t c summary opinion united_states tax_court marlin e pospisil and sharon r pospisil petitioners v commissioner of internal revenue respondent docket no 21281-12s filed date marlin e pospisil and sharon r pospisil pro_se charles j graves and douglas s polsky for respondent summary opinion paris judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed unless otherwise indicated section references are to the internal_revenue_code in effect for tax_year at issue and rule references are to the tax_court rules_of_practice and procedure pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case in a notice_of_deficiency dated date respondent determined a federal_income_tax deficiency of dollar_figure for petitioners’ taxable_year respondent also determined a sec_6662 accuracy-related_penalty of dollar_figure after concessions by the parties the issues for decision are whether petitioners are entitled to an additional cost_of_goods_sold of dollar_figure whether petitioners are entitled to deduct an additional dollar_figure of travel_expenses related to mr pospisil’s business and whether petitioners are liable for an accuracy-related_penalty under sec_6662 background some of the facts are stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioners resided in nebraska when their petition was filed mr pospisil has been in the roofing business for years historically mr pospisil’s business operating under the name northeast nebraska energy savers petitioners conceded respondent’s disallowance of dollar_figure of claimed deductions for insurance other than health further in the notice_of_deficiency respondent disallowed petitioners’ claimed total cost_of_goods_sold of dollar_figure respondent has since conceded dollar_figure of this amount see infra pp had two primary aspects first mr pospisil would perform roof maintenance and repair as a subcontractor this involved finding roofing projects working with the owners and managers of the buildings in need of repair submitting bids to the lead contracting companies and performing the repairs if his bid was accepted second he acted as an independent business owner ibo for conklin co inc conklin an independent supply company that specializes in roofing and building materials as an ibo mr pospisil would search for potential clients to purchase products from conklin whenever someone who signed up through mr pospisil purchased a conklin product mr pospisil would receive a commission his business also consisted of following up on warranty claims involving conklin products mainly roofing materials and repairing the products when necessary mr pospisil sold northeast nebraska energy savers to his son in he and his son carefully went through the company’s inventory that year and the son purchased the inventory he wanted from mr pospisil petitioners took this sale of inventory into account on their tax_return mr pospisil kept the leftover inventory and stored it in a warehouse on petitioners’ schedule c profit or loss from business the value of the carryover inventory from is reported as dollar_figure respondent does not dispute this valuation as his business was sold in mr pospisil did not have any employees and did not hire any independent contractors in however he was still in business as an ibo for conklin during that year in he continued to search for new clients to make conklin purchases and kept in contact with those already signed up to encourage them to make additional purchases thereby increasing his commission he also continued to inspect and repair conklin products under warranty this activity required mr pospisil to purchase additional inventory for his business in the cost of which was reported as dollar_figure on petitioners’ schedule c mr pospisil sometimes purchased conklin products for this purpose but he was free to and in fact did purchase inventory from other vendors as well at the end of there was no remaining inventory to be carried over to mr pospisil was required to travel across a three-state region to conduct his business successfully although he had traveled extensively throughout several states in previous years in of his travels occurred within miles of his hometown in nebraska petitioners submitted a list of towns and cities in nebraska south dakota and iowa that mr pospisil traveled to in but this list did not contain dates or a specific business_purpose mr pospisil paid dining lodging and other attendant expenses while traveling for business petitioners also traveled to florida in to update the deed on their timeshare and while there they went to disney world petitioners traveled exclusively by car and they did not keep a mileage log however mr pospisil had a dedicated vehicle for roofing matters both in his hometown and throughout his travels mr pospisil would take clients and potential clients out for coffee or to eat this was a part of mr pospisil’s business strategy to encourage clients to purchase conklin materials occasionally he would pick up the tab for a client’s children or grandchildren as well if the client had brought them to the meeting petitioners’ daughter performed some computer work for the business and mr pospisil would pay for her meals when they had business meetings at restaurants petitioners deducted the costs of these meals on their schedule c and kept the restaurant receipts even though most of the meal tickets were for amounts substantially below dollar_figure petitioners hired an accountant to prepare their tax_return petitioners used the same accountant for years and continued to hire him for return preparation even after his certified public accountant’s license had been revoked as he had continued his bookkeeping business mr pospisil would keep track of his income and expenses through a manual bookkeeping system known as the green binder system that his accountant set up for him when he first started his roofing business essentially the green binder system involved partitioning monthly expenses and receipts into approximately categories that correlated to allowable schedule c deductions relevantly two of these categories were inventory purchases and travel_expenses throughout each month mr pospisil would write down his expenditures in each expense category on a spreadsheet divided into columns one for each category at the end of the month he would total the expenses in each category and enter the totals onto a master spreadsheet that showed each category of expenses for each month of the year this was the table from which petitioners’ accountant would prepare their tax returns every year the accountant would take these amounts at their face value as long as they seemed reasonable he typically would not review the underlying receipts invoices or bank statements when preparing the returns upon completion of their return petitioners made arrangements to remit the tax payment and sign the return but they did not otherwise review it petitioners’ total_tax shown on the tax_return was dollar_figure petitioners later adjusted their tax_return to reflect tax of dollar_figure as stated above respondent has disallowed two items that petitioners claimed on their schedule c first petitioners included the cost of all of mr pospisil’s inventory in cost_of_goods_sold because no inventory remained to carry over to their calculated cost_of_goods_sold totaled dollar_figure which is the sum of the dollar_figure carryover inventory from and the dollar_figure of inventory petitioners contend was purchased in respondent does not dispute dollar_figure attributable to the carryover inventory moreover respondent has allowed petitioners dollar_figure for the inventory on the basis of conklin invoices in the record the issue is whether petitioners may include in cost_of_goods_sold the remaining dollar_figure of inventory they contend was purchased in petitioners also deducted dollar_figure on their schedule c under the heading travel meals and entertainment petitioners’ schedule c lists the total deduction under travel and does not allocate any of the total deduction to meals or entertainment petitioners have submitted hundreds of receipts to substantiate this deduction most of which are restaurant receipts although some of the restaurant receipts are from times when mr pospisil was traveling most of them are from restaurants in his hometown the remaining receipts are for gasoline hotels office supplies and entertainment such as disney world and zoo tickets the receipts do not contain information about the business clients mr pospisil was visiting or the business_purpose of the purchases respondent disallowed half of these expenses permitting petitioners to deduct dollar_figure the remaining dollar_figure is in dispute discussion the commissioner’s determination_of_a_deficiency is generally presumed correct and the taxpayer bears the burden of proving it incorrect see rule a 290_us_111 moreover deductions are a matter of legislative grace and the taxpayer bears the burden of proving entitlement to any deductions claimed see 503_us_79 292_us_435 under sec_7491 the burden_of_proof may shift to the commissioner if the taxpayer produces credible_evidence with respect to any relevant factual issue and meets other requirements petitioners have not argued that sec_7491 applies and therefore the burden_of_proof remains on them a taxpayer must substantiate deductions claimed by keeping and producing adequate_records that enable the commissioner to determine the taxpayer’s correct_tax liability sec_6001 65_tc_87 aff’d per curiam 540_f2d_821 5th cir 43_tc_824 a taxpayer claiming a deduction on a federal_income_tax return must demonstrate that the deduction is allowable pursuant to a statutory provision and must further substantiate that the expense to which the deduction relates has been paid_or_incurred