_figure total dollar_figure 3mr balsamo supplied mr burke with cocaine during the years in issue premiums due u s life continued to increase throughout on date felix c curcuru vice president of u s life wrote to mr burke regarding premium payments of dollar_figure which were overdue from the mpc mr burke had previously advised u s life that the mpc premium account was in arrears because the burke insurance agencies' administrative billing procedures had not been fully developed at a meeting in date mr burke informed u s life that mpc premium payments were late due to billing system problems and a misunderstanding as to the length of the drag that u s life had extended to several of the police units in the original agreement between u s life and the mpc u s life granted several of the police units a 3-month drag in an date letter to mr burke mr curcuru summarized the matters that were discussed at an date meeting including an mpc premium reconciliation presented by mr burke that showed dollar_figure due and unpaid to u s life through date at this meeting mr burke agreed to pay the amount owed by date but he failed to do so on date mr curcuru again wrote to mr burke to demand payment in the amount of dollar_figure by date for unpaid mpc premiums owing from mr burke through date the letter further stated that if full payment were not received by date u s life would commence legal action to collect the unpaid premiums on date mr burke wrote to mr curcuru concerning a date meeting at which mr burke was asked to prepare a payment schedule that would bring the mpc account current in his letter mr burke informed mr curcuru that the account shall be brought current by date with a major portion being supplied some time in january mr burke and mr curcuru met again on or about date at this meeting mr burke falsely claimed that he had negotiated a 6-month drag with the mpc and he then proposed a repayment schedule which he failed to meet on date u s life filed a motion for summary_judgment in lieu of complaint with the new york supreme court county of new york against mr burke and john j burke associates at that time the total premiums due u s life from the mpc insurance account was dollar_figure on date u s life obtained a default judgment in the amount of dollar_figure together with interest and costs of dollar_figure and dollar_figure respectively 6a drag is a grace period given by an insurance_company when it permits an insured to pay premiums after the specified due_date c mr burke's indictment in date mr burke informed ms romano that he was under investigation by the new york state department of insurance mr burke then instructed her to collect the insurance agency checkbooks destroy them and report them as stolen ms romano refused to carry out these instructions the records of the burke insurance agencies were seized by the suffolk county district attorney's office pursuant to search warrants authorized on date mr burke was indicted on two counts of grand larceny for embezzling more than dollar_figure million from his insurance premium account however mr burke was neither tried nor convicted for this indictment instead pursuant to a plea agreement with the suffolk county district attorney mr burke pled guilty to grand larceny a felony for his failure to remit sales_tax from jury's to the new york state department of taxation and finance in exchange for his guilty plea the embezzlement charges were dismissed iii tax returns filed for and a the alleged joint returns on date mr burke filed untimely federal_income_tax returns for the taxable years and these returns purport to be joint returns although a signature for mrs burke appears on the returns at issue the parties stipulated that mrs burke did not sign any of the returns and mrs burke had no involvement in the preparation of the delinquent returns or in the audit process leading up to the issuance of the notice_of_deficiency mr burke signed mrs burke's name to the returns without asking for or receiving her consent prior to the filing of the returns in issue mr burke had never signed his wife's name to a tax_return mrs burke individually was not required to file a federal_income_tax return of her own for any of the years in issue in date mrs burke was aware of the financial and legal problems that mr burke had encountered during the years at issue mr burke did not inform his wife that he filed the returns in issue until at least the summer of after the couple had met with attorney michael n balsamo moreover mr burke never discussed the contents of the returns with mrs burke nor did he advise her that he had signed her name to the returns mrs burke did not learn that a signature purporting to be her own appeared on the returns until date when she examined the returns at her attorney's office mrs burke filed joint returns with mr burke for years prior to the years in issue mrs burke personally signed these returns similarly petitioners filed joint returns which mrs burke personally signed for the taxable years through b income and losses as reported on the returns the and returns filed by mr burke on date reported the following items burke insurance agencies gross_income dollar_figure dollar_figure dollar_figure embezzlement loss big_number big_number -- ard rhei inc ordinary_loss dollar_figure dollar_figure dollar_figure regarding these alleged losses the following disclosure statements are contained in each of the returns for the years in issue as per the direction of john j burke amounts which were withdrawn from two corporations operated by mr burke and attributed to him were embezzled by two employees of these corporations during the years and as such these amounts have not been included as income on this tax_return attached please find all legal papers filed to date relating to this matter the disclosure concerning ard rhei's alleged losses states as per the direction of john j burke amounts approximating the results of ard rhei inc 's s-corporation i d operations have been included on the shareholders personal tax_return in order to more accurately reflect the income stated on the form_1040 the corporation's tax_return has not been filed to date c respondent's determination of income during the years in issue the following bank accounts were maintained by petitioners and the burke insurance agencies bank account title account no bank of smithtown john j burke or vivian burke bank of smithtown john j burke associates expense account bank of smithtown john j burke associates premium account bank of smithtown burke-shepis and co inc marine midland john j burke associates mpc premium account marine midland john j burke associates marine midland john j burke associates premium account marine midland john j burke associates c h i e account marine midland john j burke vivian burke marine midland burke-shepis co inc expense account relying on certain transactions with respect to the above accounts respondent determined that petitioners' gross_receipts for the years in issue were as follows dollar_figure dollar_figure dollar_figure in her answer respondent asserted an increased deficiency of dollar_figure for based upon additional funds that were transferred from marine midland bank--account no to ard rhei but which had not been included in income pursuant to the notice_of_deficiency the banking transactions upon which respondent's notice_of_deficiency and claimed increase in deficiency are based are summarized8 as follows bank account account transaction name number title type marine john j burke checks to dollar_figure dollar_figure midland assoc balsamo john mpc premium burke cash a c jury's and tobin marine john j burke cash dollar_figure dollar_figure dollar_figure 7the claimed increased deficiency is based upon the following checks drawn on marine midland bank account no john j burke associates date check no amount endorsement dollar_figure ard rhei jury' sec_11 big_number ard rhei big_number ard rhei big_number ard rhei