internal_revenue_service number release date index number ------------------------------------- ------------------------------------------------- ---------------------------------- ------------------------------------------------------ legend 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 b01 plr-116290-14 date september x ------------------------------------------------- -------------------------------------------------- country date date --------------------------- ------------------ -------------------------- dear ----------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x was formed under the laws of country x represents that it is a foreign eligible_entity eligible to elect to be disregarded as a separate_entity for federal tax purposes x intended to elect to be treated as a disregarded_entity for federal tax purposes effective date however x inadvertently failed to timely file form_8832 entity classification election x represents that it acted in good_faith and reasonably further x represents that the interests of the government will not be prejudiced for all taxable years affected by the election including tax years up through date by granting the relief sought law and analysis plr-116290-14 sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise sec_301_7701-3 provides that an entity classification election or change in entity classification must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed sec_301_7701-3 states in part if an eligible_entity makes an election to change its classification the entity cannot change its classification by election again during the sixty months succeeding the effective date of the election an election by a newly formed eligible_entity that is effective on the date of formation is not considered a change for purposes of this paragraph c iv sec_301_7701-3 provides that such an election must be signed by either a each member of the electing entity who is an owner at the time the election is filed or b any officer manager or member of the electing entity who is authorized under local law or the entity’s organization documents to make the election and who represents to having such authorization under penalties of perjury sec_301 c iii provides in part if an election is made to change the classification of an entity each person who was an owner on the date that any transactions under sec_301_7701-3 are deemed to occur and who is not an owner at the time the election is filed must also sign the election sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election 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_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a plr-116290-14 request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the granting relief will not prejudice the interests of the government conclusion based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 entity classification election with the appropriate service_center to elect to be treated as a disregarded_entity for federal tax purposes effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose this ruling is contingent on the owner of x filing within days of this letter all required returns for all open years consistent with the requested relief being effective date these returns must include but are not limited to forms information_return of u s persons with respect to foreign disregarded entities a copy of this letter should be attached to any such returns except as specifically set forth above no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely laura c fields laura c fields senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc


t c memo united_states tax_court rogelio r balot and zenaida v balot petitioners v commissioner of internal revenue respondent docket no filed date ps worked as blackjack and roulette dealers and p-h worked as a pit boss at a casino in prince george’s county maryland the casino recorded on daily time sheets the number of hours ps worked also the casino gathered apportioned and periodically paid to the dealers and pit bosses the tips from the patrons r determined deficiencies based on the casino’s time sheets and other records and ps’ bank_deposits held ps are liable for additions to tax for civil_fraud for and see sec_6663 i r c held further ps are liable for an addition_to_tax for negligence for see sec_6662 i r c held further amounts of deficiencies redetermined -- - benson s goldstein for petitioners judith c cohen for respondent memorandum findings_of_fact and opinion chabot judge respondent determined deficiencies in individual income_tax and additions to tax under sec_6663 fraud and a negligence against petitioners as follows additions to tax_year deficiency sec_6662 a sec_6663 dollar_figure -- dollar_figure big_number -- big_number big_number sec_594 -- ‘unless indicated otherwise all part and section references are to parts and sections of the internal_revenue_code_of_1986 as in effect for the years in issue - after concessions by respondent’ the issues for decision are as follows whether petitioners are liable for civil_fraud additions to tax under sec_6663 for and whether petitioners are liable for a negligence addition_to_tax under sec_6662 for what is the amount of petitioners’ unreported income for through findings_of_fact some of the facts have been stipulated the stipulations and the stipulated exhibits are incorporated herein by this reference in the answer respondent conceded that the proper amounts of petitioners’ deficiency and addition_to_tax are not more than dollar_figure and dollar_figure respectively however on opening brief respondent asks us to conclude that petitioners are liable for a negligence addition_to_tax in the amount of dollar_figure we regard respondent’s statement on brief as a clerical_error and not an attempt to withdraw part of the concession also at five places in paragraph of the answer respondent stated that at least a part of petitioners’ underpayment is due to fraud in the prayer for relief respondent asked that the additions to tax for the years through under the provisions of sec_6663 as set forth in the notice_of_deficiency be in all respects approved in the prayer for relief respondent did not refer to the sec_6662 addition_to_tax for negligence on brief respondent deals with fraud for only and and deals with negligence for we conclude that respondent did not intend to assert the fraud addition_to_tax for and respondent did not intend to concede the negligence addition_to_tax for except to the extent indicated in the first paragraph of this footnote - - petitioners rogelio r balot hereinafter sometimes referred to as rogelio and zenaida v balot hereinafter sometimes referred to as zenaida filed joint tax returns for the years in issue but have since divorced petitioners resided at separate addresses in fort washington maryland when they filed their joint petition a rogelio’s background from to date rogelio served in the united_states navy as a logistician that is a person who is responsible for logistics logisticians attend to the details of acquiring equipment and other supplies making sure that these supplies meet specifications and making sure that these supplies are sent to the right place at the right time during the last years of his military service rogelio was the enlisted supervisor of about people who dealt with logistics for the presidential helicopter in quantico virginia rogelio received pension distributions from the navy in each of the years in issue in shortly after retiring from the navy rogelio obtained full-time employment as a logistician with validity corporation a defense contractor that deals with the government rogelio attended to the requisitioning of supplies for the validity corporation a task similar to his navy duties he did not have any supervisory responsibilities in this validity corporation position validity corporation compensated rogelio - - on a biweekly basis using the direct deposit_method of payment during the years in issue although rogelio does not hold a college degree he did complete years of college course work rogelio also completed several courses in business management accounting and business law at the university of maryland and prince george’s community college b zenaida’s background during the years in issue zenaida was employed full-time as a branch manager for first american bank in this position zenaida was in charge of branch sales in charge of branch operations and responsible for keeping branch expenditures within budget determinations that were made at higher levels she supervised to employees including bank tellers and personnel in charge of establishing new_accounts with the bank first american bank entrusted zenaida with responsibilities such as ordering supplies in accord with the branch’s operating budget ensuring the branch had sufficient cash on hand to transact business for the day and ensuring the automated teller machines contained sufficient cash for the operation thereof at the time of the trial zenaida was a branch manager for crestar bank zenaida earned a bachelor of science degree in elementary education from the university of the philippines in or about -- - before beginning her career in the banking industry zenaida worked as a schoolteacher cc the cipaa casino the combined international philippines america association hereinafter sometimes referred to as cipaa was organized sometime in the 1970’s cipaa operated a casino hereinafter sometimes referred to as the cipaa casino in prince george’s county maryland during the years in issue proceeds from the cipaa casino were to aid in the construction and operation of a philippine cultural center to be located in the washington d c metropolitan area the cipaa casino employed dealers and pit bosses to operate the tables at the casino premises dealers accepted bets and received or paid out chips as required by the results of the bets they dealt cards spun wheels and otherwise interacted directly with the bettors pit bosses supervised dealers during the years in issue there generally were about to dealers and one pit boss for each to dealers the cipaa casino recorded on daily time sheets the number of hours each employee worked employees generally signed their names and recorded the times at which they arrived at the casino premises for work on the time sheet kept for that particular day although pit bosses occasionally recorded the time one or another employee came to work if an employee left the casino - premises before closing time then that employee recorded the time at which he or she left if an employee worked until closing time then a pit boss entered the time the cipaa casino closed as the time the employee’s shift ended the cipaa casino’s tuesday sessions closed pincite p m the saturday sessions closed pincite a m sunday morning the cipaa casino paid its employees an hourly amount for their services even though the cipaa casino management and staff including dealers understood that maryland gaming laws expressly prohibited the practice during the years in issue pit bosses and dealers earned compensation of dollar_figure and dollar_figure per hour respectively the cipaa casino paid this compensation to its employees in cash on a weekly basis beginning about july of the cipaa casino began to pay its employees by check instead of cash cipaa casino employees did not complete forms w-4 and the cipaa casino did not withhold social_security_taxes or income taxes in and from any of the compensation it paid to its employees the cipaa casino