sec_6001 hradesky v commissioner t c pincite under sec_162 a deduction is allowed for ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business the determination of whether an expenditure satisfies the requirements for deductibility under sec_162 is a question of fact see 320_us_467 a deduction normally is not available for personal living or family_expenses sec_262 when a taxpayer establishes that he paid_or_incurred a deductible expense but fails to establish the amount of the deduction the court normally may estimate the amount allowable as a deduction 39_f2d_540 2d cir 85_tc_731 the record must contain sufficient evidence to permit the court to conclude that a deductible expense was paid_or_incurred in at least the amount allowed 245_f2d_559 5th cir sec_274 limits the overall deductibility of entertainment which includes meals with clients and travel_expenses otherwise allowable under sec_162 as ordinary and necessary business_expenses sec_274 generally disallows deductions for entertainment and recreation but carves out an exception if the taxpayer establishes that the entertainment was directly related to or associated with the active_conduct of the taxpayer’s trade_or_business moreover sec_274 prescribes stringent substantiation requirements a taxpayer must satisfy before deducting certain categories of expenses including transportation_expenses meals and entertainment expenditures and expenses related to the use of listed_property as defined in sec_280f see 50_tc_823 aff’d 412_f2d_201 2d cir to satisfy the requirements of sec_274 the taxpayer must prove with specificity the amount time place business_purpose and in relation to entertainment_expenses the business relationship of the person s entertained sec_1_274-5t and temporary income_tax regs fed reg date an approximation of expenses is insufficient the taxpayer generally must maintain adequate_records or documentary_evidence corroborating the taxpayer’s own statement which in combination is sufficient to establish each element of an expenditure or use sec_1_274-5t temporary income_tax regs fed reg date sec_1_274-5t temporary income_tax regs fed reg date provides in relevant part that adequate_records generally consist of an account book a diary a log a statement of expense trip sheets or a similar record made at or near the time of the expenditure or use along with supporting documentary_evidence the court may not use the rule established in cohan v commissioner f 2d pincite to estimate expenses covered by sec_274 sanford v commissioner t c pincite sec_1_274-5t temporary income_tax regs fed reg date taxpayers lacking a contemporaneous log are generally expected to maintain a record created as near in time as possible to the particular expenditure or business use including the elements outlined above supported by corroborative documentary_evidence that carries with it a high degree of probative value sec_1_274-5t temporary income_tax regs supra sec_274 further limits a taxpayer’s ability to deduct the total amount of certain expenses--namely meals and entertainment_expenses even if a taxpayer has statutory authority to deduct these types of expenses and provides sufficient evidence to meet the substantiation requirements under sec_274 only of the total of otherwise deductible food beverage and entertainment_expenses is allowed as a deduction cost_of_goods_sold computation of the income of a business reported on schedule c takes into account both cost_of_goods_sold and other business_expenses the cost_of_goods_sold during a year is determined by subtracting inventory on hand at the end of the year from the total inventory on hand at the beginning of the year and the cost of purchases cost_of_goods_sold is subtracted from gross_receipts in determining gross_income sec_1_61-3 income_tax regs accordingly it is not treated as a deduction and is not subject_to the limitations on deductions in sec_162 and sec_274 88_tc_654 however any amount claimed as cost_of_goods_sold must be substantiated and taxpayers are required to maintain records sufficient for this purpose sec_6001 newman v commissioner tcmemo_2000_345 wright v commissioner tcmemo_1993_27 sec_1_6001-1 income_tax regs petitioners claimed dollar_figure for cost_of_goods_sold on their schedule c of this amount dollar_figure was carried over from the taxable_year and was the value of the leftover inventory after petitioners’ son purchased the business the remaining dollar_figure is attributable to the inventory that mr pospisil purchased in because no inventory remained at the end of petitioners included the entire cost of the inventory as part of the cost_of_goods_sold respondent has since conceded dollar_figure as cost_of_goods_sold for including the entire amount carried over from plus dollar_figure of the inventory purchased in as reflected in the conklin invoices respondent disputes the remaining dollar_figure of cost_of_goods_sold attributable to inventory petitioners contend they purchased in as not properly substantiated as stated above it is the taxpayer’s obligation to make and maintain adequate_records sufficient to substantiate a claimed deduction sec_6001 petitioners provided bank statements for every month of showing debit charges to shopko stores a vendor that sells construction supplies these debit charges total dollar_figure moreover the record contains receipts for materials from various discount and supply stores that mr pospisil credibly testified were for use in the construction roofing aspect of his business mr pospisil was not limited to purchasing inventory from conklin he was free to use other vendors for construction materials and he has provided proper documentation showing that he the conklin invoices in the record totaled dollar_figure however some of the invoices reflected vitamin purchases not roofing supply purchases although mr pospisil reported his occupation as salesman on the schedule c there is nothing in the record indicating that he was in the business of selling vitamins although cost_of_goods_sold is not subject_to restrictions on deductibility under sec_162 petitioners still bore the burden of establishing that the vitamins were in fact inventory and not for personal_use see tucker v commissioner tcmemo_1979_449 stating that the cost_of_goods_sold must be reduced by items withdrawn by the taxpayer for personal_use calamaras v commissioner tcmemo_1960_201 same see also rule a petitioners have not met this burden therefore the court will not disturb respondent’s calculation of dollar_figure for cost_of_goods_sold relating to the conklin invoices did so the total of the relevant invoices bank statements and receipts in the record substantiates petitioners’ claimed cost_of_goods_sold of dollar_figure for inventory purchased in accordingly petitioners’ claimed cost_of_goods_sold for taxable_year is upheld travel meals and entertainment_expenses petitioners deducted dollar_figure on their schedule c under the heading travel meals and entertainment schedule c further subcategorizes these expenses into travel and deductible meals and entertainment petitioners reported the entire dollar_figure under the travel heading respondent disallowed dollar_figure of the deduction to substantiate their travel meals and entertainment_expenses petitioners have inundated the court with literally hundreds of receipts most of these receipts are for restaurants both in nebraska and in other states including florida petitioners have provided very few receipts or invoices for lodging some of the receipts are for entertainment_expenses such as disney world and zoo tickets there are also handwritten notations for certain expenses although petitioners did not separate their travel meals and entertainment_expenses on their schedule c instead listing them all under travel most of the receipts are from eating establishments in petitioners’ hometown the court therefore assumes that the amount petitioners listed as travel deductions included expenses for meals and entertainment in their hometown that include the amount and general category of the expense petitioners have also provided pages and pages of invoices for items not at issue including auto expenses and utilities despite petitioners’ impressive collection of receipts reflecting totals substantially_similar to the amounts claimed very little of that documentation helps them here respondent has already allowed petitioners to deduct the claimed expenses in this category subject_to the limitation even if petitioners did properly substantiate these deductions under sec_274 the deductions would be limited to of actual expenses for meals and entertainment see sec_274 petitioners do not assert and there is no evidence on their return or otherwise that they claimed only of their meals and entertainment_expenses on their schedule c therefore respondent has already permitted petitioners to deduct the statutory maximum for meals and entertainment this includes meals that mr pospisil ate while traveling for business as well as meals with clients in his hometown which are considered entertainment_expenses this also encompasses the other entertainment_expenses because respondent has already allowed petitioners the statutory maximum deduction for meals and entertainment the court need not determine whether these expenses were properly substantiated under sec_274 the only remaining documentation relevant to this category is a few bank statements showing hotel or motel charges although not subject_to the limitation on meals and entertainment_expenses in sec_274 deductions for lodging during business travel are still subject_to the substantiation requirements of sec_274 therefore the court may not approximate these expenses but must have evidence corroborating the amount time place and business_purpose