big_number for deposit only big_number ard rhei big_number ard rhei big_number ard rhei total dollar_figure 8a description of specific transactions upon which this summary is based is contained in the appendix midland assoc withdrawals c h i e a c marine john j burke checks to dollar_figure dollar_figure dollar_figure midland assoc ard rhei jury's john burke and cash bank of john j burke checks to dollar_figure smithtown assoc cash john expense a c burke and employees bank of john j burke checks to dollar_figure smithtown or vivian cash ard burke rhei and john burke marine john j burke noncash dollar_figure dollar_figure dollar_figure midland vivian deposits burke total income dollar_figure dollar_figure dollar_figure additional income opinion respondent determined that mr burke failed to report income in the amount of dollar_figure dollar_figure and dollar_figure on the delinquent returns that he filed for and respectively and that the source of this income was money that mr burke diverted from u s life premium funds mr burke contends that the amounts in question constituted either loans from u s life10 or money that was embezzled by his employees 9this includes dollar_figure in addition to the amount determined in the notice_of_deficiency see supra note 10we note the inconsistencies in mr burke's position on brief mr burke admitted that he often withdrew sums in excess of his actual commission entitlement and that s uch excess withdrawals were treated as loans due from mr burke to the life_insurance_company however when asked by respondent at trial if he characterized his use of mpc account funds as loans mr burke denied even using funds from the premium accounts nevertheless when questioned again about this issue later in the trial by his own counsel mr burke explained they u s life had the option of treating it mr burke's withdrawal of funds in excess of his commissions like a loan okay they however never exercised that option they never charged me any interest the determinations in respondent's notice_of_deficiency are presumed correct and petitioners bear the burden of proving otherwise rule a 290_us_111 sec_61 defines gross_income to include all income from whatever source derived in addition the supreme court has determined that gross_income includes all 'accessions to wealth clearly realized and over which the taxpayers have complete dominion' including illegal earnings 366_us_213 quoting 348_us_426 accord 343_us_130 98_tc_165 borrowed funds are not included in the taxpayer's gross_income because the taxpayer's obligation to repay the funds offsets any increase in the taxpayer's assets 499_us_573 accord 412_f2d_974 5th cir 384_f2d_748 5th cir the hallmarks of a loan are consensual recognition between the borrower and the lender of the existence of the loan ie the obligation to repay and bona_fide intent on the part of the borrower to repay the funds advanced 3_f3d_625 2d cir affg tcmemo_1992_478 there is no credible_evidence in the record of any loan agreement between u s life and mr burke rather the evidence clearly establishes that mr burke was obligated to place all mpc premiums in a special premium bank account from this account mr burke was permitted to withdraw his percent annualized commission but he was obligated to remit the remaining amounts to u s life mr burke never received permission from u s life to take any amounts from the mpc premium account in excess of his commissions when u s life realized it was not receiving its portion of the premiums in a timely fashion it made inquiries and demanded payment mr burke responded with false statements and never told u s life that he had borrowed the money from the premium account eventually u s life brought suit and obtained a judgment against mr burke as to mr burke's allegation that his employees embezzled funds from him and his insurance agencies we find that no such embezzlement took place the employees whom mr burke accuses of embezzlement were credible witnesses at trial they explicitly denied receipt of any of the money in question as we have already stated in our findings_of_fact these employees were operating under mr burke's instructions when they withdrew funds from the mpc premium account and the accounts of the burke insurance agencies such funds were either given to mr burke transferred to ard rhei or otherwise dispersed on mr burke's behalf for example on several occasions funds were used to satisfy mr burke's gambling debt sec_11 or to pay persons who supplied mr burke with illegal drugsdollar_figure we conclude that mr burke improperly diverted funds for his own personal_use without the consent of u s life and these funds are therefore includable in his gross_income see james v united_states supra pincite accordingly we sustain respondent's determination that mr burke had unreported income for the years in issue we also conclude that respondent has presented sufficient evidence to carry her burden_of_proof regarding the increased deficiency for we note that the amounts which should have been paid to u s life during the years in issue actually exceed the income amounts determined by respondent embezzlement losses mr burke argues that he is entitled to deductions for losses of dollar_figure and dollar_figure in and respectively as a result of the embezzlement 11for instance a check was drawn on the mpc premium account and made payable for dollar_figure to lisa tobin the wife of a bookmaker with whom mr burke gambled 12another check was made payable for dollar_figure to don balsamo mr burke purchased cocaine from mr balsamo during the years in issue 13sufficient evidence exists to explain petitioners' need for funds well in excess of the income reported on the returns at issue petitioners lived in an expensive house incurred significant home improvement expenses paid for their son's college tuition and provided him with an automobile and insurance coverage mr burke also purchased illegal narcotics and gambled heavily of funds by employees of the burke insurance agencies taxpayers bear the burden of proving that they are entitled to the losses they claim 283_us_223 mr burke testified at trial that ms romano and evelyn coleman employees of the burke insurance agencies embezzled funds from him in particular mr burke claims that these women would write checks payable to him endorse the checks in his name and then keep the funds for themselves both ms romano and ms coleman denied these accusations ms romano testified that she would write and endorse checks in mr burke's name only when instructed to do so by mr burke himself and she would always provide him with the funds she received as already explained we believe that mr burke's allegations are nothing more than an attempt to conceal his diversion of funds for his own personal_use therefore we sustain respondent's disallowance of any embezzlement losses for the years in issue schedule e losses mr burke claimed schedule e supplemental income schedule losses of dollar_figure dollar_figure and dollar_figure for the taxable years and respectively mr burke alleges that these losses were sustained by ard rhei his wholly owned s_corporation with the exception of a dollar_figure deduction for respondent disallowed any deduction for these losses an s_corporation is not normally subject_to corporate_income_tax sec_1363 instead shareholders include their pro_rata share of the corporation's income losses deductions or credits on their individual tax returns sec_1366 shareholders are only entitled to claim losses and deductions to the extent of their adjusted_basis in the corporation's stock and any indebtedness of the s_corporation to the shareholder sec_1366 petitioners bear the burden of proving that the corporation actually incurred losses for the years in issue our review of the record convinces us that petitioners have failed to do so in this case there are several reasons for our conclusion first the record does not contain ard rhei's income_tax