recorded the amount of compensation its employees received in and on individual affidavits executed by each employee the cipaa casino issued forms w-2 to its employees for the first time for --- - to create the appearance of compliance with maryland law the cipaa casino’s management and staff including dealers characterized all remuneration they received from the cipaa casino as tips the receipt of which was believed to be legal and referred to themselves as volunteers rather than employees the cipaa casino’s management told the staff that amounts received from the cipaa casino were not to be reported to the internal_revenue_service as wages cipaa casino employees also received tip_income through the cipaa casino on each gaming table at the casino premises were two boxes one for cash that bettors exchanged for chips at the table and one for chips and cash that the bettors gave to the dealers as tips the latter box is sometimes hereinafter referred to as a tip box each hour a runner collected both boxes the moneys in the tip boxes were then commingled and distributed to the pit bosses and dealers in proportion to their hourly compensation ie hourly rate times amount of time worked the cipaa casino distributed tip_income about every weeks some pit bosses and dealers also received tips directly from casino patrons these tips were not placed into the table’s tip box and were not divided in the manner described above rather the recipient of the tip simply kept it for personal_use the --- - record does not show that either petitioner received any such direct tips d petitioners’ involvement with the cipaa casino rogelio and zenaida became members of cipaa to help with the cultural center project in rogelio and zenaida applied for and obtained positions with the cipaa casino each of them worked for the cipaa casino during each of the years in issue after receiving extensive training from the cipaa casino’s management rogelio became a low-stakes blackjack dealer zenaida became a roulette dealer rogelio began working for the cipaa casino on or about date zenaida began on or about date rogelio and zenaida maintained their full- time positions with validity corporation and first american bank respectively in addition to the positions they held at the cipaa casino rach petitioner worked for the cipaa casino most saturdays and most tuesdays for and each petitioner typically worked for the cipaa casino hours on saturdays rogelio typically worked for the cipaa casino hours on tuesdays zenaida typically hours on tuesdays the record does not include time sheets or equivalent information for rogelio became a pit boss at some point see infra note rogelio became treasurer of the cipaa casino in - zenaida became a pit boss at some point and an assistant to the president of the cipaa casino at a later point hourly compensation rogelio worked hours at the casino premises in for which the cipaa casino paid dollar_figure of hourly compensation to him zenaida worked hours at the casino premises in for which the cipaa casino paid dollar_figure of hourly compensation to her petitioners did not report any of their cipaa casino hourly compensation on their tax_return rogelio worked hours in for which the cipaa casino paid hourly compensation to him zenaida worked dollar_figure hours in for which the cipaa casino paid dollar_figure rounded of hourly compensation to her petitioners did not report any of their cipaa casino hourly compensation on their tax_return the cipaa casino paid dollar_figure of compensation income to rogelio for the cipaa casino paid dollar_figure of on opening brief respondent asks us to find that rogelio was a dealer in and in casino management promoted him to pit boss on the same page of this brief respondent asks us to find that rogelio was paid dollar_figure an hour as a pit boss in petitioners do not object to either proposed finding the parties agree that the cipaa casino compensated rogelio at the rate of dollar_figure per hour when he was a dealer and dollar_figure per hour when he was a pit boss because each party is on both sides of the question as to when rogelio was shifted from dollar_figure per hour to dollar_figure per hour the parties are directed to resolve this matter in the computation under rule unless indicated otherwise all rule references are to the tax_court rules_of_practice and procedure compensation income to zenaida for the cipaa casino issued forms w-2 to rogelio and zenaida for this compensation income which petitioners reported on their tax_return ’ tip_income rach petitioner received a share of the tips that bettors left at the tables in the casino premises during each of the years in issue on their tax_return petitioners reported that rogelio received dollar_figure tip_income and zenaida received dollar_figure tip_income petitioners’ and tax returns do not include any income that is stated to be tip_income petitioners did not report any income from the cipaa casino on their tax_return the income from the cipaa casino that petitioners reported on their tax_return is shown on forms w-2 but is not described as including tip_income on either the forms w-2 or petitioners’ tax_return the four forms w-2 attached to petitioners’ tax_return show wages tips other compensation amounts aggregating dollar_figure on their tax_return petitioners show dollar_figure the difference is accounted for by rounding and petitioners’ reporting zenaida’s cipaa casino income as dollar_figure instead of dollar_figure as shown on the form_w-2 this roughly dollar_figure overreporting is to be corrected in the computation under rule to the extent it has not already been indirectly taken into account in respondent’s notice_of_deficiency determination of other unreported income check cashing in addition to her other income-producing activities zenaida cashed checks for a dollar_figure fee she performed this service about two or three times during the years in issue eb bank_deposits petitioners maintained five bank accounts in four separate institutions during the years in issue table shows petitioners’ aggregate deposits into each account by account number in each year in issue table account dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure -0- dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure total deposits dollar_figure dollar_figure dollar_figure table shows respondent’s analysis of petitioners’ bank account deposits for each of the years through except as indicated otherwise in the notes to table the excess deposits per appeals in the table became the notice_of_deficiency adjustments labeled other unreported income table bank account analysis total bank account deposits big_number 31big_number big_number big_number less non-taxable deposits big_number big_number big_number big_number income-wages--net big_number big_number '1 big_number big_number --retirement t p-h big_number big_number big_number big_number --retirement t p-w big_number -ira distribution --condo rent big_number big_number big_number big_number --miscellaneous -tips big_number --sale of stock--net big_number big_number excess deposits per exam big_number big_number big_number additional non-taxable income per appeals adjustments -0- big_number big_number excess deposits per appeals big_number big_number 7big_number -0- net means net of withheld amounts shown on the forms w-2 this amount is dollar_figure less than the dollar_figure notice_of_deficiency adjustment for other unreported income in the absence of an explanation from respondent we conclude that the slight preponderance_of_the_evidence of record leans toward petitioners with respect to this dollar_figure on opening brief respondent concedes a dollar_figure amount which may include this dollar_figure the parties are directed to resolve this matter in the computation under rule this amount is dollar_figure less than the sum of the stipulated amounts deposited into petitioners’ bank accounts compare supra table column respondent attributes the difference to a clerical_error on respondent’s part and concedes the dollar_figure difference that is respondent does not ask that the dollar_figure notice_of_deficiency adjustment for other unreported income be increased to correct this error this amount is dollar_figure more than the sum of the items in the column showing the bank account analysis that respondent made in determining the amount of the dollar_figure notice_of_deficiency adjustment for other unreported income in the absence of an explanation from respondent we conclude that the slight preponderance_of_the_evidence of record leans toward petitioners with respect to this dollar_figure in arriving at the other unreported income adjustment in the notice_of_deficiency respondent subtracted the fp’ dollar_figure adjustment for unreported income---casino respondent did not make a corresponding subtraction of the dollar_figure adjustment for unreported income--casino in arriving at the other unreported income neither side has sought to explain justify or attack this substantial difference between the and procedures we leave the parties as we find them on this matter see eg 92_tc_206 and cases there cited this amount includes the dollar_figure by which petitioners overstated their forms w-2 income on their tax_return see infra table note this amount is dollar_figure less than the amount of the dollar_figure notice_of_deficiency adjustment for other unreported income on brief respondent asks us to find that the correct amount of this adjustment is dollar_figure which is dollar_figure less than the notice_of_deficiency adjustment it may be that this discrepancy is what led to respondent’s concession see supra note in the answer that the deficiency is dollar_figure less than the amount determined in the notice_of_deficiency and that the negligence addition_to_tax is dollar_figure less than the amount determined in the notice_of_deficiency also there is a dollar_figure difference between the dollar_figure excess deposits and the sum of the amounts in the column we assume that this difference arises from rounding the amounts to the nearest dollar the parties are directed to resolve this matter in the computation under rule tax returns on their tax returns for the years in issue petitioners reported income and total_tax as shown in table prep rpp prep table item --wages etc form_w-2 dollar_figure 1dollar_figure big_number 8---interest 9--dividends -- 10--taxable refunds -- -- 13--capital gain_or_loss -- big_number l17--pensions and annuities big_number big_number big_number 18--rents etc big_number big_number big_number 23--total income big_number big_number 53--total tax big_number big_number big_number -- - ' the dollar_figure total includes petitioners’ form_w-2 income from first american bank and validity corporation and petitioners’ unreported tip_income from the cipaa casino rogelio---dollar_figure zenaida--dollar_figure comparison of a schedule attached to petitioners’ tax_return and the forms w-2 attached to the same return makes it clear that a transposition of two digits from zenaida’s cipaa casino form_w-2 to the schedule resulted in petitioners overstating their income by dollar_figure see supra note petitioners’ tax_return shows a dollar_figure capital_loss_carryover from to stemming primarily froma dollar_figure loss in value on big_number shares of panam stock acquired on date it does not appear that petitioners claimed any capital_loss_carryover on their tax_return petitioners timely filed their tax returns for each of the years in issue 