of the expenses despite the ream of receipts in the record and the amount of traveling mr pospisil purportedly did in the record contains documentation for only four hotel or motel stays all of these charges appear to be either in or en route to or from florida petitioners visited florida primarily for personal reasons--to update the deed on their timeshare although mr pospisil was the receipts relating to gas and auto expenses are not relevant because respondent did not challenge petitioners’ claimed dollar_figure deduction for vehicle expense on their schedule c taxpayers who use a car in furtherance of their business have the option of deducting a standard mileage rate or actual vehicle expenses but not both see sec_1_274-5 income_tax regs revproc_2008_72 sec_5 2008_2_cb_1286 petitioners chose to deduct actual vehicle expenses the hotels are in florida mississippi and missouri the record indicates that mr pospisil traveled for business in only to towns in nebraska south dakota and iowa at trial mr pospisil testified that petitioners traveled to florida for an industry convention they later corrected this statement they were actually in continued always on the lookout for new clients to purchase conklin products and might therefore be considered in a way to have been always working this vague contention is insufficient to justify deducting hotel expenses for the florida trip petitioners could not provide the court with a specific business_purpose or names of clients or potential clients that mr pospisil spoke with in florida therefore petitioners are not entitled to a deduction beyond what respondent has already allowed them pursuant to the notice_of_deficiency with respect to travel meals and entertainment_expenses sec_6662 accuracy-related_penalty respondent also determined an accuracy-related_penalty under sec_6662 sec_7491 provides that the commissioner bears the burden of production with respect to the liability of any individual for additions to tax and penalties see 116_tc_438 however the burden to establish that they acted with reasonable_cause remains with the taxpayers id pincite continued florida that year to update the deed on their timeshare because the timeshare plays no part in mr pospisil’s business the travel_expenses related to it are not deductible as business_expenses see sec_162 further petitioners have not demonstrated that the timeshare is property_held_for_investment and that expenses related to its upkeep are deductible under sec_212 respondent contends that petitioners are liable for the penalty because of negligence and or disregard of rules or regulations or alternatively because their underpayment is due to a substantial_understatement_of_income_tax see sec_6662 and for purposes of the penalty ‘negligence’ includes any failure to make a reasonable attempt to comply with the provisions of this title sec_6662 under caselaw ‘ n egligence is a lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under the circumstances ’ 89_tc_849 quoting marcello v commissioner 380_f2d_499 5th cir aff’g on this issue 43_tc_168 and t c memo aff’d 904_f2d_1011 5th cir aff’d 501_us_868 sec_6662 and b imposes an accuracy-related_penalty on any underpayment attributable to any substantial_understatement_of_income_tax an understatement is substantial if it exceeds the greater of dollar_figure or of the tax required to be shown on the return sec_6662 a taxpayer will not be liable for the sec_6662 penalty if the taxpayer proves that he had reasonable_cause for the underpayment and acted in good_faith with respect to the underpayment sec_6664 the determination of reasonable_cause and good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances sec_1_6664-4 income_tax regs if a taxpayer can show that he reasonably relied on a tax professional then he may avoid a sec_6662 penalty see sec_1_6664-4 income_tax regs a taxpayer must demonstrate that t he adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment 115_tc_43 aff’d 299_f3d_221 3d cir respondent has not shown that petitioners acted negligently with respect to their tax_return by maintaining records and keeping copious receipts petitioners made a reasonable attempt to comply with the law however petitioners will be liable for a substantial_understatement_penalty if upon a rule computation their understatement of income_tax exceeds the greater of dollar_figure or of the tax required to be shown on the return sec_6662 to the extent that those computations establish that petitioners have a substantial_understatement_of_income_tax respondent will have met his burden of production see prince v commissioner tcmemo_2003_247 petitioners have not provided sufficient evidence to show that they acted reasonably or with good_faith in regard to their reporting of their meals and entertainment_expenses by not limiting their meals and entertainment_expenses to of their actual expenses as required under sec_274 petitioners did not heed the clear text of the statute petitioners mislabeled many of their meals expenses by not dividing out their meals for their accountant petitioners may not rely on their tax professional to avoid a penalty that may be calculated on this adjustment they did not provide their accountant with the underlying records but rather handed him the summaries with their own calculations the accountant took these numbers at face value and merely entered them on the return because the accountant knew that mr pospisil had traveled to several states he did not question the expenses in the travel category moreover petitioners did not review the tax_return once their accountant had prepared it if petitioners had provided their accountant with a packet of meal receipts a quick glance by the accountant would have resolved the missing meals expense category on their schedule c accordingly the accuracy-related_penalty is sustained insofar as the rule_155_computations show a substantial_understatement_of_income_tax the court has considered all of petitioners’ contentions argument requests and statements to the extent not discussed herein we conclude that they are moot irrelevant or without merit to reflect the foregoing decision will be entered under rule


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 b01 - plr-122008-04 date aug ------------------------------------- ------------------------------- --------------------------------------------- --------------------------- ----- ------------- x -------------------------------------------------- y ------------------------------------------------- z state a d1 d2 d3 d4 d5 d6 d7 dear ------------------- requesting relief under sec_1362 ----------------------- -------------------- ----------------- -------------------------- -------------------------- --------------------------- this letter responds to a letter dated date written on behalf of x plr-122008-04 facts according to the information submitted x was incorporated under the laws of state on d1 x timely elected subchapter_s status effective d2 by filing form_2553 with the service since d3 x has had a shareholder agreement which provides that any attempted transfer of shares to an ineligible shareholder shall be null and void on d4 upon request of one of x’s shareholders transferor shareholder x transferred a shares of x stock from the transferor shareholder to z on d5 x formed a subsidiary y and timely filed a form_8869 to treat y as a qsub as of the date of its formation effective d6 x spun off y and distributed all of the shares of y proportionately each of x’s shareholders z did not actually receive stock in y however on d6 z was a shareholder of record of x the spin off terminated y’s qsub election y timely filed an election to be taxed as an s_corporation effective d6 on d7 upon request of the transferor shareholder x transferred a shares of x stock from the transferor shareholder to z in addition x made three distributions to z the shareholder of record at the time of the distributions at the time of such transfers and distributions z was an ineligible s_corporation shareholder neither x nor any of its shareholders or employees intended to terminate x’s s_corporation status by making the transfer of shares to z nor did they intend to make an invalid qsub election or subsequent s_corporation_election for y immediately upon discovery of the fact that z was an ineligible shareholder x voided the shares issued to z and issued replacement certificates to the transferor shareholder in addition z repaid x the full amount of the distributions made to it and x redistributed such funds to the transferor shareholder law and analysis sec_1361 of the code provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that for purposes of subchapter_s a small_business_corporation cannot have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 defines a qualified_subchapter_s_subsidiary qsub as any domestic_corporation which is not an ineligible_corporation if percent of the stock of the corporation is held by the s_corporation and the s_corporation elects to treat the corporation as a qsub plr-122008-04 sec_1362 d a provides that an election under sec_1362 shall be terminated whenever at any time on or after the first day of the taxable_year for which the corporation is an s_corporation the corporation ceases to be a small_business_corporation the termination is effective on and after the day of the cessation sec_1362 sec_1362 of the code provides that if an election under sec_1362 by any corporation was not effective for the taxable_year for which it was made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or was terminated under paragraph or of subsection d the secretary determines that the circumstances resulting in such ineffectiveness or termination was inadvertent no later than a reasonable period of