returns for the years in issuedollar_figure second mr burke failed to offer sufficient documentation to substantiate that ard rhei incurred the losses for which mr burke claimed deductions aside from the unconvincing testimony of mr burke and his accountant the record only contains ard rhei's general ledger for this ledger without more is insufficient to substantiate these losses finally a disclosure statement in each of the returns for the years in issue demonstrates the uncertainty regarding these loss deductions these disclosures state as per the direction of john j burke amounts approximating the results of ard rhei inc 's s-corporation i d operations have been included on the shareholders personal tax_return in order to more accurately reflect the income stated on the form_1040 the corporation's tax_return has not been filed to date emphasis added because mr burke has failed to substantiate that ard rhei incurred any losses for the years in issue we sustain respondent's determination additions to tax for fraud we must next consider whether mr burke is liable for additions to tax for fraud under sec_6653 for the taxable years and respondent bears the burden_of_proof on this issue sec_7454 for the taxable_year if any portion of an underpayment_of_tax required to be shown on a return is due to fraud there shall be added to the tax an amount equal to percent of the underpayment as well as an amount equal to percent of the interest payable under sec_6601 with respect to that portion of the underpayment attributable to fraud sec_6653 and for the taxable years and the addition_to_tax is equal to 14kenneth s silver mr burke's accountant testified that he prepared these returns only a few weeks before trial percent of the portion of any underpayment attributable to fraud plu sec_50 percent of the interest due on this portion if respondent establishes that any portion of an underpayment for and is attributable to fraud then the entire underpayment is to be treated as attributable to fraud except with respect to any portion of the underpayment that the taxpayer establishes is not attributable to fraud sec_6653 and b in order to discharge her burden respondent must prove that an underpayment exists for the years in issue and that the underpayment is due to fraud sec_7454 rule b 92_tc_661 81_tc_640 78_tc_304 respondent's income determination is based on the diversion of funds from the mpc premium account for mr burke's personal benefit mr burke does not deny that funds belonging to u s life were taken from the mpc premium account instead mr burke claims that funds which were in excess of what was properly due to the burke agencies as commissions were either loans from u s life or were funds embezzled by several of mr burke's employees we have previously found that none of the withdrawn funds that should have been paid to u s life constituted loans u s life neither explicitly nor implicitly consented to lend mr burke any of the funds withdrawn from the mpc premium account mr burke could not have misapprehended this situation he neither sought nor received u s life's permission to borrow money u s life continuously requested payment of amounts to which it was entitled in response mr burke provided numerous false explanations to u s life finally in u s life brought suit and obtained a judgment against mr burke for the unpaid premiums with respect to mr burke's claim that his employees embezzled funds we have already explained why we reject this claim the evidence clearly demonstrates that mr burke used his employees to divert funds from the mpc premium account by instructing them to move money out of that account and give it to him or transfer it to ard rhei and others for his benefit mr burke engaged in a scheme to divert funds for his own benefit we reject his claims that the funds which he should have paid to u s life were either loans or embezzlements by his employees respondent's determination of mr burke's gross_receipts for the years in issue is actually less than the total amount of premiums that was owed to u s life as of date respondent has clearly demonstrated that mr burke failed to report income and erroneously claimed deductions for embezzlement losses consequently respondent has clearly proven the underpayment of income_tax for the taxable years in issue next respondent must show that mr burke intended to evade taxes known to be owing by conduct that was designed to conceal mislead or otherwise prevent the collection of such taxes 398_f2d_1002 3d cir 394_f2d_366 5th cir affg tcmemo_1966_81 80_tc_1111 the existence of fraud is a question of fact to be resolved upon consideration of the entire record 67_tc_181 affd without published opinion 578_f2d_1383 8th cir fraud is never imputed or presumed instead it must be affirmatively established by respondent with clear_and_convincing evidence 55_tc_85 however since direct evidence of a taxpayer's intent is rarely available fraud may be proven with circumstantial evidence and reasonable inferences which are drawn from established facts 317_us_492 rowlee v commissioner supra factors which are indicative of fraudulent intent on the part of a taxpayer include understatements of income inadequate records failure_to_file tax returns implausible or inconsistent explanations of behavior concealment of assets failure to cooperate with tax authorities engaging in illegal activities attempting to conceal these activities and dealing in cash 796_f2d_303 9th cir affg tcmemo_1984_601 99_tc_202 91_tc_874 upon examination of the entire record we conclude that mr burke's underpayment of federal income taxes for and is attributable to fraud mr burke substantially understated his income on the delinquent returns for the taxable years in issue such consistent and substantial_understatement of income constitutes strong evidence of fraudulent intent 536_f2d_295 9th cir affg tcmemo_1974_251 449_f2d_311 9th cir affg tcmemo_1969_48 301_f2d_484 5th cir affg tcmemo_1959_172 53_tc_96 the failure by a knowledgeable taxpayer to maintain adequate_records is also evidence of fraud 26_tc_354 there were no adequate_records kept to reflect the nature of the transactions in issue mr burke held several insurance licenses and had extensive experience in the insurance_business he was obviously aware therefore of the need to maintain adequate books_and_records his accountant repeatedly warned him of the inadequacy of the burke insurance agencies' books_and_records for instance in a letter to mr burke dated date mr silver states over the past year or so it has become extremely difficult to properly account for the results of operations for both companies in addition to no longer having an idea of how much you owe to insurance_companies for premiums collected i have to seriously question your position that your draw is nothing more than loans from the company to you failure_to_file federal_income_tax returns may be persuasive circumstantial evidence of fraudulent intent 544_f2d_883 5th cir affg tcmemo_1975_368 84_tc_405 75_tc_1 mr burke did not file the returns for the taxable years in issue until date mr burke filed delinquent returns only after being contacted by a revenue_agent mr burke also failed to file sales_tax returns for jury's with the new york state department of taxation and finance misleading a taxpayer's return preparer also constitutes evidence of fraud 43_tc_378 mr burke made numerous misrepresentations to mr silver his accountant for instance he informed mr silver that his withdrawals of mpc premiums were loans however we have already determined that no loan agreement existed between mr burke and u s life and that his diversion and use of these premiums were made without the knowledge and consent of u s life in addition when delinquent returns were prepared mr burke directed mr silver to deduct embezzlement losses for funds that he alleged had been misappropriated by ms romano and ms coleman nevertheless the record contains no evidence establishing