1991--mid-date 1992--mid-date and 1993--mid-date petitioners’ and tax returns were prepared by w o monroyo associates petitioners’ tax_return was prepared by automated tax financial services petitioners failed to report on their tax returns the hourly compensation that the cipaa casino paid to each of them in and petitioners failed to report on their tax_return the tip_income that the cipaa casino gathered apportioned and periodically paid to petitioners in the failures to report this income resulted in underpayments of tax required to be shown on petitioners’ tax returns for and the failures to - - report this income and the resulting underpayments for and were due to the fraud of each petitioner for each year for petitioners had an underpayment_of_tax required to be shown on their tax_return and some part of this underpayment was due to petitioners’ negligence opinion i general summary the cipaa casino paid dollar_figure or dollar_figure per hour worked to each petitioner in and as to this hourly compensation the cipaa casino did not send forms w-2 to petitioners for and but did for petitioners did not report any of this income on their almost dollar_figure and about dollar_figure tax returns they reported the full w-2 amounts on their tax_return the cipaa casino gathered apportioned and periodically paid to their employees the tips that patrons paid petitioners did not report any of this tip_income on their tax_return they reported dollar_figure of this income rogelio--dollar_figure zenaida--- dollar_figure on their tax_return we hold that respondent proved by clear_and_convincing evidence that petitioners failed to report hourly compensation that they received in and petitioners failed to report tip_income that they received in these omissions led to underpayments of tax for and and - each of these underpayments was due to the fraud of both rogelio and zenaida we hold that petitioners failed to prove by a preponderance_of_the_evidence that any part of the underpayments for and was not due to fraud any of the deficiency determinations for or in the notice_of_deficiency was excessive and any part of the underpayment was not due to petitioners’ negligence we consider first and the years as to which respondent determined fraud we then consider it respondent contends that petitioners underpaid their taxes for and and that all of petitioners’ and underpayments are due to fraud and thus petitioners are liable for the fraud additions to tax under sec_6663 petitioners contend that they did not underpay their taxes for and and that respondent has not met respondent’s burden_of_proof on the fraud issue petitioners maintain a that respondent’s use of the bank_deposits method of income reconstruction was not appropriate and b that even if use of the bank_deposits method was appropriate petitioners’ excess deposits are attributable to nontaxable sources alternatively petitioners contend that if they have underpaid their taxes then any additions to tax are not appropriate -- - because petitioners did not act with the requisite fraudulent intent and reasonable_cause supported their actions we agree with respondent’s conclusions and most of respondent’s contentions when respondent seeks to impose the addition_to_tax under sec_6663 respondent has the burden_of_proof to carry this burden for a year respondent must prove two elements as follows that petitioners have an underpayment_of_tax for that year and that some part of that underpayment is due to fraud see sec_7454 rule b see eg carter v sec_6663 imposition of fraud_penalty a imposition of penalty --if any part of any 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 portion of the underpayment which is attributable to fraud b determination of portion attributable to fraud --- if the secretary establishes that any portion of an underpayment is attributable to fraud the entire underpayment shall be treated as attributable to fraud except with respect to any portion of the underpayment which the taxpayer establishes by a preponderance_of_the_evidence is not attributable to fraud c special rule for joint returns --in the case of a joint_return this section shall not apply with respect to a spouse unless some part of the underpayment is due to the fraud of such spouse sec_7454 burden_of_proof in fraud foundation_manager and transferee cases a fraud ---in any proceeding involving the issue whether the petitioner has been guilty of fraud with intent continued - campbell 264_f2d_930 5th cir 56_tc_213 53_tc_96 ’ each of these elements must be proven by clear_and_convincing evidence see dilleo v commissioner 96_tc_858 affd 959_f2d_16 2d cir 94_tc_654 81_tc_640 for this purpose respondent need not prove the precise amount of the underpayment resulting from fraud but only that there is some underpayment and that some part of it is attributable to fraud see eg 466_f2d_11 5th cir 465_f2d_299 7th cir affg tcmemo_1970_274 in carrying this burden respondent may not rely on petitioners’ failure to meet their burden of proving error in respondent’s determinations as to the deficiencies see eg 92_tc_661 78_tc_304 and cases cited therein continued to evade tax the burden_of_proof in respect of such issue shall be upon the secretary ‘the elements of fraud under sec_6663 are essentially the same as those we considered under sec_6653 of prior_law see also 114_tc_533 102_tc_632 96_tc_184 n - - where fraud is determined for each of several years respondent’s burden applies separately for each of the years see 25_tc_940 affd sub nom 250_f2d_798 2d cir 29_bta_247 a mere understatement of income does not establish fraud however a pattern of consistent underreporting of income for a number of years is strong evidence of fraud see 451_f2d_197 3d cir affg t c memos and 422_f2d_63 6th cir affg tcmemo_1968_100 otsuki v commissioner t c pincite the issue of fraud is a factual question that is to be decided on an examination of all the evidence in the record see plunkett v commissioner f 2d pincite 328_f2d_147 7th cir affg 37_tc_703 stone v commissioner t c pincite in order to establish fraud as to a taxpayer respondent must show that that taxpayer intended to evade taxes which that taxpayer knew or believed were owed by conduct intended to conceal mislead or otherwise prevent the collection_of_taxes see eg 182_f3d_275 4th cir affg tcmemo_1996_452 252_f2d_56 9th cir 73_tc_370 --- - 61_tc_249 affd 519_f2d_1121 5th cir this intent may be inferred from circumstantial evidence see powell v granguist f 2d pincite 67_tc_181 affd without published opinion 578_f2d_1383 8th cir including the implausibility of petitioners’ explanations see bradford v commissioner f 2d 9th cir and cases cited therein affg tcmemo_1984_601 204_f2d_205 5th cir affg a memorandum opinion of this court dated date fraud is not imputed from one spouse to another in the case of a joint tax_return respondent must prove fraud as to each spouse charged with liability for the addition_to_tax see sec_6663 56_tc_982 affd 470_f2d_87 lst cir stone v commissioner t c pincite a underpayment the cipaa casino--hourly compensation time sheets were maintained by the cipaa casino for dealers and others who worked at the casino during each of the years before the court the cipaa casino paid compensation of dollar_figure per hour to dealers and dollar_figure per hour to pit bosses during these years rach petitioner worked at the casino in and in and received as compensation_for his or her services weekly -- - payments from the cipaa casino calculated at the appropriate hourly rate petitioners did not report any of this income on the joint tax returns that they filed for and petitioners do not claim for either year that this unreported income is properly offset by any deductions etc in addition to what is shown on their tax returns accordingly petitioners’ failures to report this hourly compensation on their and joint tax returns result in an underpayment_of_tax required to be shown on their tax_return and an underpayment_of_tax required to be shown on their tax_return we have so found petitioners agree that both of them worked for the cipaa casino during each of the years before the court they also agree or at least do not dispute that the cipaa casino paid to each of them weekly dollar_figure or dollar_figure per hour for each hour petitioners respondent need not prove that petitioners did not have offsetting deductions once the commissioner has presented clear_and_convincing evidence of unreported gross_receipts the taxpayer has the burden of coming forward with evidence as to offsetting deductions claimed by the taxpayer even in criminal cases where the government must prove a deficiency beyond a reasonable doubt see eg 581_f2d_1199 5th cir 351_f2d_336 2d cir 231_f2d_928 9th cir see also dilleo v commissioner 96_tc_858 77_tc_1169 this rule is independent of the general_rule applicable to civil cases in which the taxpayer has the burden of proving entitlement to deductions before they may be allowed see rule a 290_us_111 - - worked in the casino petitioners’ only contentions with regard to this hourly remuneration petitioners’ term are that it was not wages and the management of the cipaa casino inflated the number of hours worked by casino employees during the years firstly none of this hourly compensation was reported on petitioners’ tax returns for and as a result petitioners’ allegation that the management of the cipaa casino inflated the number of hours worked by casino employees does not affect our conclusion that petitioners’ failures to report any of their hourly compensation result in underpayments of tax for both and secondly the cipaa casino time sheets appear to conform to the testimony of each petitioner both as to the procedures that were followed and also as to each petitioner’s pattern of arrivals at and departures from the casino the variety of handwritings confirms the testimony that often the entries for petitioners reported on their tax_return dollar_figure tip_income for rogelio and dollar_figure tip_income for zenaida the parties stipulated that petitioners typically worked on saturdays and at least one day during the week if these tips were the hourly compensation as petitioners seem to suggest and if petitioners were paid dollar_figure or more per hour as petitioners concede then this would mean that rogelio worked for an average of less than hour each day he showed up and zenaida worked for about hour each day she showed up the absurdity of this conclusion convinces us that petitioners do not seriously contend that their tip reporting was intended to be a reporting of the hourly compensation that each petitioner received from the cipaa casino -- - any individual were made by that individual rogelio testified that his usual saturday shift was hours---from noon to a m the next morning confirming the information on the time sheets zenaida testified to her usual 14-hour saturday shift as to tuesdays rogelio’s confusing testimony appears to confirm the general 11-hour shift shown by the time sheets zenaida clearly testified that her tuesday shift was generally around hours as a result we are satisfied that the cipaa casino time sheets are accurate as to the number of hours each petitioner worked at the casino in and thirdly as petitioners implicitly conceded by reporting tips as income on their tax_return tips are income subject_to tax see eg 536_f2d_876 9th cir so that he that runs may read line of the form_1040 for each of the years before the court states wages salaries tips etc emphasis added whatever