time after discovery of the event resulting in the ineffectiveness steps were taken a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to this subsection agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination the corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based on the information submitted and the representations made we conclude consequently x shall be treated as an s_corporation for the taxable_year that to the extent x's s_corporation_election terminated on d4 or d7 such termination was inadvertent within the meaning of sec_1362 of the code beginning d2 and thereafter provided that apart from the facts discussed above x’s s_corporation_election was otherwise valid and has not otherwise terminated under sec_1362 federal_income_tax consequences of the facts described above under any other provision of the code in particular no opinion is expressed or implied as to whether x otherwise qualifies as a subchapter_s_corporation under sec_1361 of the code provides that it may not be used or cited as precedent this ruling is directed only to the taxpayers who requested it sec_6110 except as specifically ruled upon above no opinion is expressed as to the plr-122008-04 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayers representatives sincerely s dianna k miosi diana k miosi branch chief branch office of associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc --------------------- ----------------------------- ------------------------------------------- ---------------------------------------- -------------------- ----------------------------- ------------------------- --------------------------------------- ---------------------------------- ----------------------------------------------------------------------------------------------------- ------------- ------------------------------------ ----------------------


internal_revenue_service uniform issue list dollar_figure-00 department of the casury washington dc od person to contact telepnone pumber reter heply to ef sep ra t2 x date jul attn e e o t o legend employer a state b law c entity d plan x plan y dear ladies and gentlemen this letter is in response to a request submitted on your behalf by your authorized representative for a private_letter_ruling dated correspondence dated and as further revised and superceded by correspondence dated you have requested rulings regarding the federal_income_tax treatment of certain contributions to plan x and plan y under sec_402 and sec_404 of the internal_revenue_code supplemented by the code and and ' the following facts and representations have been submitted of page employer a is engaged in various diverse pousiness operations including the recruitment and placement of professional engineering design data processing scientific and technical support personnel for varying periods of time to companies and other organizations including government agencies in a broad range of industries which have a need for such personnel but are unable or do not choose to engage such personnel as their own employees the plans and k of employer a maintains plan x and plan y both of which qualify under sec_401 the code employer a is subject_to federal_insurance_contributions_act and federal withholding_tax as well as workers compensation and unemployment insurance laws of the state in which the individual is employed maintains a large presence in state b and in accordance with law c of state b employer a must withhold approximately of each employee's after tax salary for state disability benefits although law c provides that amounts withheld may be contributed to a state-operated fund law c permits the employer to establish a private or voluntary fund upon approval of the employer's application_for such fund employer is required to separately account for contributions earnings and accretions to its voluntary fund employer a the employer a maintains a voluntary fund the disability law c permits employers who maintain disability plan which currently holds assets that far exceed expected claims plans with excess_assets to withdraw such assets for certain limited purposes excess to the purchase of other employee_benefits for employees covered by the voluntary plan the use of excess funds in such manner is subject_to the approval of entity d one of those purposes is to apply such employer a has determined that it will make a such contributions will be accomplished in contribution to a 401_k_plan for the benefit of each employee entitled to a refund in an amount equal to the refund which will be treated as a qualified elective contribution the following manner employer a will provide a refund directly to the employee exclusively from the excess_assets of the disability plan deferral contribution in an amount equivalent to the amount of the refund will be made to the 401_k_plan unless the employee signs an election to receive such amount in cash at the same time an elective employees subject_to the above described automatic election will receive notice that explains the automatic of page compensation reduction and the employee's right to elect to have no such compensation reduction contributions to the k plan-pr to alter the amount of the contribution each participant in the plan will be notified annually of his or her compensation reduction percentage and the participant's right to change the percentage including the procedure for exercising that right and the ‘timing for the implementation of such right where an employee makes an affirmative election to receive cash in lieu of compensation reduction contributions such employee would receive his or her entire compensation plus the refund from the disability plan based on the aforementioned facts and representations you have requested the following rulings employer a is entitled to a deduction for contributions made to the plans pursuant to the employees' election to the extent that such contributions are otherwise deductible pursuant to sec_162 and sec_404 of the code each contribution on behalf of an employee will result in no additional income to the individual by correspondence dated date your authorized representative withdrew ruling_request three of the original letter_ruling request dated date sec_401 of the code and sec_1_401_k_-1 of the income_tax regulations the regulations set forth the requirements that a cash_or_deferred_arrangement must satisfy in order to be a qualified_cash_or_deferred_arrangement sec_1_401_k_-1 a cash_or_deferred_arrangement as an eligible_employee may make a cash or deferred election with respect to contributions to or accruals or other_benefits under a plan that is intended to satisfy the requirements of sec_401 i of the regulations defines an arrangement under which sec_1_401_k_-1l a i of the regulations defines a cash or deferred election as any election or modification of an earlier election by an employee to have the employer either provide an amount to the employee in the form of cash or some other taxable benefit that is not currently available or contribute an amount to a_trust accrual or other benefit under a plan deferring the receipt or provide an of e- page iv of the sec_1_401_k_-1 of compensation regulations provides that a cash or deferred election does not includera one-time irrevocable election made at the time an employee commences employment with the employer or upon the employee's first becoming eligible under any plan of the employer to have contributions made by the employer on the employee's behalf to the plan or any other plan of the employer equal to a specified amount or percentage of the employee's compensation sec_1 k g of the regulations defines elective contributions as employer contributions made to a plan that were subject_to a cash_or_deferred_arrangement elective contributions without regard to whether the cash_or_deferred_arrangement is arrangement a cash or deferred election under a qualified cash or deferred such contributions are revrul_2000_8 2000_7_irb_617 date holds that where a newly hired or current employee has an effective opportunity to elect to receive an amount in cash or have that amount contributed by the employer to a profit-sharing_plan those employer contributions made on the employee's behalf to the plan in lieu of receipt of cash compensation will not fail to be considered elective contributions within the meaning of sec_1 k g made under a qualified_cash_or_deferred_arrangement within the meaning of sec_401 merely because they are made pursuant to an arrangement under which in any case in which an employee does not affirmatively elect to receive cash the employee's compensation is reduced by a fixed percentage and that amount is contributed on the employee's behalf to the plan revrul_2000_8 also provides that the definition the regulation does not require of a cash or deferred election in sec_1 k - l a i requires that the employee have an election between the employer paying cash or some other taxable benefit to the employee or making a contribution to a_trust on behalf of the employee that the employee receive an amount in cash in any case in which the employee does not make an affirmative election to have that amount contributed to the trust thus a cash or deferred election will not fail to be made under a qualified_cash_or_deferred_arrangement merely because when an employee fails to make an affirmative election with respect to an amount of compensation that amount is contributed on the employee's behalf to a_trust provided that the employee had an effective opportunity to elect to receive that amount in cash the employee has an effective opportunity to elect page 2001459u36 to receive an amount in cash as required under section i iff the employee receives notice of the k -1 a af availability of the election and the