that either individual embezzled any funds from the burke insurance agencies and after reviewing the entire record we are convinced that the embezzlement alleged by mr burke did not take place the destruction of books_or_records to conceal finances is persuasive evidence of fraud spies v united_states u s pincite reynolds v commissioner tcmemo_1977_181 mr burke instructed ms romano to destroy insurance agency checkbooks and report them as stolen after he learned that he was under investigation by the new york state department of insurance ms romano did not carry out mr burke's instructions the omission_of_income and the commission of other criminal acts are additional indicia of fraud petzoldt v commissioner t c pincite pursuant to a plea agreement with the suffolk county district attorney mr burke pleaded guilty to grand larceny a felony under new york law for failing to file sales_tax returns and to remit sales_taxes owed from jury's to the new york state department of taxation and finance we have also determined that mr burke diverted premiums owing to u s life as the court_of_appeals for the sixth circuit remarked long ago in 111_f2d_987 6th cir affg 38_bta_16 it is a fair inference that a man who will embezzle funds in his charge will not hesitate to understate his income with intent to defraud the government a system of fraudulent bookkeeping entries by the owners of a business combined with substantial understatements of income is evidence of fraud 21_tc_123 affd 225_f2d_674 2d cir mr burke instructed ms romano to transfer funds from the mpc premium account to the burke insurance agencies' expense accounts and to draw checks payable to herself john j burke various other employees or cash the checks would be cashed and the funds delivered to mr burke pursuant to mr burke's instructions ms romano recorded these withdrawals from the expense accounts as premium refunds and expenses a taxpayer's excessive dealings in large amounts of cash is further indication of fraud 451_f2d_197 3d cir affg tcmemo_1970_37 mr burke diverted insurance premiums by having his employees cash checks and deliver the proceeds to him in order to conceal his receipt of cash mr burke instructed ms romano to write checks for amounts less than dollar_figure in order to avoid generating a currency transaction report we conclude that the record contains clear_and_convincing evidence of mr burke's fraudulent intent to evade income taxes for the taxable years in issue accordingly we find that respondent has discharged her burden and we sustain her determination that mr burke is liable for an addition_to_tax for fraud respondent computed the addition_to_tax for fraud on only a portion of the underpayment for each yeardollar_figure however with respect to the addition for respondent's answer asserts an increased addition_to_tax for fraud by 15for purposes of applying this addition_to_tax the underpayment is not reduced by any amount of tax reported on a delinquently filed return sec_6653 alleging that the tax on an additional understatement of income in the amount of dollar_figure is also due to fraud this additional understatement of income is based on evidence establishing that it was part and parcel of the overall diversion of funds to mr burke as such it is part of the overall fraud we therefore sustain the increased addition_to_tax resulting from the increased deficiency for alleged joint returns the next issue for decision is whether mrs burke is jointly liable for the deficiencies in tax this initially depends upon whether mrs burke tacitly consented to the filing of joint federal_income_tax returns for the years in issue if we find that she did then sec_6013 which establishes that spouses who file a joint tax_return are jointly and severally liable for any_tax that is due on the return is applicable mrs burke did not personally sign the alleged joint returns at issue however this court has recognized that a joint_return is not necessarily invalid because one spouse did not sign the return 56_tc_1 34_tc_740 affd per curiam 325_f2d_1 2d cir 27_tc_270 affd 251_f2d_44 8th cir the issue turns on whether the spouse intended to file and be bound by the particular return in question 780_f2d_561 6th cir affg in part revg in part and remanding tcmemo_1984_310 accord 48_tc_496 25_tc_404 once it is established that one spouse did not sign the joint_return the burden shifts to respondent to produce additional evidence of that spouse's intent o'connor v commissi412_f2d_304 2d cir affg in part and revg in part tcmemo_1967_174 estate of krock v commissioner tcmemo_1983_551 respondent relies primarily on petitioners' long history of joint filing and mrs burke's reliance on her husband to handle the couple's financial affairs cf estate of campbell v commissioner supra pincite federbush v commissioner supra pincite indeed mrs burke concedes on brief that mr burke was responsible for the preparation of any necessary tax returns and that vivian was not involved in the preparation process that vivian signed and consented to the filing of the prior year returns and that vivian signed and consented to the filing of subsequent year returns fn ref omitted however mrs burke contends and we agree that a pattern of joint_return filing is only one factor to consider in reaching a decision concerning her intent lomanno v commissioner tcmemo_1994_426 mrs burke argues that the outcome in this case is controlled by our decision in helfrich v commissioner supra in helfrich v commissioner t c pincite we held that the taxpayer did not have the requisite intent to file a joint_return with her spouse because the signature on the return is not hers furthermore she did not authorize anyone to sign her name to the return she did not know the return had been filed she did not participate in its preparation and the first time she saw it was in the collector's office mrs burke was not aware that her husband filed returns for the years in issue on date and had she been asked to sign these returns or consent to joint filing_status she would have refused numerous reasons existed for mrs burke not to consent to the filing of joint returns mrs burke was not personally required to file any returns for the years at issue the years at issue were turbulent ones for petitioners mr burke was a heavy gambler and he was abusing cocaine mrs burke knew that mr burke had been indicted for embezzlement during that he had pleaded guilty to grand larceny a felony in new york and that u s life had obtained a default judgment against him for the premiums he diverted the returns in question were filed long after their due dates at which time the burkes were experiencing severe marital problems respondent relies on estate of campbell v commissioner supra in support of her contention that mrs burke tacitly consented to the filing of the returns for the taxable years in issue in that case this court determined that the taxpayer whose signature did not appear on the return in question nevertheless intended her return to be a joint_return estate of campbell v commissioner t c pincite we based our conclusion on the fact that the taxpayers customarily filed joint returns and mrs campbell did not examine her husband's preparation of the returns rather she simply signed the returns after he completed them id pincite since her signature on prior and subsequent tax returns appeared to have been little more than a formal ritual we concluded that the absence of mrs campbell's signature was not of overriding importance id pincite moreover the court noted here it has not even been suggested that the taxpayer refused to sign the return indeed the taxpayer has offered no evidence whatever of a reason of any kind for not filing a joint_return in far from suggesting marital difficulties the record indicates that after the spouses continued to live together filing joint returns and enjoying the benefits of their economic community until mr campbell's death in id pincite citations