label petitioners would rather we apply to the hourly compensation that the cipaa casino paid to each petitioner in and those payments are income subject_to tax see eg sec_61 we hold for respondent that respondent has proven by clear_and_convincing evidence that petitioners failed to report the hourly compensation paid to them by the cipaa casino in and in the amounts determined in the notice_of_deficiency as unreported income-casino except to the extent that - - respondent’s brief introduces an uncertainty as to the amount of rogelio’s hourly compensation see supra note the cipaa casino--tip income the record is clear that each petitioner also received each year an appropriate portion of the tips that the casino’s patrons left in and ’ petitioners did not report any tip_income on their tax_return petitioners reported tip_income of dollar_figure for rogelio and dollar_figure for zenaida apart from petitioners’ thus-reported tip_income we do not find anything in the record that would enable us to quantify petitioners’ tip_income for or petitioners urge in both opening brief and answering brief that our opinion in executive network club inc v commissioner tcmemo_1995_21 highlights the extent to which the irs’ case on opening brief respondent asserts that in addition to the tips that the cipaa casino gathered from patrons and distributed to the dealers etc moreover in each year petitioners received cash tips directly from patrons tr pp we have found supra that the record does not show that either petitioner received any such direct tips the transcript pages that respondent cites refer to the testimony of another person who worked for the cipaa casino during at least part of the period in issue in the instant case that person testified that she had received such direct tips respondent’s counsel asked okay did other employees earn tips in this manner as well the witness replied probably i don’t know later petitioners’ counsel asked that witness did you ever see someone on the see side pay mr balot or mrs balot the witness replied t don’t recall sir because it was done secretly thus the only evidence to which respondent directs our attention or that our examination has turned up is a disclaimer of knowledge respondent’s assertion on this point is unfounded on the record in the instant case - - regarding the petitioners is distorted our findings_of_fact in executive network club inc describe some of the operations of a charitable organization’s casino operation in prince george’s county with a focus on how tips from patrons were collected by the casino and were ultimately distributed to the workers in cash we held that the casino operation constituted an unrelated_trade_or_business however we held that the tips that came from the patrons and were distributed to the casino workers did not constitute income to the exempt_organization in the course of our opinion we noted as follows the fact that the tips were shared does not preclude a finding that the payments by the patrons were tips similar pooling or tip-splitting arrangements have been held to constitute tip_income to those participating in the pooling or tip-splitting arrangement see 976_f2d_975 5th cir 536_f2d_876 9th cir 81_tc_8 affd without published opinion sub nom knoll v commissioner 735_f2d_1370 9th cir armeno v united_states cl_ct in respondent’s regulations respondent describes such pooling arrangements sec_31 a -l1 c - and a employment_tax regs see also guadron v commissioner tcmemo_1994_553 tech adv mem oo1 date executive network club inc v commissioner t c memo we agree with petitioners as does respondent that the process of gathering tips apportioning them and periodically paying them out to the workers in executive network club inc is guite similar to the process followed by the cipaa casino during the years in issue in the instant case however--- as we note in executive network club inc such tips are income to those workers who ultimately receive the money but in the instant case petitioners did not report any of this tip_income on their tax_return such tips are separate from the hourly compensation that each petitioner received in each year the hourly compensation also is income and petitioners did not report any of this hourly compensation on their and tax returns thus our opinion in executive network club inc v commissioner supra does not support any of petitioners’ relevant contentions but rather is consistent with and supports respondent’s position in the instant case we hold that respondent has proven by clear_and_convincing evidence that each petitioner received taxable tip_income in and and that petitioners failed to report their tip incomes however we also hold that respondent failed to prove by even a preponderance_of_the_evidence a the amount of either petitioner’s unreported tip_income and b whether petitioners failed to report any tip_income ‘lon opening brief respondent asserts that these tips clearly accounted for a large part if not virtually all of the ‘other unreported income ’ respondent has not favored us with citations to evidence of record that would support this assertion continued b fraudulent intent bach day that either petitioner worked in the casino that petitioner earned dollar_figure or dollar_figure per hour for the time worked fach week the cipaa casino paid to each petitioner and to their coworkers at the casino the hourly compensation these hourly compensation amounts paid to petitioners totaled almost dollar_figure in and around dollar_figure in petitioners failed to report any part of this hourly compensation on their and tax returns they also failed to report any of their tip_income the foregoing omitted income amounts to about percent in comparison to the total income they reported on their tax_return and about percent for see supra table based on the record as a whole including our observations of each petitioner at trial both testified and our evaluation of their educational backgrounds and the sort of full-time jobs each of them had during and we conclude that each petitioner knew that this hourly compensation and tip_income were subject_to tax and that their failures to report any part of this income on either of their tax returns for and were due to fraud thus the underpayments resulting from these failures to report were due to fraud we have so found continued or any quantification of petitioners’ tip_income - - petitioners’ own testimony confirms their having received this hourly compensation and tip_income petitioners have not explained their total failure to report these amounts petitioners’ explanations of why fraud penalties should not be imposed lack coherence if anything these explanations’ implausibility confirms our conclusions as to fraud petitioners acknowledge that they earned the compensation computed on an hourly rate for the hours they worked but insist that these amounts were not wages petitioners contend that these amounts were tips when confronted at trial with the unlikelihood that the amount of patrons’ tips precisely matched their hourly rate times hours worked they lapsed into unresponsiveness on opening brief and again on answering brief petitioners contend that they should not be subject_to any civil_fraud penalties on the tip_income received from the casino as they have reasonable_cause for their actions yet they do not tell us what is this reasonable_cause on opening brief and again on answering brief petitioners contend as follows with respect to the audit examination involving the balots the irs has failed to establish--through clear_and_convincing evidence--that there is an intentional wrongdoing on the part of the taxpayer sic first the balots were never at any time involved with the managerial operations of the casino as they worked part-time therefore they were never in any position to commit any fraudulent acts pertaining to their work in the casino -- - petitioners’ fraud is their own omissions to report on their own tax returns their own receipts of the hourly compensation that the cipaa casino paid to them thus their not being involved with the managerial operations of the casino is not a relevant defense to the civil tax_fraud with which petitioners are charged in our analysis of underpayment supra part ii a we concluded that respondent proved by clear_and_convincing evidence that petitioners failed to report what clearly was tip_income e petitioners’ shares of the patrons’ tips that was gathered apportioned and periodically paid to them in the foregoing evaluation of petitioners’ fraudulent intentions as to hourly compensation applies with even greater force to the tip_income we conclude and we have found that respondent has shown by clear_and_convincing evidence that the underpayments of tax that result from petitioners’ failure to report a their hourly compensation paid to each of them by the cipaa casino in and and b their shares of the patrons’ tips that the cipaa casino gathered apportioned and periodically paid to petitioners in all are due to the fraud of each petitioner we so hold - - c amounts of deficiencies nonfraudulent causes in parts ii a and ii b of this opinion respondent had the burden of proving by clear_and_convincing evidence that there were underpayments of tax some part of which was due to fraud respondent carried this burden in this part of the opinion petitioners have the burden of proving by a preponderance_of_the_evidence that the deficiencies’ are less than the amounts respondent determined in the notice_of_deficiency see rule a 290_us_111 petitioners also have the burden of proving by a preponderance_of_the_evidence that some part of the or underpayment is not due to fraud see sec_6663 in the absence of adequate_records respondent may employ reasonable methods of reconstructing petitioners’ taxable_income in a manner which clearly reflects income see sec_446 348_us_121 parks v commissioner t c pincite although the notice_of_deficiency does not so state it is evident from the record herein that respondent’s notice_of_deficiency determinations of other unreported income are based '2for purposes of the instant case deficiency is the same as underpayment compare sec_6211 with sec_6664 - - on use of the bank_deposits method to reconstruct petitioners’ income see supra table it is well established that bank_deposits are evidence of income where the deposits were made by the party charged with the income or to an account controlled by the party charged with the income see 87_tc_74 the premise underlying the bank_deposits method of income reconstruction is that absent some explanation a taxpayer’s bank_deposits represent income subject_to tax see dibleo v commissioner t c pincite the use of the bank_deposits method of income reconstruction has long been sanctioned by the courts see id tokarski v commissioner t c pincite 64_tc_651 and cases cited therein affd 566_f2d_2 6th cir when this method is used respondent must take into account any nontaxable deposits or deductible expenses of which respondent has knowledge see dileo v commissioner t c pincite we have held that where respondent has the burden_of_proof in a bank_deposits case eg where respondent has determined that a taxpayer has committed tax_fraud then-- respondent can satisfy the burden of proving the first prong of the fraud test ie an underpayment when the allegations of fraud are intertwined with unreported and indirectly reconstructed income in one of two ways parks v commissioner t c pincite respondent may prove an underpayment by proving a likely source