employee has a reasonable period before the cash is currently available to make the election on in this case also after receiving the notice the the compensation reduction contributions in an amount equivalent to the amount of the refund from the disability plan made by employer a to plan x or plan y behalf of employees who have not filed an election to the contrary are amounts contributed pursuant to a procedure under which the employee receives a notice explaining his or her right to not have the compensation reduction contributions made employee has a reasonable period before the cash is currently available to elect to receive that amount in cash or have a contribution made to plan x or plan y employee has an effective opportunity to elect to receive cash or have a contribution made to the plan the employee is not able to receive prior to a distributable event described in sec_401 b code the amounts contributed to plan x or plan y compensation reduction contributions in an amount equivalent to the amount of a refund from the disability plan irrevocable election because the employee will be notified annually of the amount of compensation reduction contributions and can change the election after receiving such notice contributions described above are contributions made pursuant to sec_401 are not contributions made pursuant to a one-time a cash_or_deferred_arrangement described in consequently the compensation reduction of the finally in addition of the code thus an sec_404 of the code sets forth the rules governing sec_404 provides generally that contributions the employer's deduction for contributions to a qualified_plan paid_by an employer to or under a qualified_stock bonus pension profit-sharing or annuity plan deductible are deductible under sec_404 subject_to various limitations as taxable_year to the amounts deductible in any if otherwise sec_402 of the code provides in general that any amount actually distributed to any distributee by any employees' trust described in sec_401 which is exempt from tax under sec_501 in the year of the distribution under sec_72 code is taxable to the distributee of the page sec_1_402_a_-1 of the regulations provides that if an employer makes a contribution for the benefit of an employee to a_trust described in sec_401 taxable_year of the employer which ends within or with a taxable_year of the trust for which the trust is exempt under sec_501 the employee is not required to include such contribution in his or her income except for the year or years in which such contribution is distributed or made available to him or her for th sec_402 of the code provides in part a_trust which is part of a qualified cash or deferred that contributions made by an employer on behalf of an employee to arrangement shall not be treated as distributed or made available to the employee nor as contributions made to the trust by the employee merely because the arrangement includes provisions under which the employee has an election whether the contribution will be made to the trust or received by the employee in cash with respect to ruling_request number one we conclude that since the compensation reduction contributions in an amount equivalent to the amount of the refunds from the disability plan are contributions made pursuant to a cash_or_deferred_arrangement described in sec_401 of the code employer a is entitled to a deduction for such contributions made to plan x or plan y to the extent such contributions are deductible under sec_404 a code of the with respect to ruling_request number two we conclude that since employer a will make the above-described compensation reduction contributions for the benefit of employees to plan x or plan y which are plans described in sec_401 of the code the employee is not required to include such contributions in his or her income until such time as the amounts are actually distributed to him or her in accordance with sec_402 of the code these rulings are based on the assumption that plan x and plan y are qualified under sec_401 and sec_401 of the code and that their related trusts are tax-exempt under code sec_501 at all times relevant to these rulings these rulings are also based on the assumption that the disability plan complies with all of the requirements of law c and that any refunds of excess_assets from such disability plan are authorized by entity d page this letter_ruling is directed only to the taxpayer that requested it that it maysnot be used or cited by others as precedent sec_6110 of the code provides the original of this letter_ruling is being sent to your authorized representative in accordance with a power_of_attorney on file in this office sincerely yours joyce e fbyk ’ joyce e floyd manager employee_plans technical group tax_exempt_and_government_entities_division enclosures deleted copy of letter_ruling notice cc


number release date id office uilc cca_2010101313441241 ----------------------------- from --------------- sent wednesday date pm to --------------- cc subject fw irm dollar_figure protective claims on a separate note--------------------------------------------------------------------- it is possible for a tp to get a refund after an ic finding if they have substantial expenses that are now allowed on sch c the income_tax savings from the expense deductions may offset the difference between seca and fica


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi - plr-107066-00 date date x properties city d1 d2 dollar_figurex dollar_figurey dear this letter responds to a letter dated date and subsequent correspondence written by your authorized representative on behalf of x requesting a ruling that x’s rental income from the properties is not passive_investment_income within the meaning of sec_1362 of the internal_revenue_code the information submitted states that x is a closely_held_c_corporation with accumulated_earnings_and_profits x anticipates making an election to be treated as an s_corporation on d1 x is in the business of owning renting and managing the properties the properties are commercial retail stores and offices located in city x directly and through contractors provides various services in operating the properties services provided in the last year include the following security for tenants and tourists maintenance of the properties’ exterior walls roofs heating electricity and plumbing gardening and landscaping maintenance of the sidewalk curbing and trash removal and hour emergency repair service in addition to the services provided to tenants x handles the usual marketing leasing and administrative functions involved in managing real_estate including posting for rent signs in vacant store windows negotiating and preparing tenant leases directly leasing its properties to tenants collecting rents from its tenants paying all of the properties operating expanses and obtaining insurance coverage in the fiscal_year ending d2 x received approximately dollar_figurex in rents and paid approximately dollar_figurey in relevant expenses sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect for the taxable_year sec_1362 provides that an election under sec_1362 shall be terminated whenever the corporation has accumulated_earnings_and_profits at the close of each of consecutive taxable years and has gross_receipts for each of such taxable years more than percent of which are passive_investment_income sec_1362 provides that except as otherwise provided the term passive_investment_income means gross_receipts derived from royalties rents dividends interest annuities and sales or exchanges of stock_or_securities sec_1_1362-2 of the income_tax regulations defines rents as amounts received for_the_use_of or right to use property whether real or personal of the corporation sec_1_1362-2 provides that rents does not include rents derived in the active trade_or_business of renting property rents received by a corporation are derived in an active trade_or_business of renting property only if based on all the facts and circumstances the corporation provides significant services or incurs substantial costs in the rental business generally significant services are not rendered and substantial costs are not incurred in connection with net leases whether significant services are performed or substantial costs are incurred in the rental business is determined based upon all the facts and circumstances including but not limited to the number of persons employed to provide the services and the types and amounts of costs and expenses_incurred other than depreciation based solely on the facts and the representations submitted we conclude that the rental income that x derives from properties is income from the active trade_or_business of renting property and is not passive_investment_income as described in sec_1362 except as specifically set forth above we express no opinion as to the federal tax consequences of the transaction described above under any other provision of the code further we express no opinion on whether x is a small_business_corporation eligible to make an s election under sec_1361 of the code this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely yours branch j thomas hines acting branch chief office of the associate chief_counsel passthroughs and special industries enclosures 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 corp - plr-110699-98 date date re distributing controlled bank thrift x year y state z fdic ots plr-110699-98 dear this is in reply to your letters received on date in which rulings were requested as to the federal_income_tax consequences of a proposed transaction additional information was submitted in and with letters dated june november and date the information submitted for consideration is summarized below distributing is an accrual