omitted we find estate of campbell v commissioner supra to be clearly distinguishable from the case at hand mrs campbell was fully aware that the tax_return at issue had been filed as a joint_return she was also involved in the audit process thus she had the opportunity to raise an objection to the joint filing of the return but chose not to id pincite consequently the court considered her subsequent effort to discredit the return to be merely an afterthought id by contrast mrs burke was not involved in the audit process leading up to the issuance of the notice_of_deficiency she was unaware that the irs was seeking to hold her liable for any taxes relating to the years at issue until she and mr burke met with attorney michael n balsamo in the summer of prior to this time mrs burke was unaware that purported joint federal_income_tax returns had been filed we conclude that mrs burke did not tacitly consent to the filing of joint federal_income_tax returns for the years in issue and therefore she is not jointly and severally liable for the tax16 in issue it follows that mr burke's federal_income_tax liability for and must now be computed under the filing_status of married filing separate addition_to_tax for failure_to_file a timely return mr burke filed a delinquent_return for the taxable_year and respondent determined that he is liable under sec_6651 for an addition_to_tax on the portion of the underpayment that is not due to fraud see sec_6653 mr burke bears the burden_of_proof on this issue however he did not address this issue on brief and there is no evidence that would lead us to conclude that he had a reasonable excuse for not filing his return until date we sustain respondent's determination additions to tax for substantial_understatement_of_income_tax respondent determined that mr burke is liable for additions to tax for and under sec_6661 respondent also alleged in her answer that this addition_to_tax applies to the understatement_of_tax attributable to the additional income of dollar_figure that we have found that mr burke received in sec_6661 provides for an addition_to_tax equal to percent of the amount of any underpayment attributable to a substantial_understatement_of_income_tax 90_tc_498 an understatement is substantial if it exceeds the greater of dollar_figure 16since we have determined that mrs burke did not tacitly consent to the filing of joint federal_income_tax returns we need not consider whether she satisfies the requirements for protection under the innocent spouse provision in sec_6013 or percent of the tax required to be shown on the return sec_6661 an amount may be reduced however if the taxpayer shows that there was substantial_authority for such treatment of the item or that the relevant facts affecting the tax treatment of the item are adequately disclosed on the return or in a separate statement attached to the return sec_6661 respondent's determinations are presumed correct and mr burke bears the burden of proving otherwise rule a hall v commissioner 729_f2d_632 9th cir affg tcmemo_1982_337 58_tc_757 kerr v commissioner tcmemo_1990_155 mr burke did not address this issue on brief we sustain the additions to tax pursuant to sec_6661 as determined in the notice_of_deficiency and hold that mr burke is also liable for this addition_to_tax with respect to the understatement_of_tax attributable to additional income of dollar_figure which we have found for decision will be entered under rule marine midland bank account no john j burke associates mpc premium account appendix checks payable to cash date check no amount endorsement dollar_figure joann romano romano big_number lisa whelan whelan big_number whelan total dollar_figure checks payable to lisa tobin dollar_figure lisa tobin tobin total dollar_figure checks payable to jury's of setauket dollar_figure jury's of setauket jury's big_number jury's total dollar_figure checks payable to john j burke cashed dollar_figure john burke burke whelan big_number burke total dollar_figure total dollar_figure checks payable to don balsamo dollar_figure don balsamo balsamo total dollar_figure total dollar_figure marine midland bank account no john j burke associates c h i e account cash withdrawals date amount withdrawal signature dollar_figure burke big_number burke big_number burke big_number burke big_number burke big_number burke big_number burke total dollar_figure dollar_figure burke big_number burke big_number burke big_number burke big_number burke total dollar_figure dollar_figure burke big_number burke big_number burke big_number burke big_number burke big_number burke big_number burke total dollar_figure marine midland bank account no john j burke associates checks payable to john j burke date check no amount endorsement dollar_figure burke whelan big_number burke big_number burke total dollar_figure checks payable to cash dollar_figure whelan whelan total dollar_figure checks payable to jury's of setauket dollar_figure jury's total dollar_figure total dollar_figure checks payable to john j burke dollar_figure burke romano big_number burke romano big_number burke alvin koenigberg koenigberg big_number burke whelan big_number burke big_number burke romano big_number burke whelan big_number burke big_number burke big_number burke big_number burke romano big_number burke big_number burke whelan big_number burke whelan big_number burke romano big_number burke evelyn coleman coleman big_number burke big_number burke romano big_number burke coleman big_number burke whelan big_number burke whelan big_number burke big_number burke coleman big_number burke big_number burke big_number burke big_number burke coleman big_number burke coleman big_number burke big_number illegible big_number burke coleman big_number burke big_number burke coleman big_number burke gena cohen cohen big_number burke coleman burke big_number burke romano big_number burke romano big_number burke lynda aquilina aquilina big_number burke aquilina big_number john burke for deposit to ard rhei burke aquilina big_number burke aquilina big_number burke big_number burke big_number deposit to ard rhei big_number burke coleman big_number burke coleman burke total dollar_figure checks payable to cash dollar_figure whelan big_number whelan total dollar_figure checks payable to jury's ard rhei inc dollar_figure ard rhei jury's big_number --- big_number jury's big_number for deposit only big_number for deposit only big_number for deposit only big_number jury's big_number jury's big_number jury's big_number for deposit only big_number --- big_number --- big_number jury's big_number jury' sec_11 big_number jury' sec_11 big_number jury' sec_11 big_number jury' sec_11 big_number jury' sec_11 big_number jury' sec_11 big_number jury' sec_11 big_number ard rhei big_number ard rhei big_number ard rhei big_number for deposit only big_number ard rhei big_number ard rhei big_number ard rhei total dollar_figure total 4dollar_figure answer 4this figure includes the increased deficiency asserted by respondent in her checks payable to john j burke date check no amount endorsement dollar_figure burke aquilina big_number burke aquilina big_number burke aquilina big_number burke big_number burke big_number burke aquilina big_number burke coleman big_number burke howard kornahins kornahins big_number burke aquilina big_number burke burke cohen total dollar_figure checks payable to cash dollar_figure burke aquilina total dollar_figure total dollar_figure bank of smithtown account no john j burke associates expense account checks payable to cash date check no amount endorsement dollar_figure whelan total dollar_figure checks payable to phyllis cox dollar_figure phyllis cox cox total dollar_figure checks payable to john j burke dollar_figure burke karen vitteritti vitteritti total dollar_figure checks payable to joann romano dollar_figure total dollar_figure total dollar_figure bank of smithtown account no john j burke or vivian burke checks payable to cash date