of the unreported income 348_us_121 parks v commissioner supra pincite nicholas v - - commissioner t c alternatively where the taxpayer alleges a nontaxable source respondent may satisfy the burden by disproving the nontaxable source so alleged 355_us_595 parks v commissioner supra pincite x dileo v commissioner t c pincite table supra summarizes respondent’s revenue agent’s conclusions in analyzing petitioners’ bank_deposits on its face respondent’s calculations seem reasonable but see our notes to table petitioners contend that the bank_deposits method is not appropriate for use in the petitioners’ case and also that the alleged excess bank_deposits are from sources representing traditional inter-family intra-family and friend transfers petitioners assert as follows according to a review of the various court cases involving the bank_deposit_method it is clear that the bank_deposit_method is most prevalently used to determine unreported income of professionals shopkeepers and others whose income arise largely from receipts of a business petitioners stress that they were never self-employed during tax years and and that they did not operate a business during tax years nor were they ever in the business of being ‘gamblers ’ firstly we are not aware of any doctrine that the commissioner may appropriately use the bank_deposits method to reconstruct income only where the taxpayer is operating a business nor do petitioners suggest any reason why there should be such a doctrine - -- secondly each petitioner testified that petitioners did not keep track of their tip_income and that they should have kept records ’ clearly there was unreported tip_income for and 3qon answering brief petitioners object to the statement claiming they failed to keep adequate books_and_records they overlook their own trial testimony as follows q cohen can you tell the court the amount of tips that you earned from the casino during the tax years at issue and that would be through a rogelio what i earned qo tips a tips i don’t know q you don’t know well didn’t you keep any records of the tips a i should have because the management was telling us you know it’s up to you to make sure you know to keep a record of what you receive q you said you should have but you didn’t is that what you said i don’t want to put words in your mouth a yes q cohen did you tell your return preparer that you worked at the casino during through a rogelio did i tell my lawyer q no no no the return preparer the person who did your tax_return a yes they’re aware of it q you told them you worked there in through continued -- - there may have been unreported income for later years this alone is sufficient to warrant the use of the bank_deposits method to determine how much income was unreported and to test the comprehensiveness of petitioners’ income reporting for later years continued a uh-huh q okay did you tell them how much income you earned at the casino a as far as my recollection as far as ‘91 because we were just talking about it i remember i told him that these are tips o you told him what a when -- in i remember i was --- you know i don’t know best of my recollection i thought i told my accountant or the tax preparer that this is how much money i made in the casino q but you didn’t provide that return preparer with any books_and_records reflecting the amount of tips and wages that you earned at the casino during through right a no we just -- just like i said i never kept a record q cohen did you keep any books_and_records related to the income that you earned with the casino back in the years at issue a zenaida no i did not i should have but i did not - - thirdly from the testimony of the irs revenue_agent and from petitioners’ trial memorandum it appears that during the years in issue petitioners went to atlantic city new jersey about times a year and that they gambled while in atlantic city petitioners did not report gambling winnings and did not deduct gambling_losses since the federal tax laws have required that nonbusiness gamblers---petitioners strenuously insist that they are not in the business of being gamblers----must report their winnings above_the_line and may deduct their losses only below_the_line see discussion in gajewski v commissioner t c pincite this bifurcation of gambling winnings and losses for nonbusiness gamblers has been mandated even when it is clear that the taxpayers’ losses exceed their winnings and they are not entitled to itemize their deductions---- in effect taxing the nonbusiness taxpayers on their gross winnings see 25_tc_106 thus petitioners’ acknowledgment that they did some nonbusiness gambling in each of the years in issue is another basis for the irs revenue agent’s belief that petitioners may have some unreported income that may be reconstructed by the bank_deposits method accordingly we conclude that respondent was justified in using the bank_deposits method to reconstruct petitioners’ income -- - petitioners’ oft-voiced contention that the excess bank_deposits are from traditional inter-family intra-family and friend transfers was not supported by evidence of record where there was evidence presented to respondent during the audit respondent treated the transactions as nontaxable as is shown in exhibits 26-r and 39-r before the court petitioners neither provided particulars nor presented the testimony of relatives or friends nor explained why those witnesses were not available see 6_tc_1158 affd 162_f2d_513 10th cir petitioners have failed to carry their burden of proving that they are entitled to nontaxable treatment for any deposits or parts of any deposits in excess of what respondent already allowed finally petitioners contend as follows in fact the taxpayers should not be subject_to any civil_tax_penalties on the tip_income received from the casino as they have reasonable_cause for their actions however should the tax_court determine that a civil_tax_penalty should be assessed against the taxpayers based on their receipt of tip_income a fair reading of recent case law clearly establishes that the petitioners should at the most only be subject_to the negligence_penalty under code sec_6662 neither petitioner testified why he or she thought that the income whether hourly compensation or tip_income was not subject_to tax for that matter neither petitioner even testified that he or she thought any category or specific item of -- - omitted income was not subject_to tax the record is devoid of evidence that petitioners or either of them asked any_tax adviser or tax-return preparer about any of the omitted items petitioners do not even take the trouble to describe to us what they claim to be the reasonable_cause for their actions we have ignored zenaida’s check-cashing activities because the amounts of her fees for any year are uncertain and trivial and they may in any event be adequately dealt with under respondent’s use of the bank_deposits method we hold for respondent that petitioners failed to show by a preponderance_of_the_evidence that the deficiency for or is less than what respondent determined as modified by respondent’s concessions and our observations in the footnotes to table supra we hold for respondent that petitioners failed to show by a preponderance_of_the_evidence that any part of the underpayment for or was not due to fraud iii for respondent determined that petitioners have a tax_deficiency resulting from their failure to report dollar_figure of income and petitioners are liable for 20-percent negligence ‘we assume that the cashed checks have been properly accounted for under the instant case’s application of the bank_deposits method see supra table petitioners have not suggested otherwise -- -- penalty based on a determination that the entire amount of the deficiency is due to petitioners’ negligence a amounts of deficiency the deficiency that respondent determined is due entirely to application of the bank_deposits method supra table especially notes and our comments and conclusions in the course of our analysis of the bank_deposits method in part ii c supra apply equally to we hold that except as to respondent’s concessions and our comments in supra table notes and petitioners have failed to show that respondent’s determination of omitted income was excessive b negligence respondent determined that petitioners are liable for a percent negligence addition_to_tax on the entire underpayment for respondent contends petitioners’ failure to maintain and furnish adequate_records of their income-producing activities thwarted respondent’s attempt to examine petitioners’ tax_liability for that year petitioners maintain that sec_6662 does not apply because reasonable_cause excuses their failure to report all of their taxable_income for -- - sec_6662' imposes an accuracy-related_penalty of sec_6662 provides in pertinent part as follows sec_6662 imposition of accuracy-related_penalty a imposition of penalty --if this section applies to any portion of an underpayment_of_tax required to be shown on a return there shall be added to the tax an amount equal to percent of the portion of the underpayment to which this section applies b portion of underpayment to which section applies ---this section shall apply to the portion of any underpayment which is attributable to or more of the following negligence or disregard of rules or regulations c negligence --for purposes of this section the term negligence includes any failure to make a reasonable attempt to comply with the provisions of this title title_26 the internal_revenue_code and the term disregard includes any careless reckless or intentional disregard sec_6664 provides in pertinent part as follows sec definitions and special rules c reasonable_cause exception ---- in general --no penalty shall be imposed under this part part ii relating to accuracy-related and fraud penalties with respect to any portion of an underpayment if it is shown that there was reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion - al --- percent of any portion of an underpayment that is attributable to the taxpayer’s negligence broadly speaking for purposes of the provision negligence is the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances to determine that person’s income_tax_liability see 108_tc_147 105_tc_324 negligence includes any failure to keep adegquate books_and_records see sec_1_6662-3 income_tax regs petitioners have the burden of proving error in respondent’s determination that the addition_to_tax should be imposed against them ’ see 106_f3d_1445 9th cir affg tcmemo_1993_281 91_f3d_670 4th cir affg tcmemo_1995_46 asat inc v commissioner t c pincite petitioners have failed to introduce any evidence or offer any relevant argument supporting their contention that respondent erred in determining that the addition_to_tax under sec_6662 applies the following sentence represents the extent of sec_7491 relating to burden_of_proof with respect to additions to tax as enacted by sec of the internal_revenue_service restructuring and reform act of act publaw_105_206 112_stat_685 does not apply in the instant case because the examination in petitioners’ case began before date the effective date of sec_7491 see the act sec c 112_stat_727 - -- petitioners’ argument in support of their contention that reasonable_cause excuses their underpayment in fact the taxpayers should not be subject_to any civil_tax_penalties on the tip_income received from the casino as they have reasonable_cause for their actions petitioners have not favored us with any statement as to what is the reasonable_cause for their actions in the absence of any explanation and any evidence that on our inspection might constitute reasonable_cause we conclude that sec_6662 applies to take account of respondent’s concessions and the foregoing decision will be entered under rule