basis state z corporation engaged in business as a two-bank holding_company its wholly owned subsidiaries that have been wholly owned throughout the preceding five year period are bank a state-chartered bank and thrift a federally-chartered savings bank both provide a full range of services and banking products thrift was formerly x during year y x’s federal bank charter was converted to a federal savings bank charter and the bank was renamed bank bank’s primary federal regulator is fdic thrift’s primary federal regulator is ots parent is subject_to both the requirements of the bank_holding_company act of bhca and the federal deposit insurance corporation improvement act of as of date distributing had outstanding big_number shares of voting common_stock controlled will be formed under the laws of state z to effectuate the proposed transaction described below controlled will be an accrual basis taxpayer financial information has been received which indicates that distributing’s bank and thrift each has had gross_receipts and operating_expenses representative of the active_conduct_of_a_banking business for each of the past five years during thrift was converted from a national bank to a thrift institution as a national bank thrift was prohibited from expanding and establishing branches outside of the county where it is located putting it at a competitive disadvantage with other depository_institution in its market area as a thrift charter thrift with the approval of the ots has begun establishing branches outside of the county where it is located thrift is located in rural_state z where there are several projects currently underway that have created a need for housing in order to participate in this need for housing the management of distributing and thrift through thrift want to enter the businesses of real_estate development and the sale and brokerage of title insurance thrift is currently the wholly owned subsidiary of distributing and is part of an organization that includes a commercial bank as a sister corporation bank as a result distributing is a bank_holding_company and subject_to the activities restrictions of such entitles set forth in bhca that do not permit a bank_holding_company to engage directly or indirectly in any activities other than those closely related to banking taxpayer’s legal counsel is of the opinion that the businesses of real_estate development and the plr-110699-98 sale and brokerage of title insurance will not be considered to be activities closely related to banking by the federal reserve board the relevant federal regulatory body taxpayer’s legal counsel has submitted documentation that demonstrates its opinion is warranted however a savings and loan holding_company is permitted to engage in many activities not related to banking thus an organization without a bank subsidiary as controlled will be following the proposed transaction described below will not be subject_to bhca and therefore will be permitted to engage in any business activity not prohibited by the ots as a savings and loan holding_company therefore in order to allow thrift to enter the business of real_estate development and the sale brokerage of title insurance the following transaction is proposed i ii distributing will contribute all of the outstanding_stock of thrift to controlled a newly formed corporation in exchange for big_number shares of voting common_stock of controlled distributing will distribute on a pro_rata basis all of the shares of controlled stock to the distributing shareholders iii controlled will then be the parent_corporation of thrift the taxpayer has made the following representations with respect to the proposed transaction a b c d no part of the consideration to be distributed by distributing will be received by any shareholder as a creditor employee or in any capacity other than that of a shareholder of the corporation the five years of financial information submitted on behalf of distributing is representative of distributing’s present operation and in regard to such corporation there have been no substantial operational changes since the date of the last financial statement submitted immediately after the proposed distributions at least percent of the fair_market_value of the gross assets of distributing and controlled will consist of the stock and securities of controlled corporations that are engaged in the active_conduct of trade_or_business as defined in sec_355 following the proposed transaction distributing and controlled will each continue the active_conduct of their respective businesses independently and with their separate employees certain management employees of the two active businesses bank and thrift have and will continue to plr-110699-98 perform various management functions for each of bank and thrift the distribution of the stock of controlled is carried out for the following corporate business_purpose to create a savings and loan holding_company which is permitted to engage in any activity with the limited exception that the activity may not be undertaken for the purpose or have the effect of evading any law or regulations applicable to the savings and loan holding_company savings association subsidiary the distribution of the controlled stock is motivated in whole by this stated business_purpose neither distributing controlled or any other corporation plans to become or will become eligible to be an s_corporation there is no plan or intention by the shareholders of distributing to sell exchange transfer by gift or otherwise dispose_of any of their stock in either of distributing or controlled after the transaction there is no plan or intention by either distributing or controlled directly or through any subsidiary_corporation to purchase any of its stock after the transaction there is no plan or intention to liquidate either distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the transaction except in the ordinary course of business distributing neither accumulated its receivables nor made extraordinary payment of its payables in anticipation of the transaction payments made in connection with all continuing transactions if any between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arms’ length no two parties to the transaction are investment companies as defined in sec_368 and iv e f g h i j k l based solely on the information submitted and on the representations set forth above and provided that thrift does become active in the businesses of branch banking real_estate development and title insurance we hold as follows the transfer by distributing to controlled of all of the thrift stock solely in exchange for all of the stock of controlled followed by the distribution of plr-110699-98 the controlled stock as described above will qualify as a reorganization within the meaning of sec_368 of the code distributing and controlled will each be a_party_to_a_reorganization within the meaning of sec_368 no gain_or_loss will be recognized to distributing upon the transfer of thrift stock to controlled in exchange for controlled stock sec_361 no gain_or_loss will be recognized to controlled upon the receipt of distributing’s thrift stock in exchange for controlled stock sec_1032 the basis of the thrift stock received by controlled will be the same as the basis of such stock in the hands of distributing immediately before such transfer sec_362 the holding_period of the thrift stock received by controlled will include the period during which such stock was held by distributing sec_1223 no gain_or_loss will be recognized to distributing upon the distribution of all of the controlled stock sec_361 no gain_or_loss will be recognized to and no amount will be included in the income of distributing’s shareholders upon the receipt of controlled stock sec_355 the aggregate basis of the controlled and distributing stock in the hands of each distributing shareholder immediately after the distribution will be the same as the aggregate basis of the distributing stock held by each distributing shareholder immediately before the distribution allocated between the distributing stock and controlled stock in proportion to the fair_market_value of each in accordance with sec_1_358-2 of the regulations sec_358 and b the holding_period of the controlled stock received by each distributing shareholder will in each instance include the holding_period of the distributing stock with respect to which the distribution was made provided that such distributing stock is held as a capital_asset on the date of the distribution sec_1223 as provided in sec_312 of the code proper allocation of earnings_and_profits between distributing and controlled will be made in accordance with sec_1_312-10 of the regulations plr-110699-98 no opinion is expressed concerning the federal_income_tax treatment of the proposed transaction under other provisions of the code or regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transactions that are not specifically covered by the above rulings the ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter should be attached to the federal_income_tax returns of the taxpayers involved for the taxable_year in which the transaction covered by this ruling letter is consummated in accordance with the power_of_attorney on file in this office copies of this letter are being sent to your authorized representatives sincerely yours assistant chief_counsel corporate by debra l carlisle chief branch


number release date id office uilc cca_2010051118082244 ---------------------------- from ---------------------- sent tuesday date pm to -------------------- cc subject c question --------- the discussion below answers your question sec_6501 provides an exception to the general 3-year assessment limitations_period under sec_6501 if the value of gifted property is required to be shown on a gift_tax_return return of tax imposed by chapter of subtitle b of the internal_revenue_code but is not shown on the return then any gift_tax on the transfer of gifted property may be assessed at any time the unlimited assessment_period does not apply if the gift was disclosed on the return in a manner adequate to apprise the secretary of the nature of such item the treasury regulations promulgated under sec_6501 provide that if a gift is not adequately disclosed on a gift_tax_return then the tax imposed on that gift may be assessed at any time sec_301_6501_c_-1 a gift will be adequately disclosed if the gift_tax_return provides inter alia the following information a description of the transferred property the identity of and relationship between the transferor and each transferee a detailed description of the method used to determine the fair_market_value of the property transferred including any financial data used in determining the value of the interest any restrictions on the transferred property considered in determining the fair_market_value of the property and a description of any discounts claimed in valuing the property in the case of a transfer of an interest in an entity that is not actively_traded a description must be provided of any discount claimed in valuing the interest in the entity or any assets owned by such entity sec_301_6501_c_-1 the adequate_disclosure requirements may also be met if the donor submits an appraisal of the transferred property that meets the requirements set forth in sec_301_6501_c_-1 the period of limitations on assessment of gift_tax with respect to a gift will commence to run only if the donor submits information required under the regulations revproc_2000_34 2000_2_cb_186 you indicated that a donor of stock of a closely-held business failed to disclose on the gift_tax_return any information with respect to the method used to determine the fmv of the stock and any description of discounts used to value the stock when discounts were in fact used to value the stock based on these basic facts it appears that the gift_tax imposed on the stock transfer may be assessed at any time under sec_6501 please note that gifts subject_to the special valuation rules in sec_2701 or sec_2702 or any taxable_event described in sec_25_2701-4 must be adequately shown on the gift_tax_return under sec_301_6501_c_-1 for the period of limitations on assessment to begin to run while the adequately shown standard in sec_301_6501_c_-1 may differ somewhat from the adequate_disclosure standard of sec_301_6501_c_-1 the sec_301_6501_c_-1 regulations imposes similar disclosure requirements with respect to the particular method the donor used for gift valuation purposes sec_301_6501_c_-1 provides that the gift_tax_return to provide a detailed description including all actuarial factors and discount rates used of the method used to determine the amount_of_the_gift arising from the transfer or taxable_event including in the case of an equity_interest that is not actively_traded the financial and other data used in determining value financial data should generally include balance sheets and statements of net_earnings operating results and dividends_paid for each of the years immediately before the valuation_date if you need additional assistance please feel free to contact me


t c memo united_states tax_court charles a sisson and maralee m sisson petitioners v commissioner of internal revenue respondent docket no filed date cs an individual filed for ch bankruptcy in cs’s ch bankruptcy case was open throughout during cs earned self-employment_income held cs is liable for the self-employment_tax on his self- employment income for charles a sisson and maralee m sisson for themselves david l zoss for respondent memorandum opinion morrison judge on date the respondent referred to here as the irs issued a notice_of_deficiency to petitioners charles a sisson and maralee m sisson for the and tax years the irs determined the following deficiencies and penalties year deficiency accuracy-related_penalty dollar_figure big_number big_number dollar_figure big_number big_number on date the sissons filed a petition with the tax_court for redetermination since then as explained below various aspects of the case have been resolved through a partial dismissal for lack of jurisdiction stipulations of the parties and waiver of arguments by the parties the issue that remains is a legal one the sissons contend that charles sisson is not liable for self-employment_tax for because his bankruptcy_estate is liable we hold that charles sisson is liable all dollar amounts are rounded to the nearest dollar when they filed their tax_court petition the sissons resided in minnesota background bankruptcy petition charles sisson’s earnings from the imf on date charles sisson filed a voluntary petition under chapter of the bankruptcy code the filing of his petition created a bankruptcy_estate which is a separate_entity for bankruptcy purposes and a separate taxpayer for federal_income_tax purposes see sec_1398 u s c sec_541 123_tc_144 during charles sisson a united_states citizen performed services in the united_states as an employee of the international monetary fund or imf he received wages from the imf of dollar_figure that included a dollar_figure gross up to help him pay the self-employment_tax on his earnings although charles sisson was a wage-earning employee of the imf in the usual sense of the word wage the internal revenue code’s employment-tax provisions do not classify his work for the imf as employment and do not classify the payments he received from the imf as wages these definitional points are explained in greater detail below in recognition of the definitions in the internal_revenue_code we will refer to the the bankruptcy code is title of the united_states_code unless otherwise noted all references to sections are to the internal_revenue_code_of_1986 as amended which is title_26 of the united_states_code payments that charles sisson received from the imf as earnings rather than wages the imf withheld no tax from his earnings--not the tax imposed by sec_1 the self-employment_tax imposed by sec_1401 or the fica federal_insurance_contributions_act tax imposed by sec_3101 and sec_3111 because charles sisson was in bankruptcy during his imf earnings for that year became property of his bankruptcy_estate pursuant to u s c sec a he paid his imf earnings over to his bankruptcy_estate his bankruptcy_estate paid his personal living_expenses during and continued to do so until he retired from the imf in the sissons’ federal_income_tax return for the tax_year the sissons jointly filed a federal_income_tax return on form_1040 in reporting their liability for self-employment_tax on that return they did not include in their self-employment_income any of charles sisson’s imf earnings the only self-employment_income or losses they reported were self-employment losses from his consulting and farming activities not related to the imf as a consequence of these consulting and farming losses the sissons reported that charles sisson had no self-employment-tax liability for the title of form_1040 is u s individual_income_tax_return in reporting their liability for the tax under sec_1 on their return the sissons reported that charles sisson’s imf earnings were includible in their gross_income as explained below the sissons erred in so doing the imf earnings were properly includible in the gross_income of charles sisson’s bankruptcy_estate not the gross_income of the sissons for purposes of sec_1 see sec_1398 the sissons claimed various deductions most of which were attributable to losses from his consulting and farming activities these deductions reduced their reported taxable_income so that their reported tax_liability under sec_1 was only dollar_figure notice_of_deficiency in the notice_of_deficiency the irs determined that charles sisson’s self- employment income for was dollar_figure the amount of his imf earnings from the year and that his self-employment-tax liability for the year was dollar_figure the notice_of_deficiency also made adjustments to the sissons’ tax_liability under sec_1 for for example it disallowed deductions from the reported consulting and farming losses however the notice_of_deficiency did not make an adjustment to remove charles sisson’s imf earnings from the sissons’ income for purposes of the sec_1 tax the deficiency determined for was dollar_figure this amount was computed as follows sec_1 tax owed self-employment_tax owed sec_1 tax reported deficiency dollar_figure big_number big_number filing of the tax_court petition dismissal of the case with respect to charles sisson’s tax_year on date the sissons filed the tax_court petition at the time however charles sisson still had an open chapter bankruptcy case the bankruptcy code’s automatic-stay provision u s c sec_362 barred charles sisson from filing a tax_court petition with respect to any taxes that had accrued before he filed his bankruptcy petition ie date his income_tax_liability had accrued before he filed his bankruptcy petition therefore on date we dismissed the case as to charles sisson for the tax_year for lack of jurisdiction stipulations and motion under tax_court rule_of practice and procedure a the parties entered into the following stipulations maralee sisson has no deficiency for or because of the operation of sec_6015 charles sisson has no deficiency for charles sisson is not liable for an accuracy-related_penalty for or these three stipulations left only one item unresolved the amount of charles sisson’s deficiency for the parties made a final stipulation that the sole remaining issue in dispute is whether petitioner charles sisson owes self- employment_tax for the parties also filed a motion which was granted on date to have the case resolved without a trial under tax_court rule_of practice and procedure a discussion when a taxpayer files a petition in response to an irs notice_of_deficiency and the filing of the petition is not barred by the automatic-stay provision of the bankruptcy code we have jurisdiction to redetermine the amount of the tax_deficiency for the tax years at issue sec_6213 sec_6214 a deficiency is generally defined as the tax owed minus the tax reported sec_6211 for this purpose the tax includes both the tax under sec_1 and the self-employment_tax under sec_1401 sec_6211 providing that tax includes tax imposed by subtitle a sec_1 to and subtitle b sec_2001 to the notice_of_deficiency made several adjustments to the sissons’ liability under sec_1 for the tax_year even though the irs made these adjustments to the sissons’ sec_1 liability the parties have stipulated that the only remaining disputed issue is whether charles sisson is liable for the self-employment_tax for the tax_year furthermore the motion under tax_court rule_of practice and procedure a filed by the parties states that the only unresolved issue is whether charles sisson owes self-employment_tax and as a result is liable for a deficiency in income_tax this as a result statement suggests that the amount of the deficiency currently asserted by the irs hinges on charles sisson’s liability for self-employment_tax not the sissons’ liability for the tax imposed by sec_1 because we consider that the irs no longer asserts that the deficiency results from the sissons’ liability for the sec_1 tax we do not resolve in this opinion any issues related to the sissons’ liability for the sec_1 tax we consider only charles sisson’s liability for the self-employment_tax we do discuss the sissons’ liability for the sec_1 tax but only in the course of explaining the effect of sec_1398 on charles sisson’s self-employment-tax liability there is still a deficiency because as we hold charles sisson has a self- employment-tax liability for the parties will give us their views of the amount of the deficiency in their computations under tax ct r pract proc we expect they will address whether the deficiency is dollar_figure that is the dollar_figure self-employment-tax liability minus zero self-employment_tax reported or dollar_figure that is the dollar_figure self-employment-tax liability minus the dollar_figure of sec_1 tax reported or some other amount the sissons contend that charles sisson does not owe self-employment_tax because in their view his bankruptcy_estate is liable for the self-employment-tax liability corresponding to his imf earnings they do not contend that charles sisson’s self-employment earnings should be reduced by his losses from consulting and farming activities therefore we do not consider whether his self- employment income should be reduced by those losses we consider only the sissons’ argument that charles sisson’s bankruptcy_estate is the true taxpayer with respect to the self-employment_tax corresponding to his imf earnings the self-employment_tax is one of two types of tax on individuals that are designed to fund the social_security system 809_f3d_503 9th cir first there are the fica_taxes on wages paid to employees sec_3101 and b a and b second there is the self- employment_tax on self-employment_income which is generally defined as income from services other than as an employee sec_1402 a c for fica tax purposes wages are defined as all remuneration for employment sec_3121 employment is generally defined as any service performed by an employee for an employer but a specific exception excludes services performed in the employ of an international_organization such as the imf no relevant facts are in dispute sec_3121 sec_7701 exec order no fed reg date because of this exception regarding international organizations charles sisson’s earnings from the imf are not considered wages under fica the self-employment_tax also has a special rule for services performed for international organizations in the united_states by a united_states citizen sec_1402 self-employment_income is defined as the net_earnings from self- employment derived by an individual sec_1402 the net_earnings from self- employment are defined as the gross_income derived by an individual from any trade_or_business carried on by the individual minus deductions sec_1402 the term trade_or_business generally excludes the performance of service by an individual as an employee but includes the performance of service in the united_states by an individual united_states citizen in the employ of an international_organization sec_1402 c because of this special rule_of inclusion regarding service for international organizations charles sisson’s earnings from the imf are considered self-employment_income it is the sissons’ contention that the corresponding self-employment-tax liability is payable by charles sisson’s bankruptcy_estate to sort out this contention we consult sec_1398 and sec_1399 these provisions were added by the bankruptcy_tax_act_of_1980 pub_l_no sec_3 stat at the senate_finance_committee gave the following background when they were being considered by congress at present there are no rules in the internal_revenue_code specifying whether the bankruptcy_estate constitutes a taxable entity apart from the individual debtor and if so how tax_attributes are to be allocated between the estate and the debtor this has resulted in uncertainty and litigation concerning the federal_income_tax liability of the bankruptcy_estate and the debtor the provisions of sec_3 of the bill adding new sec_1398 and sec_1399 to the internal_revenue_code provide the first comprehensive statutory treatment of these issues s rept no pincite 1980_2_cb_620 with that background in mind we now describe the pertinent portions of sec_1398 and sec_1399 sec_1398 provides that this section shall apply to any case under chapter or chapter of title of the united_states_code in which the debtor is an individual sec_1398 provides except as otherwise provided in this section the taxable_income of the estate shall be computed in the same manner as for an individual the tax shall be computed on such taxable_income and shall be paid_by the trustee sec_1398 provides that the gross_income of the estate includes the gross_income of the debtor to which the estate is entitled under the bankruptcy code sec_1398 provides that the gross_income of the debtor does not include any item to the extent the item is included in the gross_income of the estate by reason of sec_1398 sec_1398 provides that the bankruptcy_estate succeeds to and takes into account various tax_attributes of the debtor such as net_operating_loss carryovers sec_1399 provides except in any case to which sec_1398 applies no separate taxable entity shall result from the commencement of a case under title of the united_states_code sec_1398 applies to charles sisson’s bankruptcy case because his case is a chapter case and he is an individual debtor sec_1398 thus his bankruptcy_estate is a separate taxable entity and it is liable for the tax referred to in sec_1398 the tax referred to in sec_1398 includes the tax under sec_1 we reach this conclusion because sec_1398 defines the taxable_income of the estate and requires the tax computed on such taxable_income to be paid_by the bankruptcy trustee sec_1 is a tax on taxable_income therefore the sec_1 tax is a tax imposed on the bankruptcy_estate by operation of sec_1398 in calculating the taxable_income of the bankruptcy_estate sec_1398 requires the estate to include in its gross_income any of the debtor’s income to which the estate is entitled under the bankruptcy code under section a of the bankruptcy code u s c sec a the property of the bankruptcy_estate of an individual debtor includes the debtor’s earnings from services performed by the debtor after the filing of the bankruptcy petition charles sisson is an individual debtor his imf earnings during were for services he performed after he filed his bankruptcy petition therefore his bankruptcy_estate is entitled to his imf earnings under u s c sec a and it must include them in its gross_income under sec_1398 the imf earnings are not includible in charles sisson’s gross_income see sec_1398 thus the sissons should not have reported the imf earnings as their income on their tax_return for purposes of the tax under sec_1 by contrast to the tax under sec_1 the self-employment_tax is a tax on self-employment_income sec_1401 self-employment_income is defined as the net_earnings_from_self-employment derived by an individual sec_1402 the net_earnings_from_self-employment are defined as the gross_income derived by an individual from a trade_or_business less deductions sec_1402 thus the self-employment_tax is not a tax on taxable_income it is therefore not the tax imposed on the bankruptcy_estate by sec_1398 sec_1398 includes no other provision apart from sec_1398 imposing tax_liability on a bankruptcy_estate because sec_1398 imposes the sec_1 tax on the bankruptcy_estate but not the self-employment_tax we infer that congress did not intend a bankruptcy_estate to be subject_to the self-employment_tax we conclude that a bankruptcy_estate is not liable for the self-employment_tax we reject the sissons’ argument that charles sisson’s bankruptcy_estate is liable for the self-employment_tax we hold that he is liable for the self- employment_tax on his imf earnings for decision will be entered under tax_court rule_of practice and procedure our conclusion is consistent with the irs’s published guidance in notice_2006_83 sec_4 2006_2_cb_596 however we do not rely on the notice or give it the deference that would be due a regulation see 13_f3d_969 6th cir