check no amount endorsement dollar_figure burke big_number burke big_number burke anna m vogel vogel burke vogel big_number burke cox total dollar_figure checks payable to john j burke dollar_figure burke romano total dollar_figure checks payable to ard rhei inc dollar_figure --- total dollar_figure total dollar_figure marine midland bank account no john j burke vivian burke deposits date amount cash non-cash dollar_figure big_number big_number big_number big_number big_number dollar_figure cash big_number big_number cash big_number big_number big_number big_number big_number big_number big_number big_number cash big_number big_number big_number cash big_number big_number big_number cash big_number big_number big_number big_number big_number big_number cash total deposits dollar_figure total cash deposits dollar_figure net deposits dollar_figure deposits dollar_figure dollar_figure cash big_number big_number cash big_number big_number cash big_number big_number cash big_number big_number big_number big_number big_number cash big_number big_number cash big_number big_number cash big_number big_number cash big_number big_number big_number cash big_number cash big_number big_number big_number big_number big_number big_number big_number big_number big_number total deposits dollar_figure total cash deposits dollar_figure net deposits dollar_figure deposits dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure cash dollar_figure dollar_figure dollar_figure cash dollar_figure dollar_figure cash total deposits dollar_figure total cash deposits dollar_figure net deposits dollar_figure


number release date id office uilc cca-717112-08 -------------- from -------------------------- sent thursday date am to --------------------------------------------------------- cc subject general info on claims it was nice speaking with you all this morning and i am glad we are all on the same page ----------------secretary is going e-mail him and request a telephone conference monday afternoon his morning schedule conflicts with mine time once i hear back from the ----- in the meantime below is a general overview of protective claims --------- per your request citations to the regulatory are included at the end i will e-mail you the exact protective claims are filed to preserve the taxpayer's right to claim a refund when the taxpayer's right to the refund is contingent on future events and may not be determinable until after the statute_of_limitations expires the internal_revenue_manual irm indicates that a protective claim is based on an expected change in the tax law other legislation regulations or case law see irm protective claims the concept of a protective claim is well established by the case law even though this term is not used in the statute or regulations a claim should not be viewed as a valid protective claim for irs processing purposes merely because the taxpayer labels it as such pursuant to sec_301_6402-2 a valid protective claim need not state a particular dollar amount or demand an immediate refund however the claim must identify and describe the contingencies affecting the claim must be sufficiently clear and definite to alert the service as to the essential nature of the claim and must identify a specific year or years for which a refund is sought the requirement that the claim state grounds and provide supporting facts is interpreted liberally by the service so long as the claim is sufficiently clear and definite apprise us of the essential nature of the claim it will be accepted as having met the requirement the service has discretion in deciding how to process protective claims in general it is in the interests of the service and taxpayers to delay action on protective claims until the pending litigation or other contingency is resolved once the contingency is resolved the service may obtain additional information necessary in processing the claim and then allow or disallow the claim there is no shortage of cases in this area both those invalidating and those sustaining the claims case law distinguishes between general and specific refund claims general claims assert that an overpayment has occurred but lack supporting facts or reasons see 302_us_517 288_us_62 specific claims by contrast identify the particular transactions or factual circumstances underlying the refund request see united_states v andrews u s pincite a general claim may be amended following the running of the statute_of_limitations to supply the missing information that caused the claim to be classified as general see eg united_states v memphis cotton oil co u s pincite assume a taxpayer files if the a timely general_refund_claim but the service takes no action on that filing taxpayer files a second claim correcting the defects in the first the two claims are treated as one the supreme court phrased this rule as follows in memphis cotton oil the commissioner may disallow the original claim promptly for its excessive generality if however he holds it without action until the form has been corrected and still more clearly if he hears it and hears it on the merits what is before him is not a double claim but a claim single and indivisible the new indissolubly welded into the structure of the old id two considerations are relevant in determining whether the supplemental claim is considered an amendment to the original claim rather than an untimely new claim first the supplemental claim will not be considered an amendment to the original claim if it would require the investigation of new matters that would not have been disclosed by the investigation of the original claim such a supplemental claim is a new claim rather than an amendment to the existing timely claim second the supplemental claim will not generally be considered an amendment if the service took final action on the original claim by rejecting the original claim or allowing it in whole or in part if these two requirements are satisfied there is no specific time period within which the supplemental claim must be filed information that either clarifies matters already within the service's knowledge or provides information that the service would have naturally ascertained in the course of its investigation does not constitute new matters and a taxpayer may amend the original claim after the statute_of_limitations on refund claims has expired by providing such information where a late-filed amended claim relies upon the same facts as a timely claim the amendment may constitute an acceptable clarification of the original 93_fsupp_107 d mass held untimely claim seeking carry-over adjustments based on same facts asserted in timely claim was permissible amendment similarly if the service already knew of the matters asserted in an amended claim because it had actually investigated the original timely claim the amendment could be a permissible clarification of the original 78_fsupp_111 however the claim cannot be amended after the statute_of_limitations expires if the amendment would require the investigation of new matters that would not have been disclosed by the investigation of the original claim 302_us_517 105_f2d_183 2d cir for example in 973_f2d_638 8th cir the court held that a taxpayer could not amend a refund claim that was based on a credit for hiring welfare recipients because the amendment involved a new factual basis namely the hiring of employees not involved in the original claim other cases have held that the original claim cannot be amended if the amendment involves a substantial change in the legal grounds for the claim in 137_f2d_426 3d cir the original claim was based on the taxpayer's position that certain income was nontaxable the amendment asserted a different legal ground namely that the income if taxable was overstated as to the second requirement numerous cases have held that a supplemental claim filed after the expiration of the statute_of_limitations is not timely if the service had previously taken final action on the