internal_revenue_service number release date index number ----------------------- ------------------------------------- -------------------------------------- re -------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------ telephone number -------------------- refer reply to cc psi plr-139346-15 date date legend decedent spouse date date trust marital trust law firm attorney a attorney b dear ---------- ------------- ----------------- ------------------ -------------------- ------------------------------------------ ---------------------------------------------------------- ------------------------------------- ---------------------------------------------------------- -------------------- ------------------ ------------------- this letter responds to your authorized representative’s letter of date and other submissions requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to make a qualified_terminable_interest_property qtip_election under sec_2056 of the internal_revenue_code the facts and representations submitted are as follows decedent executed a_trust trust on date that became irrevocable at his death decedent died on date he was survived by spouse item two part c of trust provides in part that on decedent’s death the balance of plr-139346-15 the assets of the trust estate which would qualify for the unlimited_marital_deduction is to be set apart as a separate trust marital trust for the benefit of spouse under item two part c sec_1 all of the net_income of the marital trust is to be paid to spouse at least quarterly principal may be paid to spouse in such amounts as the trustees deem appropriate to provide for her health support or maintenance in addition spouse may request principal in amounts not to exceed in any one calendar_year the greater of five thousand dollars or five percent of the aggregate value of the marital trust principal under item two part c sec_2 on spouse’s death the assets remaining in the marital trust are to be distributed to such of decedent’s descendants as spouse may appoint by will spouse is the executor of decedent’s estate she engaged law firm to prepare the form_706 united_states estate and generation-skipping_transfer_tax return for decedent’s estate attorney a directly supervised and oversaw the preparation of the return throughout the preparation attorney b was involved with and consulted about various issues from time to time on schedule m the value of the property that passed to the marital trust was listed as qtip property but no qtip_election was made for this property you have requested an extension of time under sec_301_9100-1 and sec_301_9100-3 to make a qtip_election under sec_2056 to treat the marital trust as qtip property law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2056 provides that for purposes of the tax imposed by sec_2001 the value of the taxable_estate shall except as limited by sec_2056 be determined by deducting from the value of the gross_estate an amount equal to the value of any interest in property which passes or has passed_from_the_decedent to the surviving_spouse but only to the extent that such interest is included in determining the value of the gross_estate sec_2056 provides that in the case of qualified_terminable_interest_property for purposes of sec_2056 such property shall be treated as passing to the surviving_spouse and for purposes of sec_2056 no part of such property shall be treated as passing to any person other than the surviving_spouse sec_2056 defines the term qualified_terminable_interest_property as property i which passes from the decedent ii in which the surviving_spouse has a plr-139346-15 qualifying_income_interest_for_life as defined in sec_2056 and iii to which an election under sec_2056 applies sec_2056 provides that an election under sec_2056 with respect to any property shall be made by the executor on the return of tax imposed by sec_2001 such an election once made shall be irrevocable sec_20_2056_b_-7 of the estate_tax regulations provides that in general the election referred to in sec_2056 and v is made on the return of tax imposed by sec_2001 for purposes of this paragraph the term return of tax imposed by sec_2001 means the last estate_tax_return filed by the executor on or before the due_date of the return including extensions or if a timely return is not filed the first estate_tax_return filed by the executor after the due_date sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election 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 provides the standards used to determine whether to grant an extension of time to make an election whose date is prescribed by a regulation and not expressly provided by statute requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election in the present case the marital trust was created for the benefit of spouse although it was identified on schedule m the return failed to indicate a qtip_election for the marital trust property based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore the executor of decedent’s estate is granted an extension of time of days from the date of this letter to make a qtip_election with respect to the marital trust the election should be made on a supplemental form_706 filed with the cincinnati plr-139346-15 service_center at the following address internal_revenue_service center cincinnati oh a copy of this letter should be attached to the supplemental form_706 a copy is enclosed for this purpose the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request_for_ruling it is subject_to verification on examination except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code 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 associate chief_counsel passthroughs and special industries leslie h finlow leslie h finlow senior technician reviewer branch enclosure copy of letter for sec_6110 purposes cc


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 psi b02 - plr-131894-05 date date -------------------- ------------------------- --------------------------------------- -------------------------------------------------------- lp ------------------------------------------- gp a d1 dear ---------------- correspondence submitted on behalf of lp by its authorized representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes this letter responds to a letter dated date and subsequent the information submitted states that lp is a limited_partnership formed on d1 a an officer of gp the general_partner of lp represents that lp was intended to be classified as an association_taxable_as_a_corporation for federal tax purposes effective d1 however form_8832 entity classification election was not filed timely for lp sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes plr-131894-05 sec_301_7701-3 provides that an eligible_entity with at least two owners will be classified as a partnership unless it elects otherwise sec_301_7701-3 provides that to elect to be classified other than as provided in b an eligible_entity must file form_8832 with the designated service_center sec_301_7701-3 provides that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 cannot be more than days prior to the date on which the election is filed and cannot be more than months after the date on which the election is filed sec_301_9100-1 gives the commissioner discretion to grant reasonable extensions of time to make regulatory elections under the rules of sec_301_9100-2 and sec_301_9100-3 under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or an announcement published in the internal_revenue_bulletin determine whether to grant a discretionary extension of time these standards indicate that the commissioner should grant relief when the taxpayer provides evidence proving to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 sets forth the standards which the commissioner uses to based solely on the facts submitted and representations made we conclude that the requirements of ' have been satisfied as a result lp is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect to be treated as an association_taxable_as_a_corporation for federal tax purposes effective d1 a copy of this letter should be attached to the form_8832 a copy is included for that purpose federal tax consequences of the facts described above under any other provision of the code provides that it may not be used or cited as precedent except as specifically set forth above no opinion is expressed concerning the this ruling is directed only to the taxpayer requesting it sec_6110 plr-131894-05 letter is being sent to lp’s authorized representative in accordance with the power_of_attorney on file with this office a copy of this sincerely heather c maloy associate chief_counsel passthroughs special industries enclosure cc- copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si br 7-plr-107002-99 date date legend grantor son daughter beneficiary beneficiary trustee trustee trustee trust court state date date date a dear this is in response to a letter of submitted on behalf of trustee trustee seeks rulings that the trust is exempt from the generation- skipping transfer gst tax and that certain proposed modifications to the trustee succession provisions of the trust will not result in the imposition of the gst tax on distributions from such trust to skip persons grantor irrevocably established trust on date article dollar_figure of the trust provides that the trustee shall hold manage invest and reinvest the trust estate collect the income therefrom and from time to time pay all none or such part of the net_income of the trust as the trustee may in his discretion determine among the members living at the time of distribution of a class composed of daughter and daughter’s issue in such amounts interests and proportions as the trustee may determine article dollar_figure of the trust provides that the trust shall terminate if it has not previously terminated twenty-one years after the death of the survivor of daughter and the issue of daughter living at the date of this instrument upon such termination the entire trust property shall be distributed to the then living issue of daughter or if there shall be none to the then living issue of grantor or if there shall be none one-half of such property shall be distributed to the beneficiary to be used exclusively for educational_purposes by providing student scholarships from income and student loans from principal and the remaining one half of such property shall be distributed to beneficiary for its general purposes if upon termination of the trust the foregoing charitable transfers shall take effect and if either of the foregoing organizations is not then in existence or if there is any doubt as to such organizations’s correct identity the distribution of such organization’s share of the trust estate shall be made to such educational or charitable entity as the trustee shall determine to be most similar to the organization which grantor has attempted to designate article dollar_figure of the trust provides that in addition to the powers set forth in other parts of this instrument the trustee shall have the following powers with respect to any trust created by this instrument a power to determine the amounts of income distributable from time to time to each of the members of the class to whom income is distributable including power to make unequal distributions and power to withhold all income from one or more or all of the members of the class b power to accumulate all income which it may determine not to distribute all accumulations may be added at such time as the trustee shall determine to the principal of the trust or held by the trustee as undistributed_income c power from time to time to distribute all or any part of the principal to and among those persons receiving or eligible in the discretion of the trustee to receive distributions of income in such shares and amounts as the trustee may determine including power to make unequal distributions and power to withhold all distributions of principal from one or more members of the class such powers are exercisable in the discretion of the trustees and no beneficiary shall have any right or power to enforce or object to any reasonable exercise of such powers article dollar_figure of the trust provides that notwithstanding any other provision of this instrument if at any time there shall be acting as trustee any person who is also a beneficiary of a_trust established hereby such person shall not in the exercise of his discretionary power to distributed income and principal distribute to himself accumulated income or principal of such trust in excess of that which is necessary for his health education support and maintenance for the purpose of this limitation distributions necessary for health shall include distributions to pay medical dental hospital nursing and invalidism expenses distributions necessary for education shall include distributions to pay the expenses of private_schools and colleges and professional and postgraduate education and the terms support and maintenance shall not be limited to the bare necessities of life but shall mean support and maintenance in reasonable comfort and in his accustomed manner of living article dollar_figure of the trust provides that any trustee hereunder who is under a legal_obligation to support any beneficiary hereunder shall under no circumstances be entitled to exercise his discretionary power to distribute income and principal to such beneficiary in such a way as to discharge such obligation of support the grantor named son as the trustee of the trust article dollar_figure of the trust provides that if son shall resign or for any other reason cease to act as the trustee trustee shall become the trustee if trustee shall refuse or for any reason be unable to act as the trustee or after accepting the trusteeship shall resign or for any other reason cease to act as the trustee trustee shall become the trustee article dollar_figure of the trust provides that any corporate trustee may at any time be removed by daughter during her lifetime and after her death by all of the adult beneficiaries currently eligible to receive the income of the trust upon such removal or if at any time for any other reason there shall be no person or corporation acting as the trustee hereunder daughter if living or if not all of the adult beneficiaries currently eligible to receive the income of the trust shall have power to appoint a successor trustee which shall be any corporation authorized under the laws of any state or of the united_states to administer trusts and having a combined capital and surplus of at least dollar_figurea to be effective any such removal and any such appointment shall be by written notice signed by the person or persons exercising such power and delivered to the removed trustee if any and to the designated successor son resigned as trustee of the trust shortly after it was created trustee succeeded son as trustee and is still serving as the sole trustee of the trust on date trustee daughter and daughter’s issue individually and on behalf of their respective minor unborn and unascertained descendants as the current income beneficiaries of the trust collectively petitioners petitioned the court of state requesting that the court modify the successor trustee provisions of the trust to allow the appointment of individuals as well as corporate successor trustees in their petition petitioners requested that the successor trustee provisions of the trust be modified to a appoint trustee as sole individual successor trustee to trustee and b permit daughter if living or if not the adult income beneficiaries to remove any trustee of the trust individual or corporate other than trustee and appoint any individual or corporate successor trustees on date court granted the petitioners’ petition effective upon the petitioners’ receipt of a favorable ruling from the service which provides that the modification in successor trustee provisions contemplated by the court order will not subject any part of the trust to the federal gst tax trustee represents that no corpus has been added actually or constructively to the trust subsequent to date sec_2601 imposes a tax on every generation-skipping_transfer within the meaning of subchapter_b sec_2611 defines the term generation-skipping_transfer as a taxable_distribution a taxable_termination and a direct_skip sec_2612 provides that the term taxable_termination means the termination by death lapse of time release of power or otherwise of an interest in property held in a_trust unless- a immediately after the termination a non-skip_person has an interest in the property or b at no time after the termination may a distribution including distributions on termination be made from the trust to a skip_person sec_2612 provides that the term taxable_distribution means any distribution from a_trust to a skip_person other than a taxable_termination or a direct_skip sec_2612 provides that the term direct_skip means a transfer subject_to a tax imposed by chapter or of an interest in property to a skip_person sec_2613 provides that the term skip_person means-- a natural_person assigned to a generation which i sec_2 or more generations below the generation assignment of the transferor or a trust-- a if all interests in the trust are held by skip persons or b if-- i there is no person holding an interest in the trust and ii at no time after such transfer may a distribution including distributions on termination be made from the trust to a non-skip_person sec_26_2601-1 of the generation-skipping_transfer_tax regulations provides that except as otherwise provided in sec_26 the provisions of chapter of the internal_revenue_code_of_1986 code apply to any generation-skipping_transfer as defined in sec_2611 made after date sec_26_2601-1 provides that the tax does not apply to any generation- skipping transfer under a_trust as defined in sec_2652 that was irrevocable on date the rule_of the preceding sentence does not apply to a pro_rata portion of any generation-skipping_transfer under an irrevocable_trust if additions are made to the trust after date sec_26_2601-1 provides that except as provided in sec_26_2601-1 property includible in the gross_estate under sec_2038 or c property includible in the gross_estate under sec_2042 any trust in existence on date is considered an irrevocable_trust sec_26_2601-1 provides that if an addition is made after date to an irrevocable_trust which is excluded from chapter by sec_26 b a pro_rata portion of subsequent distributions from and terminations of interests in property held in the trust is subject_to the provisions of chapter sec_26_2611-1 provides that a generation-skipping_transfer is an event that is either a direct_skip a taxable_distribution or a taxable_termination the determination as to whether an event is a generation-skipping_transfer is made by reference to the most recent transfer subject_to the estate or gift_tax a modification of a generation-skipping_trust that is otherwise exempt under sec_26_2601-1 will generally result in a loss of its exempt or grandfathered status if the modification changes the quality value or timing of any powers beneficial interests rights or expectancies originally provided for under the terms of the trust trust is a generation-skipping_trust because trust provides for distributions to persons that are two or more generations below the trustor’s generation thus unless trust is excepted from the gst tax provisions by reason of sec_26_2601-1 trust would be subject_to the gst tax we conclude that if no additions have been made to trust after date the gst tax does not apply to trust because trust was an irrevocable_trust on date within the meaning of sec_26_2601-1 in this case the proposed modification of the trust relates to the appointment of successor trustees we also conclude that based on the facts presented and the terms of the trust the proposed reformation will not change the quality value or timing of any powers beneficial interests rights or expectancies originally provided for under the terms of the trust except as ruled above we express or imply no opinion concerning the federal tax consequences of this transaction under the cited provisions or any other provision of the code this letter_ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely james c gibbons assistant to the chief branch office of the assistant chief_counsel passthroughs and special industries


internal_revenue_service national_office technical_advice_memorandum sep number release date index uil no case mis no tam-111306-03 cc tege eoeg et1 director eo examinations te_ge taxpayer's name taxpayer's address taxpayer's identification no years involved date of conference legend taxpayer residents workers state year a year b year c year d year year year c2 tam-111306-03 year issue sec_1 whether the taxpayer is entitled to relief of employment_tax liability under the provisions of sec_530 of the revenue act of because of a prior audit whether the taxpayer was required to file information returns for payments made to or for the benefit of workers under sec_6041 of the internal_revenue_code code if it is determined that the payments are income to the workers whether the payments made to or for the benefit of workers were subject_to backup withholding under sec_3406 of the code if it is determined that the payments are income to the workers whether the taxpayer is entitled to receive a classification settlement program offer to resolve the workers classification issue conclusion the taxpayer is entitled to relief of employment_tax liability under the provisions of sec_530 of the revenue act of because of a prior audit the taxpayer was required to file information returns for payments made to or for the benefit of workers under sec_6041 of the internal_revenue_code code if it is determined that the payments are income to the workers the payments made to or for the benefit of workers were subject_to backup withholding under sec_3406 of the code if it is determined that the payments are income to the workers because the taxpayer is entitled to relief of employment_tax liability under the provisions of sec_530 the taxpayer does not need to take advantage of the classification settlement program facts the taxpayer is a voluntary therapeutic residential community dedicated to the care and well being of people with developmental disabilities residents the community also includes workers who care for residents and the workers’ children the residents workers and the workers’ children live together in extended family households and work together in a variety of craft shops and work areas crafts include candle making stained glass