original claim such final action generally occurs when the service denies or allows the claim in either case the supplemental claim is untimely because once the service has taken final action on the original claim there is no longer any claim left to amend 109_f2d_640 1st cir mondshein v united_states f_supp e d n y aff'd 469_f2d_1394 2d cir 87_f2d_889 2d cir 310_f2d_648 5th cir and 203_f2d_686 8th cir once the service disallows a claim the taxpayer generally has no right to amend the claim however the taxpayer may file a lawsuit to recover the overpayment and at trial the taxpayer may depending on the circumstances be allowed to introduce evidence to show a larger overpayment than that stated in the original claim pink v united_states supra 139_fsupp_148 ct_cl sec_6402 provides that the secretary within the applicable_period of limitations may credit the amount of an overpayment_of_tax including interest against any internal revenue tax_liability of the person who made the overpayment and shall refund the balance to the person sec_6511 provides that no refund may be allowed or made after the expiration of the period of limitation for filing a claim_for_refund unless a claim_for_refund is filed by the taxpayer within such period in general the period of limitation under sec_6511 for filing a refund claim is three years from the time the return was filed or two years from the time the tax was paid whichever is later sec_7422 prohibits any suit or proceeding in any court for a refund of taxes unless a claim_for_refund has been filed with the secretary in the manner prescribed in regulations established by the secretary sec_301_6402-2 of the procedure and administration regulations identifies the following general requirements that must be satisfied for the filing of a proper refund claim with minor exceptions the claim must be filed with the service_center where the tax was paid reg sec_301_6402-2 the claim must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the commissioner of the exact basis thereof reg sec_301_6402-2 the statement of the grounds and the facts must be verified by a written declaration made under the penalties of perjury sec_301_6402-2 except as provided with respect to income_tax and certain other taxes the claim is to be made on a form_843 reg sec_301_6402-2 and in the case of income gift and federal unemployment taxes a separate claim is to be made for each type of tax for each taxable_year or period reg sec_301_6402-2 sec_301_6402-2 of the procedure and administration regulations further provides that no refund_or_credit will be allowed after the expiration of the statutory period of limitations applicable to the filing of a claim therefore except upon one or more of the grounds set forth in a claim filed before the expiration of such period sec_301_6402-3 of the procedure and administration regulations provides in general in the case of an overpayment of income taxes a claim for credit or refund of such overpayment shall be made on the appropriate form here form 1120x


internal_revenue_service department of the treasury index number u i l no washington dc number release date legend person to contact telephone number refer reply to cc dom p si plr-108120-99 date date company state shareholder a dear this letter responds to a letter dated date requesting a ruling on behalf of company under sec_1362 of the internal_revenue_code the information submitted discloses that company was incorporated on a in state company has one shareholder shareholder it is represented that company has intended to be an s_corporation since its incorporation believing itself to be an s_corporation company has operated accordingly since a after the end of its taxable_year beginning on a however company discovered that its s election had not been timely filed company requests a ruling that its sec_1362 election will be treated as timely made for its taxable_year that begins on a sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 explains when an s election will be effective generally if an s election is made within the first two and one half months of a corporation's taxable_year plr-108120-99 then that corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year following the year in which the s election is made sec_1362 provides that if no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply applying the relevant law to the facts submitted and representations made we rule that company's sec_1362 election will be treated as timely made for its taxable_year that begins on a however this ruling is contingent on company filing form_2553 election by a small_business_corporation with an effective date of a with the appropriate service_center within days from the date of this ruling a copy of this letter should be attached to the form_2553 except as specifically set forth above we express no opinion concerning the federal tax consequences of the foregoing facts specifically we express no opinion on whether company otherwise qualifies as an s_corporation this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours william p o’shea chief branch office of the assistant chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes


t c summary opinion united_states tax_court marvina darlene harper petitioner v commissioner of internal revenue respondent docket no 10792-09s filed date marvina darlene harper pro_se alicia a mazurek for respondent armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any unless otherwise indicated all subsequent section references are to the internal_revenue_code_of_1986 as amended and all rule references are to the tax_court rules_of_practice and procedure other court and this opinion shall not be treated as precedent for any other case pursuant to sec_6015 petitioner made an administrative request for relief from joint_and_several_liability for federal income taxes for and by notice respondent denied petitioner’s request for relief petitioner timely filed a petition with this court under sec_6015 for review of respondent’s determination the sole issue for decision is whether petitioner is entitled to relief from joint_and_several_liability under sec_6015 for and background some of the facts have been stipulated and they are so found we incorporate by reference the parties’ stipulation of facts and accompanying exhibits petitioner resided in the state of michigan when the petition was filed petitioner and frederick verdell harper mr harper met while petitioner was a resident at harper house a substance abuse treatment facility run by mr harper petitioner and mr harper were married in date during their marriage petitioner and mr harper assumed traditional roles mr harper was the sole breadwinner and managed the household finances while petitioner maintained the home her only source_of_income was social_security_benefits although petitioner would occasionally help out at harper house by driving female residents to appointments she was not involved in the bookkeeping or finances of the business all of the couple’s assets were owned in mr harper’s sole name petitioner did not have a bank account in her name nor did she and mr harper have any joint accounts although petitioner testified that she and mr harper had what she thought was a good marriage she did not have any money of her own other than modest social_security_benefits and had to ask mr harper for money to make most purchases petitioner and mr harper filed joint federal_income_tax returns for and mr harper had each of the returns prepared by a professional tax_return_preparer and did not need to request documents or records from petitioner to facilitate the completion of the returns at mr harper’s request petitioner signed each of the tax returns but did not review the returns for accuracy because mr harper handled all of the financial matters for the household and business petitioner did not know that tax debts were accumulating petitioner and mr harper were divorced in date and mr harper died in date on date the internal_revenue_service irs received petitioner’s form_8857 request for innocent spouse relief ultimately the irs denied petitioner’s request for relief from joint_and_several_liability under sec_6015 on the basis that petitioner had not shown that she did not know and had no reason to know that the taxes would not be paid petitioner filed the petition in this case on date discussion a spouse may be relieved from joint_and_several tax_liability under sec_6015 if taking into account all the facts and circumstances it is inequitable to hold the spouse liable the spouse requesting relief generally bears the burden_of_proof see rule a 119_tc_306 affd 101_fedappx_34 6th cir the record establishes that petitioner satisfies the threshold conditions of revproc_2003_61 sec_4 2003_2_cb_296 we consider all relevant facts and circumstances in determining whether the taxpayer is entitled to innocent spouse relief 132_tc_203 we may consider evidence introduced at trial even if it was not included in the administrative record 130_tc_115 in determining whether relief is justified we give no deference to the irs’ determination that petitioner is not entitled to relief see porter v commissioner t c pincite if a requesting spouse fulfills the threshold requirements of revproc_2003_61 sec_4 the commissioner will ordinarily grant relief from joint_and_several_liability with respect to underpayments on a joint federal_income_tax return provided all of the following additional requirements are satisfied on the date of the request for relief the requesting spouse is no longer married to or is legally_separated from the nonrequesting spouse on the date the requesting spouse signed the joint_return the requesting spouse did not know and had no reason to know that the nonrequesting spouse would not pay the tax_liability and the requesting spouse will suffer economic hardship if the commissioner does not grant relief revproc_2003_61 sec_4 c b pincite respondent concedes that petitioner was divorced from mr harper on the date she requested relief under sec_6015 however respondent contends that petitioner has not established that she had no knowledge or reason to know on the dates that the and joint federal_income_tax returns were signed that the underpayments reported on those returns would not be paid or she would face economic hardship if her request for relief were denied accordingly respondent argues that petitioner has not satisfied the requirements of revproc_2003_61 sec_4 and is therefore not entitled to equitable relief under sec_6015 we disagree knowledge or reason to know respondent contends that because petitioner did not review the returns before signing them and did not know there was a balance due when she signed the returns she could not have believed that mr harper would pay the balance due even if petitioner had reviewed the returns she would not have known or had reason to know that the liabilities reported on the returns would not be paid mr harper handled all of the couple’s financial affairs for both the household and his business and petitioner was responsible for maintaining the home during the years in issue petitioner did not have a bank account in her own name nor did she have access to a jointly held bank account all accounts were in mr harper’s sole name thus even if petitioner had reviewed the and joint federal_income_tax returns and seen that there were balances due she would not have known or had reason to know that mr harper would not pay the tax_liabilities nor would she have had access to resources to pay the liabilities herself or even to ascertain whether the liabilities had been paid economic hardship respondent contends that petitioner would not experience economic hardship if her request for equitable relief were denied to ascertain whether a requesting spouse will suffer economic hardship if the commissioner denies his or her request for sec_6015 relief revproc_2003_61 sec_4 directs the commissioner to base his decision on rules similar to those found in sec_301_6343-1 proced admin regs those rules provide that an economic hardship exists if an individual is unable to pay reasonable living_expenses in determining a reasonable amount for basic living_expenses the commissioner shall consider information provided by the taxpayer including the taxpayer’s age employment status and history ability to earn number of dependents and status as a dependent of someone else the amount reasonably necessary for food clothing housing utilities medical_expenses transportation child_support and other necessities the cost of living in the geographical area in which the taxpayer lives the amount of property available to pay the taxpayer’s expenses any extraordinary circumstances eg special education expenses a medical catastrophe or a natural disaster and any other factor bearing on economic hardship sec_301_6343-1 proced admin regs although we are not required to accept petitioner’s testimony uncritically see ishizaki v commissioner tcmemo_2001_318 neither are we required to reject petitioner’s testimony if we find it credible see eg 120_tc_137 indeed we find petitioner’s testimony as well as that of her witness to be honest forthright and credible in addition the irs has issued guidelines for allowable expenses necessary expenses are those that meet the necessary expense_test ie ‘they must provide for a taxpayer’s health and welfare and or the production of income’ and they must be reasonable schulman v commissioner tcmemo_2002_129 n quoting internal_revenue_manual pt date there are three types of necessary expenses those based on national standards eg food housekeeping supplies clothing and personal care products and services those based on local standards eg housing utilities and transportation and other expenses which are not based on national or local standards id when petitioner and mr harper divorced in petitioner was left with nothing mr harper took the car and there was no joint property to divide between them petitioner pulled herself up by her bootstraps went back to school and earned a degree and she now works as a substance abuse counselor petitioner is employed part time at a hospital typically working hours per week and earning dollar_figure an hour petitioner’s salary is supplemented by the occasional bonuses given by the hospital petitioner’s testimony regarding her expenses augmented by the national standards indicates that her expenses equal if they do not exceed her income thus we conclude that petitioner would face economic hardship if her request for relief under sec_6015 were denied accordingly based on our review of all the facts and circumstances we hold that petitioner is entitled to relief from joint_and_several_liability under sec_6015 for the years in issue conclusion we have considered all of the substantive arguments made by respondent regarding the issue of petitioner’s entitlement to relief from joint_and_several_liability under sec_6015 to the extent that we have not specifically addressed any of at trial on date as well as in a posttrial memorandum brief respondent also invoked sec_1_6015-5 income_tax regs and argued that petitioner had failed to file her claim for relief within the 2-year period specified in the regulation in 132_tc_131 this court invalidated sec_1_6015-5 income_tax regs however on date our decision in that case was reversed by the court_of_appeals for the seventh circuit 607_f3d_479 7th cir nevertheless at this time in circuits other than the seventh circuit 132_tc_131 remains the law of this court hall v commissioner t c date cf 54_tc_742 affd on other issues 445_f2d_985 10th cir as petitioner’s case would be appealable to the court_of_appeals for the sixth circuit were it not a small_tax_case see sec_7463 we follow this court’s decisions in lantz and hall those arguments we conclude that they are irrelevant moot or without merit to reflect the foregoing decision will be entered for petitioner