bookbinding weaving and woodworking work tam-111306-03 c3 on the land includes a dairy farm vegetable gardens and healing plant and seed gardens and processing the community also has a bakery gift shop a café culture and arts center and medical therapy clinic there are short-term and permanent workers with children living and working in the community the taxpayer also has full-time and part-time employees assisting workers the workers have various credentials including credentials in education social and physical sciences and in arts and humanities residents and workers share responsibilities for homemaking training administration community outreach and the cultural artistic and spiritual life of the community each year additional short-term workers many young adults from abroad join the work of the community for time spans ranging from a few months to three years the taxpayer offers orientation and training courses to all short-term workers and a three-year seminar in social therapy for qualified applicants long-term workers do not receive a salary the taxpayer has a community budget that pays for the workers’ basic expenses such as food clothing vacations medical insurance education and training in addition the taxpayer makes payments to or on behalf of the workers for human concerns payments for human concerns include sabbatical payments severance or separation payments for former workers and payment for medical and dental bills for workers and their children after separation the taxpayer is licensed by the state to provide its services and receives revenue though charitable_contributions government funding and from the sale of products from its workshops gift shop and café the taxpayer is an exempt_organization under sec_501 on the taxpayer ’s form_990 return of organization exempt from income_tax for year and year the taxpayer reported certain payments referred to as human concerns vacation expenses and tuition payments at private school for the children of the workers also workers are provided free housing and receive monthly subsistence payments based upon the age of their children the revenue_agent treated these disbursements to be taxable compensation and expanded the audit to include employment_taxes year sec_1 through in response to the employment_tax audit the taxpayer advised the agent that it was not liable for employment_taxes because it was entitled to relief under sec_530 based on prior audits service records indicate that the taxpayer was examined for year a and the examination resulted in a no_change_letter the taxpayer was also examined for employment_taxes for years b through d this examination also resulted in a no_change_letter the taxpayer asserts that it has consistently treated the workers as volunteers and has never issued either forms w-2 or forms to the workers the tam-111306-03 c4 taxpayer has never obtained social_security numbers from the workers since they were volunteers law and analysis issue sec_530 generally sec_530 provides a taxpayer with relief from employment_tax liability for a particular taxable_period if the taxpayer can demonstrate that it meets the three statutory requirements of sec_530 for any period after date the sec_530 relief only applies if the taxpayer did not treat an individual as an employee for any period substantive consistency_requirement all federal returns including information returns required to be filed by the taxpayer with respect to the individual for the periods are filed on a basis consistent with the taxpayer’s treatment of the individual as not being an employee reporting consistency_requirement and the taxpayer has a reasonable basis for not treating the individual as an employee sec_530 a sets forth three safe havens which must be considered in determining whether a business has a reasonable basis for not treating an individual as an employee the three safe havens are reasonable reliance on a judicial precedent published rulings technical_advice with respect to the taxpayer or letter_ruling to the taxpayer b a past internal_revenue_service audit of the taxpayer in which there was no assessment attributable to the treatment for employment_tax purposes of the individuals holding positions substantially_similar to the position held by this individual or c long-standing recognized practice of a significant segment of the industry in which such individual was engaged however a taxpayer who fails to meet any of the three safe havens is nevertheless entitled to relief if the taxpayer can demonstrate in some other manner a reasonable basis for not treating workers as an employee the term reasonable basis should be construed literally in favor of the taxpayer see revproc_85_18 1985_1_cb_633 in order to satisfy the reporting consistency_requirement a business must timely file all required forms with respect to workers for the period on a basis consistent with the business’ s treatment of the worker as not being an employee in training rev independent_contractor or employee at page we state if a business is not required to file relief will not be denied on the basis that the return was not filed an example is provided where a business is not required to filed information returns because the dollar_figure threshold has not been met the taxpayer asserts that it did not file forms because it treated the workers as volunteers in prior audits it was not required to file forms for payments made to workers treated as volunteers since the taxpayer was not required to file forms for volunteers the taxpayer has satisfied the reporting consistency_requirement tam-111306-03 c5 in order to satisfy the substantive consistency_requirement the taxpayer must demonstrate that it has not treated any individual holding a similar position as an employee based on the factual information presented by the taxpayer the taxpayer has demonstrated that it has consistently treated workers and other individuals performing substantially the same function as workers as volunteers thus taxpayer has satisfied the substantive consistency_requirement in order to satisfy the reasonable basis test the taxpayer must have reasonably relied on judicial precedent a past audit industry practice or some other reasonable basis for its treatment of the individuals here the taxpayer relied on several prior audits which specifically included an audit of employment_taxes thus the taxpayer has satisfied the reasonable basis test consequently the taxpayer is entitled to relief under sec_530 issue information returns sec_6041 of the code requires all persons engaged in a trade_or_business and making payment in the course of such trade_or_business to another person of rent salaries wages premiums annuities compensations remunerations emoluments or other fixed or determinable gains profits and income of dollar_figure or more in any taxable_year to render a true and accurate return in such form and manner and to such extent as may be prescribed by the regulations sec_1_6041-1 provides that the term all persons engaged in a trade_or_business as used in sec_6041 includes not only those so engaged for gain or profit but also organizations the activities of which are not for the purpose of gain or profit thus the term includes the organizations referred to in sec_401 sec_501 sec_501 and sec_521 sec_1_6041-1 provides that income is fixed when it is paid in amounts definitely predetermined income is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained the income need not be paid annually or at regular intervals the term gain profits and income as used in sec_1 of the regulations means gross_income a payer is not required to make a return under sec_6041 for payments that are not includible in the recipient's income the taxpayer is exempt from federal income_taxation pursuant to sec_501 of the code sec_1_6041-1 provides that the term all persons engaged in a trade_or_business includes organizations the activities of which are not for the purpose of gain or profit in particular sec_1_6041-1 provides that the term includes the organizations referred to in sec_501 the taxpayer provides for the care and well being of adults with developmental disabilities therefore even though the taxpayer is exempt from federal income_taxation pursuant to sec_501 the taxpayer is tam-111306-03 c6 engaged in a trade_or_business for purposes of sec_6041 the taxpayer asserts that it not subject_to_withholding taxes on the taxable fringe_benefits as proposed by the agent since the individuals performing services are volunteers in support of this position the taxpayer relies on st joseph farms of indiana bros of congregation of holy cross southwe85_tc_9 in st joseph farms the tax_court discussed the term trade_or_business as defined under sec_513 the term trade_or_business is defined for purposes of sec_6041 in sec_1_6041-1 of the income_tax regulations therefore the definition provided in st joseph farms is irrelevant for purposes of our analysis the taxpayer was created to provide for the care and well being of adults with developmental disabilities workers care for the residents and in return the taxpayer provides for the workers’ basic expenses such as food clothing vacations medical insurance education and training therefore the payments made by the taxpayer are made in the course of its trade_or_business whether the payments are reportable under sec_6041 depends on whether the payments are income to the workers if the payments are income the taxpayer is required to file information returns for payments made to or for the benefit of the workers to the extent that the payments exceed dollar_figure issue backup withholding sec_3406 provides that in the case of any reportable_payment if a the payee fails to furnish his tin to the payer in the manner required b the secretary notifies the payer that the tin furnished by the payee is incorrect c there has been a notified_payee_underreporting described in subsection c or d there has been a payee certification failure described in subsection d then the payer will deduct and withhold from such payment a tax equal to percent of such payment sec_3406 provides that the term reportable_payment means a any reportable_interest_or_dividend_payment and b any other_reportable_payment sec_3406 provides that the term other_reportable_payment means any payment of a kind and to a payee required to be shown on a return required under sec_6041 relating to certain information_at_source sec_31_3406_d_-1 of the employment_tax regulations provides that for accounts contracts or relationships subject_to information reporting under sec_6041 the payee must furnish the payee's tin to the payer sec_31_3406_e_-1 provides that a payer is required to withhold under sec_3406 on any reportable_payment at the time the payer pays the reportable tam-111306-03 c7 payment to the payee if the payer has not received the payee's tin in the manner required in sec_31_3406_d_-1 if the payments constitute income the payments will be reportable under sec_6041 since the taxpayer did not obtain social_security numbers from the workers the payments would also be subject_to_withholding under sec_3406 pursuant to sec_31_3406_a_-4 the taxpayer would be required to withhold at the time it made the payments to the workers issue classification settlement program because the taxpayer is entitled to relief of employment_tax liability under the provisions of sec_530 the taxpayer does not need to take advantage of the classification settlement program caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent