t c summary opinion united_states tax_court william g applegate petitioner v commissioner of internal revenue respondent lucy s wang petitioner v commissioner of internal revenue respondent docket nos 19676-02s 19692-02s filed date william g applegate pro_se in docket no 19676-02s lucy s wang pro_se in docket no 19692-02s timothy s sinnott for respondent dean special_trial_judge these consolidated cases were heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time that the petitions were filed unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure the decisions to be entered are not reviewable by any other court and this opinion should not be cited as authority respondent determined for a deficiency in william g applegate's and lucy s wang's federal_income_tax of dollar_figure the issues for decision are whether petitioners are entitled to deductions for employee business_expenses and whether ms wang is entitled to relief from joint_and_several_liability on a joint_return under sec_6015 the stipulated facts and the exhibits received into evidence are incorporated herein by reference at the time the petitions in these cases were filed both petitioners resided in attica indiana the court consolidated these cases for purposes of trial briefing and opinion because they involve common questions of law and fact background during taxable_year petitioner william g applegate mr applegate and petitioner lucy s wang ms wang were married to each other and they presently remain so petitioners timely filed a joint form_1040 u s individual_income_tax_return for which was prepared by ms wang using information 1in the notice_of_deficiency respondent allowed petitioners a previously unclaimed child_tax_credit of dollar_figure provided to her by mr applegate ms wang did not discuss the return with mr applegate ms wang is a graduate of purdue university holding a degree in engineering during taxable_year ms wang was employed as an environmental engineer with eli lilly co eli lilly her employer of years mr applegate is also a graduate of purdue university holding a bachelor of science degree in industrial supervision during mr applegate in his roles as president secretary shareholder and employee of driall inc driall earned dollar_figure driall a closely_held_corporation owned by mr applegate's family manufactures agricultural equipment and incinerators petitioners maintained joint savings and checking accounts ms wang's wages from eli lilly as well as checks from driall to mr applegate were deposited into their joint checking account ms wang had full access to both the joint savings and checking accounts she reviewed the monthly bank statements wrote checks and balanced the checkbook driall had a reimbursement policy in place during which covered a variety of expenses the reimbursable expenses included business use of personal vehicles business travel_expenses meals and entertainment_expenses and general business_expenses driall's reimbursement policies for business travel meals and entertainment and general business_expenses required an employee to obtain preapproval for the expenses before incurring them preapproval for business travel and general business_expenses could be obtained from the accounting department and the head of the department incurring the expense meals expenses in excess of dollar_figure per day and any entertainment_expenses also required preapproval but only from the accounting department mr applegate was the head of his department and the head of accounting and preapproved his own expenses during mr applegate paid the following expenses with respect to his employment with driall item amount mileage travel business_expenses meals entertainment dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure mr applegate gave ms wang the receipts for his expenses and on their schedule a itemized_deductions petitioners claimed a total deduction for unreimbursed employee business_expenses of dollar_figure less the 2-percent agi floor of dollar_figure or dollar_figure mr applegate could have received reimbursement from driall for these expenses instead of deducting them on their tax_return respondent disallowed all of petitioners' claimed deductions for unreimbursed employee business_expenses petitioners also earned dollar_figure in taxable interest from the eli lilly credit_union which they failed to report on their return ms wang seeks relief from joint_and_several_liability for the deficiency pursuant to sec_6015 discussion unreimbursed employee business_expenses under sec_7491 the burden_of_proof may shift to the commissioner because the unreimbursed employee_business_expense issue is a question of law sec_7491 is inapplicable and the court decides the issue without regard to the burden_of_proof pursuant to sec_162 a taxpayer may deduct unreimbursed expenses which he actually paid and which were ordinary and necessary expenses of his trade_or_business 79_tc_1 because the business of a corporation is not considered the business of its shareholders or officers 287_us_410 unreimbursed expenditures undertaken for the benefit of the corporation by one of its officers generally are not deductible by the officer 308_us_488 mr applegate testified that he incurred expenses on behalf of driall in his capacity as a corporate officer he claims he sought reimbursement from driall for his expenses but driall did not have the funds to reimburse him what happened in practice is that mr applegate looked at driall's account to see if there was money available for reimbursement and did not seek reimbursement because he concluded that driall did not have sufficient funds mr applegate contends therefore that he is entitled to a deduction for these unreimbursed expenses respondent argues that the disallowed expenses were incurred by mr applegate on behalf of driall and that they are driall's expenses which may not be deducted by mr applegate as his own trade_or_business_expenses under sec_162 mr applegate was entitled to reimbursement from driall for the expenses_incurred on its behalf where such an arrangement exists the failure to claim such reimbursement from the corporation will not convert the corporation's expenses into the corporate employee's own deductible ordinary and necessary business_expenses 24_tc_21 thomas v commissioner tcmemo_1988_505 king v commissioner tcmemo_1980_373 ockrant v commissioner tcmemo_1966_60 worth v commissioner tcmemo_1961_39 had mr applegate requested reimbursement the agreement by the corporation to reimburse an employee or officer coupled with a failure to reimburse might have given rise to a debt due from driall to mr applegate for the unreimbursed amount see worth v commissioner supra the debt would be deductible only in the year in which it became worthless thomas v commissioner supra king v commissioner supra ockrant v commissioner supra worth v commissioner supra respondent's determination disallowing petitioners' deduction for unreimbursed employee business_expenses is sustained relief from joint_and_several_liability under sec_6015 generally married taxpayers may elect to file a joint federal_income_tax return sec_6013 after making the election each spouse is jointly and severally liable for the entire tax due sec_6013 a spouse may seek relief from joint_and_several_liability under sec_6015 a spouse may qualify for relief from liability under sec_6015 or if eligible may allocate liability under sec_6015 in addition if relief is not available under sec_6015 or c an individual may seek equitable relief under sec_6015 114_tc_324 114_tc_276 the court's review is not limited to the commissioner's administrative record 122_tc_32 except as otherwise provided in sec_6015 the taxpayer bears the burden_of_proof rule a 119_tc_306 affd 101_fedappx_34 6th cir ms wang seeks relief from liability under sec_6015 with respect to respondent's adjustments to the return for the disallowed employee business_expenses she does not qualify for relief under sec_6015 because she is still married to mr applegate see sec_6015 thus the court begins its analysis with sec_6015 a sec_6015 sec_6015 provides relief from joint_and_several_liability for tax including interest penalties and other_amounts to the extent that such liability is attributable to an understatement_of_tax to be eligible for relief the requesting spouse must satisfy the following five elements of sec_6015 a a joint_return has been made for a taxable_year b on such return there is an understatement_of_tax attributable to erroneous items of individual filing the joint_return c the other individual filing the joint_return establishes that in signing the return he or she did not know and had no reason to know that there was such an understatement d taking into account all the facts and circumstances it is inequitable to hold the other individual liable for the deficiency in tax for such taxable_year attributable to such understatement and e the other individual makes a valid election respondent does not appear to dispute that ms wang satisfies two elements of sec_6015 namely those regarding joint_return and timely election under sec_6015 and e respectively additionally the parties stipulated that the employee business_expenses at issue are attributable to mr applegate's employment with driall thus ms wang has also satisfied the requirement that the understatement_of_tax resulting from the disallowed employee business_expenses must not be attributable to the individual seeking relief from the liability sec_6015 the court now considers whether ms wang satisfies the remaining two elements of sec_6015 with respect to the schedule a deductions for unreimbursed employee business_expenses the first of the two remaining elements of sec_6015 requires that ms wang in signing the return did not know and had no reason to know that there was an understatement see 182_f3d_275 4th cir affg tcmemo_1996_452 a requesting spouse has knowledge or reason to know of an understatement if he or she actually knew of the understatement or if a reasonably prudent taxpayer in his or her position at the time he or she signed the return could have been expected to know that the return contained an understatement or that further investigation was warranted butler v commissioner supra pincite in deciding whether a spouse has reason to know of an understatement the court undertakes a subjective inquiry there are several factors that are relevant to the court's analysis including but not limited to the alleged innocent spouse's level of education the spouse's involvement in the family's business and financial affairs and the culpable spouse's evasiveness and deceit concerning the couple's finances id pincite ms wang has a degree in engineering from purdue university and had full responsibility for the family finances she had full access to the family bank accounts reviewed the bank account statements monthly and maintained and balanced the family checkbook ms wang also prepared the tax_return for the year in issue finally mr applegate made no attempt to deceive ms wang about expenditures he made regarding his employment in fact she admits he gave her all his receipts for the expenditures ms wang simply made no effort to question him about them despite the fact that his expenses of over dollar_figure equaled almost percent of his income of dollar_figure the court finds that ms wang has failed to satisfy the requirements of sec_6015 therefore she does not qualify for relief under sec_6015 b sec_6015 ms wang may still qualify for relief however under sec_6015 sec_6015 grants the commissioner discretion to relieve from joint_and_several_liability an individual who files a joint_return relief from the underpayment is not available to ms wang under sec_6015 or c thus ms wang has satisfied sec_6015 as contemplated by sec_6015 the commissioner has prescribed guidelines in revproc_2000_15 sec_4 2000_1_cb_447 to be used in determining whether an individual qualifies for relief under that section revproc_2000_15 sec_4 c b pincite sets forth the threshold conditions that must be satisfied before the commissioner will consider a request for equitable relief under sec_6015 sec_6015 provides in pertinent part as follows sec_6015 relief from joint_and_several_liability on joint_return f equitable relief --under procedures prescribed by the secretary if-- taking into account all the facts and circumstances it is inequitable to hold the individual liable for any unpaid tax or any deficiency or any portion of either and relief is not available to such individual under subsection b or c the secretary may relieve such individual of such liability 3the guidelines applicable herein are set forth in revproc_2000_15 2000_1_cb_447 which was in effect at the time ms wang's request for relief was made revproc_2000_15 supra has been superseded by revproc_2003_61 2003_32_irb_296 effective for requests for relief filed on or after date respondent does not dispute that ms wang has satisfied those threshold conditions where the requesting spouse satisfies the threshold conditions set forth in revproc_2000_15 sec_4 revproc_2000_15 sec dollar_figure sets forth the circumstances under which the commissioner will ordinarily grant relief to that spouse under sec_6015 ms wang was still married to mr applegate at the time she filed the claim for relief and thus has failed to satisfy all of the elements of revproc_2000_15 sec dollar_figure and does not qualify for relief under that section where as here the requesting spouse fails to qualify for relief under revproc_2000_15 sec_4 the commissioner may nonetheless grant the requesting spouse relief under revproc_2000_15 sec_4 revproc_2000_15 sec_4 and pincite_1_cb_448 sets forth six positive and six negative factors that are to be considered in determining whether to grant relief the revenue_procedure makes clear that no single factor is to be determinative in any particular case that all factors are to be considered and weighed appropriately and that the list of factors is not intended to be exhaustive the sole factor weighing in favor of granting relief for ms wang is that the items giving rise to the deficiency--the schedule a employee_business_expense deductions--are attributable solely to mr applegate there are however several factors weighing against granting relief to ms wang first she clearly knew about the employee_business_expense deductions because mr applegate gave her his receipts and she used them to prepare their tax_return second ms wang received significant benefit from mr applegate's employee_business_expense deductions his expenses of dollar_figure equaled almost percent of their gross_income and constituted almost percent of their total itemized_deductions finally ms wang has provided no information at all to show that she will experience economic hardship if relief from the liability is not granted accordingly the court concludes that it is not inequitable under sec_6015 to hold ms wang liable for the deficiency reviewed and adopted as the report of the small_tax_case division decisions will be entered for respondent in docket nos 19676-02s and 19692-02s


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-118339-08 date october x -------------------------------------------------- ------------------ date date ----------------- ----------------- a ----------------------------------------------------- ---------------------------------- trust ----------------------------------------------------------------------------------------- -------------------- -------------------------------------------------- dear ------------ this responds to a letter dated date submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts x elected to be taxed as an s_corporation effective date on date trust became a shareholder of x however a the income_beneficiary of trust did not timely file the appropriate election under sec_1362 as a result of the failure_to_file the election x’s s_corporation_election terminated on date x represents that there was no intent to terminate x’s s_corporation_election and that the failure_to_file timely the qsst election for trust was not motivated by tax_avoidance or retroactive tax planning x also represents that since date and plr-118339-08 thereafter trust has complied with the requirements under sec_1361 which defines a qsst x and its shareholders agree to make any adjustments required by the secretary consistent with the treatment of x as an s_corporation law and analysis sec_1361 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 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b 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 c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1361 provides that a qsst whose beneficiary makes an election under sec_1362 will be treated as a_trust described in sec_1361 and the qsst's beneficiary will be treated as the owner for purposes of sec_678 of that portion of the qsst's s_corporation stock to which the election under sec_1361 applies under sec_1361 a beneficiary of a qsst may elect to have sec_1361 apply under sec_1361 this election will be effective up to days and two months before the date of the election sec_1361 defines a qsst as a_trust a the terms of which require that i during the life of the current income_beneficiary there shall be only one income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current beneficiary in the trust shall terminate on the earlier of the beneficiary's death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to that beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to one individual who is a citizen or resident_of_the_united_states sec_1362 provides in relevant part that if an election under sec_1362 by any corporation was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 b or to obtain shareholder consents the secretary plr-118339-08 determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in ineffectiveness steps were taken so that the corporation is once more a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make any adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to the period then notwithstanding the circumstances resulting in the ineffectiveness the corporation shall be treated as continuing to be an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and the representations made we conclude that the termination of x's subchapter_s_election on date was inadvertent within the meaning of sec_1362 therefore x will be treated as continuing to be an s_corporation from date and thereafter provided that the a files a qsst election with the appropriate service_center within days of the date of this letter a copy of this letter should be attached to the qsst election except as specifically set forth above we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x is otherwise eligible to be treated as an s_corporation or whether trust is eligible to be treated as a qsst this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your representative plr-118339-08 the rulings contained in this letter are 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 rulings it is subject_to verification on examination sincerely david r haglund david r haglund senior technician reviewer office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


department of the treasury internal_revenue_service washington d c date number release date cc dom fs p si uilc internal_revenue_service national_office field_service_advice memorandum for district_counsel cc from assistant chief_counsel field service cc dom fs subject income from discharge of partnership indebtedness this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend a b c d e partner partner dollar_figurea dollar_figureb dollar_figurec dollar_figured dollar_figuree dollar_figuref dollar_figureg dollar_figureh dollar_figurei dollar_figurej dollar_figurek w x y z date date date date date date date date date date date date date year year year year year year year year month month month month month tax_year tax_year district x state y issue whether the taxpayers realized cancellation_of_indebtedness_income in tax_year conclusion the taxpayers did not realize cancellation_of_indebtedness_income in the tax_year facts a a limited_partnership was formed on date to acquire construct and lease commercial property the property partner one of the four original managing general partners received y percent of the partnership interests the limited_partner held a z percent interest on date a obtained a dollar_figureb construction loan from b repayment of the principal was due on demand or by date as security for the loan a executed a deed_of_trust and each of its managing partners executed a recourse promissory note and personally guaranteed the loan construction on the property was completed in year by date the nationwide real_estate market had declined and b agreed to extend the due_date of the loan to date in year a discovered that toxic chemicals apparently from c and d had leaked onto the property real_estate values continued to decline in state y and between month and month of year partner and his wife partner acquired the general and limited_partnership interests of the other partners for a nominal amount partner held w percent of the partnership interests as general_partner and partner held a z percent interest as limited_partner on date b was placed into receivership the receiver collected all rents and other revenue from the property on date b assigned to e certain assets including the debt of a on date after attempting to collect from partner e filed suit against b c d and partner both in his capacity as a general_partner of a and as a guarantor in the united_states district_court for district x partner filed a cross-complaint against c and d the indebtedness was reduced to an interlocutory judgment on date as of date the total balance of the unpaid loan was dollar_figurea including interest on date e entered into a settlement agreement with partner and a where e agreed to pay them dollar_figurek in exchange for their dismissal of an appeal of the district court’s decision to have all rents from the property paid to the receiver partner and a also agreed to pursue their claims against c and d e agreed to pay their attorneys’ fees and partner and a agreed that e’s attorney would take the lead in the case e agreed that as of the date of the sale of the property it would not enforce a deficiency judgment against either partner or a unless they fail to pursue their claims against c and d or they pursue such claims in a negligent manner or if partner 1’s statement of net_worth was false in a material way partner and a also agreed to use their best efforts to sell the property and that e was entitled to the proceeds from the sale of the property as of date the principal balance of the loan was dollar_figurec on date the property the sole asset of a was sold for dollar_figureg a deficiency determination was held and the outstanding liability on the note was determined to be approximately dollar_figuree on or about date a deficiency judgment was entered against partner and a for dollar_figured in month of year e settled its case against d for dollar_figurei and in month of year e settled its case against c for dollar_figurej on date both the complaints and cross- complaints were dismissed also in month of year e dismissed the deficiency judgment against partner and a a filed a final federal_income_tax return for tax_year reporting cancellation of indebtedness of dollar_figuref an attachment to the tax_return states that all of a’s unpaid debt was forgiven as of date the date of the settlement agreement with e the year form k-1 issued by a to partner included the cancellation_of_indebtedness_income a majority of the cancellation_of_indebtedness_income was excluded from partner and partner 2's joint federal_income_tax return for tax_year based on the claim that they were insolvent at the time of the discharge_of_indebtedness cancellation_of_indebtedness_income was included into gross_income to the extent that partner and partner were solvent a statutory_notice_of_deficiency was issued for tax_year adjusting the capital_gain of partner and partner e issued a form 1099-c for tax_year to partner not to a for the excess of the deficiency judgment over the dollar_figureh recovered from c and d the attorney for e has stated that e fully intended on pursuing collection from partner and or a until month of year when the settlement was reached with c and d law and analysis the broad definition of gross_income includes income_from_discharge_of_indebtedness sec_61 see 284_us_1 however if the discharge_of_indebtedness occurs when the taxpayer is insolvent the discharge_of_indebtedness income is excluded from gross_income sec_108 insolvent is defined as the excess of liabilities over the fair_market_value of assets sec_108 in the case of a partnership the discharge of partnership indebtedness is determined and realized at the partnership level while the insolvency_exception is applied at the partner level sec_108 see marcaccio v commissioner t c memo income from the discharge_of_indebtedness is treated as an item_of_income which is allocated separately to each partner under sec_702 h_rep_no 96th cong 2d sess pincite s rep no 96th cong 2d sess pincite the amount_realized from the sale_or_other_disposition of property subject_to a nonrecourse_liability includes the amount of liabilities from which the transferor is discharged sec_1_1001-2 in contrast the amount_realized from the sale_or_other_disposition of property subject_to a recourse_liability does not include the amount of indebtedness discharged sec_1_1001-2 a partnership_liability is treated as nonrecourse to the extent that no partner or related although a’s year federal_income_tax return stated that it was the final return a filed a year state y partnership tax_return in or around month of year person bears the economic risk of loss for the liability sec_1 a a partnership_liability is treated as a recourse_liability to the extent that any partner or related_person bears the economic risk of loss for the liability sec_1_752-1 when the debt was created on date each of the partners personally guaranteed the repayment of the debt and each partner executed a recourse promissory note accordingly the debt was a recourse_liability when a borrowed the funds based on the available information there is no indication that any of the partners was relieved of personal liability when partner and partner acquired the partnership interests of the other partners between month and month of year addititonally e did not provide partner with a release of partner 1's recourse promissory note or partner 1's guarantee of the loan instead the settlement agreement entered into by partner a and e provided that a s of the date of the sale of the property e agrees not to levy execute or otherwise enforce a deficiency judgment against a or partner except if a the court determines that a and or partner intentionally fail to pursue or pursue in a grossly negligent manner its or his claims in this action or b partner 1's statement of current net_worth and income and expense verification dated date is false in a material way further the attorney for e has informed district_counsel that e fully intended on pursuing collection from partner and or a until month of year when the settlement was reached with c and d therefore the debt was still a recourse_liability after the settlement agreement was executed finally the property was sold by a on date we believe that the debt was still a recourse_liability after the sale of the property because e could have attempted to collect the outstanding liability from partner based on the recourse promissory note he executed and on partner 1’s personal guarantee of the debt a partnership is terminated for federal_income_tax purposes only if no part of any business financial operation or venture of the partnership continues to be carried a partner bears the economic risk of loss for a partnership_liability to the extent that if the partnership constructively liquidated the partner or related_person would be obligated to make a payment to any person or a contribution to the partnership due to the fact that the liability becomes due and payable and the partner or related_person would not be entitled to reimbursement from another partner or a person related to another partner sec_1_752-2 in determining the year in which income should be reported consideration cannot be given to what may or may not happen in a subsequent year barker v commissioner tcmemo_1983_643 citing 366_us_213 282_f2d_700 9th cir clem v commissioner t c memo on by any of its partners in a partnership or within a 12-month_period there is a sale_or_exchange of percent or more of the total interest in a partnership capital and profits sec_708 between month and month of year partner and partner acquired x percent and z percent of the partnership interests in a respectively accordingly a terminated for federal_income_tax purposes between month and month of year pursuant to sec_708 there is also a question of whether a terminated under b a at the time it disposed of the property because it held no other assets and did not have any other activity although we believe that the sale of the property did not cause a termination of a we believe the issue of whether the partnership terminated is irrelevant to the issue of whether partner realized income from the cancellation of indebtedness because under the laws in state x a partner is not relieved of liability on the date the partnership terminates case development hazards and other considerations if you have any questions or need further assistance please call by deborah a butler assistant chief_counsel patrick putzi special counsel natural_resources cc dom fs ps si


t c memo united_states tax_court domingo a lopez petitioner v commissioner of internal revenue respondent docket no filed date denis m mcdevitt for petitioners rodney j bartlett for respondent memorandum opinion couvillion special_trial_judge respondent determined that petitioner was liable for the following additions to tax for the years and ' unless otherwise indicated all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure additions to tax_year sec_6653 a sec_6653 a sec_6661 dollar_figure dollar_figure --- fifty percent of the interest due on dollar_figure fifty percent of the interest due on dollar_figure the issues for decision are whether for and petitioner is liable for the additions to tax under sec_6653 and for negligence and whether for petitioner is liable for the addition_to_tax under sec_6661 for a substantial_understatement of tax the issues in this case relate to the participation of petitioner as a limited_partner in a partnership known as blythe jojoba i research ltd blythe i or the partnership some of the facts were stipulated and those facts with the annexed exhibits are so found and are incorporated herein by reference at the time the petition was filed petitioner's legal residence was la jolla california petitioner is a medical doctor specializing in dermatology petitioner has been engaged in the private practice of dermatology in the san diego california area since for approximately years prior to petitioner worked as a physician in the u s navy petitioner was born and raised in the u_s_territory of puerto rico where petitioner's father was an accountant and a coffee bean and citron fruit farmer while growing up petitioner occasionally assisted his father on the coffee bean and citron plantation shortly after his entry into medical practice petitioner began to attend various business and financial seminars in order to become more educated about efficiently sustaining a private medical practice during one of these seminars in petitioner met thomas moore mr moore a financial adviser with coordinated financial services cfs of salt lake city utah mr moore was a promoter for blythe i petitioner engaged mr moore to conduct a comprehensive analysis of petitioner's personal and business financial situation one of mr moore's recommendations was to invest in a tax-sheltered program designed to generate dollar_figure of deductions in and thus he introduced petitioner to the blythe i offering which was being promoted as an agricultural research_and_development partnership according to petitioner mr moore had no apparent previous experience with agricultural or research_and_development partnerships mr moore provided petitioner with a fairly voluminous private_placement memorandum’ the offering which described the proposed investment in and the activities to be conducted through blythe i petitioner reviewed the document and then passed along the private_placement memorandum consisted of some pages plus eight exhibits and a table of contents the offering to his certified_public_accountant and tax attorney denis mcdevitt mr mcdevitt whom petitioner had recently hired to prepare his income_tax returns after reviewing the offering mr mcdevitt advised petitioner that he had no problem with petitioner's investment in blythe i petitioner did not consult any independent expert in the area of agriculture or jojoba plants as to whether jojoba oil or any other jojoba derivative had a potentially lucrative commercial market petitioner nevertheless invested in blythe i on his joint federal_income_tax return petitioner reported wages of dollar_figure from his medical practice and other employment as well as dollar_figure from his wife's employment petitioner also reported interest_income of dollar_figure taxable dividend income of dollar_figure a state_income_tax refund of dollar_figure a capital_loss of dollar_figure and taxable pension income of dollar_figure additionally petitioner reported a loss of dollar_figure from blythe i thus petitioner reported total income of dollar_figure anda total_tax liability of dollar_figure on his joint federal_income_tax return petitioner reported wages of dollar_figure from his medical practice and other employment as well as dollar_figure from his wife's employment petitioner also reported interest_income of dollar_figure a state_income_tax refund of dollar_figure and taxable pension income of dollar_figure additionally petitioner reported a loss of dollar_figure from blythe i thus petitioner reported total income of dollar_figure and a total_tax liability of dollar_figure blythe i was audited by the internal_revenue_service anda notice of final_partnership_administrative_adjustment was issued to the partnership the partnership initiated a tefra proceeding in this court and a decision was entered in utah jojoba i research v commissioner tcmemo_1998_6 which involved a similar jojoba investment program ’ in the decided case this court held that the partnerships did not directly or indirectly engage in research or experimentation and that the partnerships lacked a realistic prospect of entering into a trade_or_business in upholding respondent's disallowance of research_and_experimental_expenditures the court found that the agreements between the partnerships and the proposed research_and_development contractor u s agri research development corp u s agri had been designed and entered into solely to provide a mechanism to disguise the capital contributions of limited partners as currently deductible expenditures the court stated that the activities of the partnerships were another example of efforts by promoters and investors in the early 1980's to reduce the tax_matters_partner of blythe i signed a stipulation to be bound by the outcome of utah jojoba i research v commissioner tcmemo_1998_6 ‘ bighteen docketed cases were bound by stipulation by the outcome of utah jojoba i research v commissioner supra the cost of commencing and engaging in the farming of jojoba by claiming inaccurately that capital expenditures in jojoba plantations might be treated as research or experimental expenditures_for purposes of claiming deductions under sec_174 id as a result of blythe i's tefra proceeding petitioner and his wife were assessed tax deficiencies of dollar_figure for and dollar_figure for plus interest subsequently respondent issued a notice_of_deficiency to petitioner and his wife for and for affected items determining that they are liable for the additions to tax for negligence under sec_6653 and for and and a substantial_understatement of tax under sec_6661 for these additions to tax are the subject of the instant case petitioner's wife did not petition this court and did not testify at trial the first issue is the additions to tax for negligence under sec_6653 and for both years at issue sec_6653 imposes an addition_to_tax in an amount equal to percent of an underpayment_of_tax if any part of the underpayment is due to negligence or intentional disregard of rules or regulations sec_6653 imposes another addition_to_tax in an amount equal to percent of the interest due on the portion of the underpayment attributable to negligence or intentional disregard of rules or regulations respondent’s determinations in a notice_of_deficiency are presumed correct and petitioner must establish otherwise rule a 290_us_111 cf sec_7491 c respondent determined that petitioner's underpayments were due to negligence petitioner therefore has the burden of proving he was not negligent in deducting his share of the partnership’s losses 64_tc_651 affd 566_f2d_2 6th cir 58_tc_757 anderson v commissioner tcmemo_1993_607 affd 62_f3d_1266 10th cir negligence is defined as the failure to exercise the due care that a reasonable and ordinarily prudent person would exercise under like circumstances 62_f3d_1266 10th cir affg tcmemo_1993_607 85_tc_934 glassley v commissioner tcmemo_1996_206 the focus of inquiry is on the reasonableness of the taxpayer’s actions in light of his experience and the nature of the investment henry schwartz the internal_revenue_service restructuring reform act of publaw_105_206 sec 112_stat_726 added sec_7491 which places the burden of production on the secretary with respect to a taxpayer’s liability for penalties and additions to tax in court proceedings arising in connection with examinations commencing after date petitioner does not contend nor is there evidence that his examination commenced after date or that sec_7491 is applicable in this case corp v commissioner 60_tc_728 greene v commissioner tcmemo_1998_101 affd without published opinion 187_f3d_629 4th cir glassley v commissioner supra turner v commissioner tcmemo_1995_363 whether a taxpayer is negligent in claiming a tax deduction depends upon both the legitimacy of the underlying investment and due care in the claiming of the deduction 82_f3d_918 9th cir affg tcmemo_1994_217 see greene v commissioner supra a taxpayer may avoid liability for negligence penalties under some circumstances if the taxpayer reasonably relied on competent professional advice see 89_tc_849 affd 904_f2d_1011 5th cir affd on other issue 501_us_868 such reliance however is not an absolute defense to negligence but rather a factor to be considered id moreover the taxpayer must show that the professional adviser had the expertise and knowledge of the pertinent facts to provide informed advice on the subject matter id the facts pertinent to the instant case relating to the structure formation and operation of blythe i are as discussed in utah jojoba i research v commissioner supra with the exception of a few specific dates and dollar amounts blythe i was organized in date as a limited_partnership for the described purpose of conducting research_and_development r d involving the jojoba plant the offering dated date provided for a maximum capitalization of dollar_figure consisting of limited_partnership units at dollar_figure per unit bach unit required a cash downpayment of dollar_figure anda noninterest--bearing promissory note in the principal_amount of dollar_figure payable in annual installments with an acceleration provision in the event of default the offering was limited to investors with a net_worth exclusive of home furnishings and automobiles of dollar_figure or investors whose net_worth was dollar_figure exclusive of home furnishings and automobiles and who anticipated that for the taxable_year of the investment they would have gross_income equal to dollar_figure or taxable_income a portion of which but for tax-advantaged investments would be subject_to a federal_income_tax rate of percent petitioner invested in four limited_partnership units which reguired an initial downpayment of dollar_figure and execution of a promissory note for dollar_figure with payments of dollar_figure each year from through dollar_figure per year from through and a final payment of dollar_figure in on the promissory note the record reflects that the dollar_figure due in and the dollar_figure due in totaling dollar_figure were paid in petitioner defaulted on the remainder due on the promissory note -- - the offering identified william kellen mr kellen as the general_partner and u s agri as the contractor for the r d program under an r d agreement additionally a license agreement between blythe i and u s agri granted u s agri the exclusive right to utilize technology developed for blythe i for years in exchange for a royalty of percent of all products produced the offering included copies of both the r d agreement and the license agreement the r d agreement was executed concurrently with the license agreement according to its terms the r d agreement expired upon the partnership's execution of the license agreement since the two were executed concurrently amounts paid to u s agri by the partnership were not paid pursuant to a valid r d agreement but were passive investments in a farming venture under which the investors' return if any was to be in the form of a royalty pursuant to the licensing agreement thus as this court held in utah jojoba i research v commissioner tcmemo_1998_6 the partnership was never engaged in research or experimentation either directly or indirectly moreover this court found in utah jojoba i research v commissioner supra that u s agri's attempts to farm jojoba commercially did not constitute research_and_development thereby concluding that the r d agreement was designed and entered into solely to decrease the cost of participation in the jojoba farming venture for the limited partners through large upfront deductions for expenditures that were actually capital contributions the court concluded further that the partnership was not involved in a trade_or_business and had no realistic prospect of entering into a trade_or_business with respect to any technology that was to be developed by u s agri petitioner here contends that his investment in blythe i was motivated solely by the potential to earn a profit petitioner contends further that his reliance on the advice of his certified_public_accountant and tax attorney mr mcdevitt should absolve him of liability for the negligence_penalty in this case petitioner also argues that taking into account his experience and the nature of the investment in blythe i he exercised the due care that a reasonable and ordinarily prudent person would have exercised under like circumstances for the reasons set forth below the court does not agree with petitioner's contentions first the principal flaw in the structure of blythe i was evident from the face of the very documents included in the offering a reading of the r d agreement and licensing agreement both of which were included as part of the offering plainly shows that the licensing agreement canceled or rendered ineffective the r d agreement because of the concurrent execution of the two documents thus the partnership was never engaged either directly or indirectly in the conduct of any research or experimentation rather the partnership was merely a passive investor seeking royalty returns pursuant to the licensing agreement any experienced attorney capable of reading and understanding the subject documents should have understood the legal ramifications of the licensing agreement canceling out the r d agreement however petitioner's tax attorney mr mcdevitt obviously failed to review diligently the offering prior to advising petitioner to invest in blythe i it is also clear from the record that petitioner failed to scrutinize carefully the offering himself secondly in making his investment in blythe i petitioner relied on the advice of his certified_public_accountant and tax attorney mr mcdevitt and mr moore who was a promoter for the partnership mr mcdevitt made only a cursory review of the offering and made no objection to petitioner's investment in blythe i when asked at trial whether he endorsed the investment mr mcdevitt stated that endorse might be too strong a word mr mcdevitt did not give petitioner a written opinion about the investment nor did he conduct any independent research or consult any type of agricultural or jojoba plant expert about the investment instead he relied solely on the representations made in the offering moreover at trial mr mcdevitt claimed that at the time he advised petitioner about blythe i he had prior experience with agricultural partnerships and research_and_development partnerships yet no evidence about the amount scope and nature of such experience was produced mr mcdevitt failed to conduct any independent investigation to determine whether the specific research_and_development proposed to be conducted by or on behalf of the partnership would have qualified for deductions under sec_174 it is also notable that mr mcdevitt had no background or experience in the area of jojoba plants there is no evidence in the record to suggest that petitioner or his wife ever guestioned mr mcdevitt about the facts and or legal analysis upon which he based his recommendations further the record is devoid of any evidence that petitioner asked mr mcdevitt to explain the blythe i investment to him particularly those portions of the offering that he had opted not to read or apparently was unable to understand the facts in this case are similar to those in glassley v commissioner tcmemo_1996_206 in which this court found that the taxpayers acted on their fascination with the idea of participating in a jojoba farming venture and their satisfaction with tax benefits of expensing their investments which were clear to them from the promoter’s presentation they passed the offering circular by their accountants for a glance similarly petitioner here acted on his enthusiasm for the potential uses of jojoba and acted with knowledge of the tax benefits of making the investment the evidence in this record suggests that the nature of the advice given by mr mcdevitt was highly generalized and based primarily on a mere cursory review of the offering rather than on independent knowledge research or analysis petitioner failed to show that mr mcdevitt had the expertise and knowledge of the pertinent facts to provide informed advice on the investment in blythe i see freytag v commissioner t c pincite accordingly petitioner failed to establish that his reliance on the advice of mr mcdevitt was reasonable or in good_faith see glassley v commissioner supra the court next examines petitioner's reliance on the advice of mr moore petitioner admitted that he relied heavily on the advice of mr moore and the information contained in the offering in making his investment in blythe i yet mr moore also had no background or expertise in the areas of agriculture or jojoba plants in fact it appears that nearly all other potential investments recommended to petitioner by mr moore in his financial analysis were real_estate investments and that blythe i was the only investment of an agricultural nature advocated by -- - him more importantly because mr moore had a personal profit_motive in selling this investment to clients he had a conflict of interest in advising petitioner to purchase the limited_partnership interests the advice petitioner received from mr moore fails as a defense to negligence due to his lack of competence to give such advice and the clear presence of a conflict of interest see 91_tc_524 petitioner's reliance on the advice of mr moore was unreasonable under the circumstances outside of mr mcdevitt and mr moore petitioner made no other inguiry into the viability of this partnership's proposed research and operations the court finds it notable that the offering listed at least potential uses of jojoba nuts yet petitioner failed to explore the plausibility of any of those potential uses some of the potential uses listed in the offering were various lubricants for high-speed or high- temperature machinery cosmetics shampoos and soaps sunscreens pharmaceuticals cooking oils disinfectants polishing waxes corrosion inhibitors candles animal feed supplements and fertilizer being a physician it seems logical that petitioner would have had some access to information about the commercial petitioner acknowledged in his testimony that he knew mr moore was receiving commissions for finding investors to purchase the limited_partnership interests -- - use of jojoba in the pharmaceutical arena however petitioner failed to pursue this possibility petitioner's failure to investigate independently any of the enumerated potential uses of jojoba plants was unreasonable under the circumstances petitioner had no legal background or training limited agricultural background or training and no prior background with jojoba plants yet he consulted few if any sources of such information prior to investing in blythe i petitioner's limited youthful background with the growth and sale of coffee and citron should have educated petitioner that no two plant species respond to identical treatment and that each has a different potential for commercial production and sales ’ petitioner appears to argue that it would have been difficult for him to locate an appropriate expert to examine the investment on the contrary the court does not believe that petitioner would have experienced a great degree of difficulty in contacting the agricultural department of a nearby college or university or going to another reliable source to inquire about the research_and_development of jojoba plants and their potential commercial usage if any a indeed petitioner testified that the commercial market for coffee was much larger and more lucrative than that for citron reasonable and ordinarily prudent investor would have at least attempted to make this type of inquiry under the circumstances petitioner was not a naive investor and should have recognized the need for independent professional advice see 94_tc_637 affd without published opinion 956_f2d_274 9th cir affd in part without published opinion sub nom cowles v commissioner 949_f2d_401 10th cir glassley v commissioner tcmemo_1996_206 in fact the offering cautioned that prospective investors should not construe this memorandum or any prior or subsequent communications as constituting legal or tax_advice and urged investors to consult their own counsel as to all matters concerning this investment the offering was replete with statements including the cover page statement that this offering involves a high degree of risk warning of tax risks involved with the investment and the highly speculative nature of the commercial viability of the jojoba plant the offering contained inconsistent information such as the statement on page that the general_partner has limited experience in dealing in petitioner testified that at the time of his investment in blythe i he was aware of jojoba research being conducted at the university of california at riverside and the university of arizona at tucson also in utah jojoba i research v commissioner tcmemo_1998_6 the court noted that there were experimental jojoba plantations located at the university of california at riverside of which the general_partner of blythe i mr kellen was aware -- - jojoba beans and is mainly relying on the r d contractor to develop technology and plant cultivars over the term of the r d agreement contrasted with the statement on page that the general_partner pioneered the development of the blythe airport as an alfalfa ranch and jojoba farming in desert center and was familiar with the development of jojoba citrus vineyards alfalfa and asparagus such inconsistencies should have raised a healthy suspicion in the mind of a reasonable and ordinarily prudent investor even one lacking any legal tax or agricultural background however petitioner did not carefully read the offering nor did he make any effort to have the investment explained to him prior to committing to invest in blythe i the court is mindful that the court_of_appeals for the ninth circuit ninth circuit the court to which an appeal in this case would lie has held that experience and involvement of the general_partner and the lack of warning signs could reasonably lead investors to believe they were entitled to deductions in light of the undeveloped state of the law regarding sec_174 see 998_f2d_1514 9th cir affg in part and revg in part tcmemo_1990_380 in its holding the ninth circuit explained that the supreme court's decision in 416_us_500 left unclear the extent to which research must be in connection with a trade_or_business for purposes of qualifying for an immediate deduction under sec_174 however in the instant case the partnership was neither engaged in a trade_or_business nor conducting research_and_development either directly or indirectly additionally the experience in jojoba research_and_development of the general_partner of blythe i mr kellen was questionable at best as evidenced by conflicting statements in the offering also it is apparent from the evidence presented in this case that mr kellen had minimal involvement in the partnership petitioner is precluded from relying upon a lack of warning as a defense to negligence when there is no evidence that a reasonable investigation was ever made and the offering materials contained many warnings of the tax risks associated with the investment on this record the court finds that petitioner did not exercise the due care of a reasonable and ordinarily prudent person under the circumstances consequently the court holds that petitioner is liable for the negligence additions to tax under sec_6653 and for each of the years at issue respondent is sustained on this issue the second issue is whether petitioner is liable for the addition_to_tax under sec_6661 for a substantial_understatement of tax for sec_6661 as amended by the omnibus budget reconciliation act of publaw_99_509 - - sec_8002 100_stat_1951 provides for an addition_to_tax of percent of the amount of any underpayment attributable toa substantial_understatement_of_income_tax for the taxable_year a substantial_understatement_of_income_tax exists if the amount of the understatement exceeds the greater of percent of the tax reguired to be shown on the return or dollar_figure sec_6661 b a generally the amount of an understatement is reduced by the portion of the understatement that the taxpayer shows is attributable to either the tax treatment of any item for which there was substantial_authority or the tax treatment of any item with respect to which the relevant facts were adequately disclosed on the return sec_6661 b if an understatement is attributable to a tax_shelter_item however different standards apply first in addition to showing the existence of substantial_authority a taxpayer must show that he reasonably believed that the tax treatment claimed was more_likely_than_not proper sec_6661 c ii second disclosure whether or not adequate will not reduce the amount of the understatement sec_6661 b c i substantial_authority exists when the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary positions sec_1 b income_tax regs petitioner has failed to --- - show that substantial_authority existed for the tax treatment of the blythe i loss on his return adequate_disclosure of the tax treatment of a particular item may be made either in a statement attached to the return or on the return itself if it 1s in accordance with the requirements of revproc_83_21 1983_1_cb_680 sec_1 b and c income_tax regs the record indicates that petitioner did not attach a statement to his return disclosing the specific facts surrounding the blythe i loss deduction revproc_83_21 supra applicable to tax returns filed in lists information that would be deemed sufficient disclosure if listed on the return itself without the necessity of attaching an additional statement to the return however none of the specific tax items referenced in revproc_83_21 supra are relevant to the instant case if disclosure is not made in compliance with the regulations or the revenue_procedure adequate_disclosure on the return may still be satisfied if sufficient information is provided to enable respondent to identify the potential controversy involved schirmer v commissioner 89_tc_277 however a mere claiming of the loss without further explanation is not sufficient to alert respondent to the controversial sec_174 deduction of which the partnership loss consisted petitioner has failed to show that the relevant facts pertaining to his -- - blythe i loss deduction were adequately disclosed on his return finally sec_6661 provides the secretary with the discretion to waive the sec_6661 addition_to_tax if the taxpayer shows he acted with reasonable_cause and in good_faith this court reviews the secretary’s failure to waive the addition_to_tax for abuse_of_discretion see 110_tc_189 petitioner argues that he acted in good_faith and reasonably relied upon the advice of mr mcdevitt in claiming the relevant loss however nothing in the record indicates that petitioner requested a waiver for good_faith and reasonable_cause under sec_6661 in the absence of such a request this court cannot review respondent’s determination for an abuse_of_discretion see id in any event petitioner has not shown that he met the tests of reasonable_cause and good_faith petitioner failed to prove that he had substantial_authority for his treatment of the partnership loss and that he adequately disclosed the relevant facts of that treatment the understatement upon which the addition_to_tax was imposed was dollar_figure the understatement is substantial because it exceeds as noted earlier even if an adequate_disclosure had been made on the return such disclosure would not reduce the amount of the understatement attributable to a tax_shelter_item - - the greater of dollar_figure or percent of the amount required to be shown on the return on this record the court holds that petitioner is liable for the addition_to_tax under sec_6661 for a substantial_understatement of tax for respondent is sustained on this issue decision will be entered for respondent the amount required to be shown on the return was dollar_figure percent of which equals dollar_figure


qwhuqdo 5hyhqxh 6huylfh department of the treasury number release date index no attention washington dc person to contact identifying number telephone number refer reply to cc ita b06 plr-164319-01 date date legend a date date date inventory dear this letter is in reply to the ruling_request submitted on behalf of a by a’s authorized representatives pursuant to sec_301_9100-1 of the procedure and administration regulations specifically a has requested permission to revise the form_970 application to use lifo inventory_method filed for the tax_year ended date this ruling_request is made in accordance with sec_301_9100-3 on date a was organized as a partnership and classified as such for federal_income_tax purposes a received an extension until date to file its u s return of income for the tax_year ending date on date an authorized representative of a timely executed a form_970 to elect the last-in_first-out lifo_method for a’s tax_year ended date this form_970 was included with a’s return for the tax_year ended date the form_970 requested that a’s inventory excluding inventorie sec_1 and be allowed to use the earliest-acquisitions method in the determination of cost_of_goods_sold the form_970 also requested that a be permitted to use the double-extension_method to compute the lifo value of its dollar-value pools however a intended that its lifo election apply solely to its inventory moreover a used the most-recent-purchases method in determining its costs of goods sold and the link-chain_method to determine the lifo value of its dollar-value pools for its inventory a has consistently used these methods for its tax_year ended date and for all subsequent years to determine federal taxable_income further for these years a used these methods to account for its inventory for financial reporting purposes sec_472 of the internal_revenue_code provides that a taxpayer may use the lifo_method of inventorying goods specified in an application to use such method filed at such time and in such manner as the secretary may prescribe sec_1_472-3 of the income_tax regulations provides that the lifo inventory_method may be adopted and used only if the taxpayer files with its income_tax return for the tax_year as of the close of which the method is first to be used a statement of its election to use such inventory_method the statement shall be made on form_970 pursuant to the instructions printed with respect thereto and to the requirements of this section or in such other manner as may be acceptable to the commissioner sec_703 provides that generally any election affecting the taxable_income derived from a partnership must be made by the partnership sec_6031 generally provides that every partnership is required to file a return for each tax_year under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of the time to make a regulatory election under all subtitles of the code except subtitles e g h and i provided that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government sec_301_9100-1 defines a 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 an election includes an application_for relief in respect of tax and a request to adopt change or retain an accounting_method or accounting_period sec_301_9100-2 sets forth rules governing automatic extensions for regulatory elections if the provisions of sec_301_9100-2 do not apply to a taxpayer's situation the provisions of sec_301_9100-3 may apply sec_301_9100-3 sets forth the standards that the commissioner will use in determining whether to grant an extension of time to make a regulatory election it also sets forth information and representations that must be furnished by the taxpayer to enable the internal_revenue_service to determine whether the taxpayer has satisfied these standards the standards to be applied are whether the taxpayer acted reasonably and in good_faith and whether granting relief would prejudice the interests of the government under sec_301_9100-3 a taxpayer that applies for relief for failure to make an election before the failure is discovered by the service ordinarily will be deemed to have acted reasonably and in good_faith however pursuant to sec_301_9100-3 a taxpayer will not be considered to have acted reasonably and in good_faith if the taxpayer seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested or if the taxpayer was informed in all material respects of the required election and related tax consequences and chose not to make the election furthermore a taxpayer ordinarily will not be considered to have acted reasonably and in good_faith if the taxpayer uses hindsight in requesting relief sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in a taxpayer having a lower tax_liability in the aggregate for all tax years affected by the regulatory election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money sec_301_9100-3 provides that the interests of the government are ordinarily prejudiced if the tax_year in which the regulatory election should have been made or any_tax year that would have been affected by the election had it been timely made are closed by the period of limitations on assessment before the taxpayer receives the ruling granting relief under sec_301_9100-1 the information and representations furnished by a establish that it has acted reasonably and in good_faith in this request furthermore granting an extension will not prejudice the interests of the government accordingly an extension of time is hereby granted for a to file a modified form_970 for the tax_year ended date this extension shall be for a period of days from the date of this ruling please attach a copy of this ruling to the form_970 when it is filed no opinion is expressed as to the application of any other provisions of the code or the regulations which may be applicable specifically no opinion is expressed in regard to a’s use of the lifo_method pursuant to a power_of_attorney on file in this office a copy of this ruling is being sent to each of a's authorized representatives this ruling is directed only to a sec_6110 provides that it may not be used or cited as precedent sincerely james atkinson deputy associate chief_counsel income_tax accounting


t c memo united_states tax_court julian w mandody petitioner v commissioner of internal revenue respondent docket no 8822-03l filed date julian w mandody pro_se francis c mucciolo for respondent memorandum opinion vasquez judge this case is before the court on respondent’s motion for summary_judgment rule a provides that either party may move for summary_judgment upon all or any part of the legal issues in controversy unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials fla peach corp v commissioner 90_tc_678 full or partial summary_judgment is appropriate if the pleadings answers to interrogatories depositions admissions and any other acceptable materials together with the affidavits if any show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law rule b 98_tc_518 affd 17_f3d_965 7th cir the moving party bears the burden of proving that there is no genuine issue of material fact and factual inferences will be read in a manner most favorable to the party opposing summary_judgment 85_tc_812 79_tc_340 upon consideration of the record and viewing it in a light most favorable to petitioner material issues of fact are in dispute accordingly we shall deny respondent’s motion for summary_judgment petitioner and respondent dispute what issues petitioner raised and what actually transpired at the sec_6330 hearing respondent contends that petitioner did not submit requested documents eg a form 433-a collection information statement for individuals or a completed offer_in_compromise oic to the settlement officer we note that respondent did not call the settlement officer as a witness petitioner credibly testified that he submitted a copy of a completed oic to the settlement officer and informed her that the oic had been submitted to the internal_revenue_service irs in date before the sec_6330 hearing petitioner also credibly testified that he raised the issue of reinstating an installment_agreement that had been defaulted because of one late return that he submitted and resubmitted a completed form a and that he submitted other documents to the settlement officer petitioner also credibly testified that the settlement officer refused to consider or would not reconsider documents he submitted to the irs before the sec_6330 hearing petitioner also credibly testified that there were misunderstandings between him and the settlement officer regarding what years needed to be covered and what information needed to be submitted respondent at the hearing in our court noted that petitioner’s testimony contradicted administrative records prepared by the settlement officer and submitted by respondent as an attachment to the motion for summary_judgment as stated supra factual inferences will be read in a manner most favorable to the party opposing summary_judgment dahlstrom v commissioner supra pincite jacklin v commissioner supra pincite we further note that respondent objected to the admission of four documents received at the court hearing on the grounds that they were not part of the administrative record petitioner credibly testified that all of these documents had been provided to the irs at some point possibly before the sec_6330 hearing and that at least some of these documents were submitted to the settlement officer as part of the sec_6330 hearing accordingly the issue of what documents should be contained in petitioner’s administrative record also is in dispute material facts remain in dispute accordingly summary_judgment is inappropriate at this juncture to reflect the foregoing an appropriate order will be issued


tax_exempt_and_government_entities_division release number release date uil code department of the treasury internal_revenue_service tege eo examinations mail stop dal commerce st dallas texas date date taxpayer_identification_number person to contact employee identification_number employee telephone number phone fax certified mail - return receipt dear this is a final adverse determination regarding your exempt status under sec_501 of the internal_revenue_code you are no longer exempt under sec_501 of the code for the tax_year ending june 20xx the revocation of your exempt status was made for the following reason s you are not operated under the lodge_system thus you fail to meet the requirements of sec_501 which requires an organization to operate under the lodge_system or for the exclusive benefit of the members of a fraternity itself operating_under_the_lodge_system in order to be exempt under sec_501 you are required to file an income_tax return on form_1120 for the tax_year ending june 20xx with the appropriate service_center in accordance with the instructions of the return processing of income_tax returns and assessments of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination you may file an action for declaratory_judgment under the provisions of sec_7428 of the code in one of the following three venues united_states tax_court the united_states court of federal claims or the united_states district_court for the district of columbia a petition or complaint in one of these three courts must be filed within days from the date this determination_letter was mailed to you please contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory_judgment by referring to the enclosed publication you may write to the courts at the following addresses united_states tax_court second street n w washington d c u s court of federal claims madison place n w washington d c u s district_court for the district of columbia constitution ave n w washington d c the taxpayer_advocate_service tas is an independent organization within the irs that can help protect your taxpayer rights tas can offer you help if your tax problem is causing a hardship or you've tried but haven't been able to resolve your problem with the irs if you qualify for tas assistance which is always free tas will do everything possible to help you visit www taxpayeradvocate irs gov or call if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely maria hooke director eo examinations enclosures publication department of the treasury sz yi internal_revenue_service irs tax exempt and government entities exempt_organizations examinations date date taxpayer identification saentier number form tax_year s ended person to contact id number contact numbers telephone fax manager's name d number manager's contact number response due_date certified mail - return receipt requested dear why you are receiving this letter we propose to revoke your status as an organization described in sec_501 c of the internal_revenue_code code enclosed is our report of examination explaining the proposed action what you need to do if you agree if you agree with our proposal please sign the enclosed form_6018 consent to proposed action - sec_7428 and return it to the contact person at the address listed above unless you have already provided us a signed form we'll issue a final revocation letter determining that you aren't an organization described in sec_501 if we don't hear from you lf you don’t respond to this proposal within calendar days from the date of this letter we'll issue a final revocation letter failing to respond to this proposal will adversely impact your legal standing to seek a declaratory_judgment because you failed to exhaust your administrative remedies effect of revocation status if you receive a final revocation letter you'll be required to file federal_income_tax returns for the tax_year s shown above as well as for subsequent tax years - what you need to do if you disagree with the proposed revocation if you disagree with our proposed revocation you may request a meeting or telephone conference with the supervisor of the irs contact identified in the heading of this letter you also letter rev catalog number 34809f may file a protest with the irs appeals_office by submitting a written request to the contact person at the address listed above within calendar days from the date of this letter the appeals_office is independent of the exempt_organizations division and resolves most disputes informally for your protest to be valid it must contain certain specific information including a statement of the facts the applicable law and arguments in support of your position for specific information needed for a valid protest please refer to page one of the enclosed publication how to appeal an irs decision on tax-exempt status and page six of the enclosed publication the examination process publication also includes information on your rights as a taxpayer and the irs collection process please note that fast track mediation referred to in publication generally doesn’t apply after we issue this letter you also may request that we refer this matter for technical_advice as explained in publication please contact the individual identified on the first page of this letter if you are considering requesting technical_advice if we issue a determination_letter to you based on a technical_advice_memorandum issued by the exempt_organizations rulings and agreements office no further irs administrative appeal will be available to you contacting the taxpayer_advocate office is a taxpayer right you have the right to contact the office_of_the_taxpayer_advocate their assistance isn't a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate can't reverse a legally correct_tax determination or extend the time you have fixed by law to file a petition in a united_states court they can however see that a tax matter that hasn't been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service office_of_the_taxpayer_advocate letter rev catalog number 34809f for additional information if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely margaret von lienen director eo examinations enclosures report of examination form_6018 publication publication letter rev catalog number 34809f schedule number or exhibit form 886-a rev date name of taxpayer tax identification_number year period ended 20xx explanations of items issue whether should continue to qualify for exemption as an organization described in the internal_revenue_code irc sec_501 fact sec_29 sec_15xx for the purpose of the following was chartered under the laws of bucks county on april maintaining a society for the promotion and cultivation of the science of vocal music and to aid and assist is members in case of sickness and distress and for the promotion of social intercourse and enjoyment among each other the organization was incorporated under the laws of the state of on may 18xx for the above stated purpose as a charitable_organization the organization received its determination_letter on august 20xx the organization is an independent organization and has no subordinates the organization is not operated under the lodge_system the organization’s receipts are derived from membership dues and operation of a social_club for its members the receipts from the club are substantial and are derived from bar sales and various amusement devices law sec_501 of the code describes certain organizations exempt from federal_income_tax under sec_501 and as pertinent here reads in part as follows civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare clubs organized and operated exclusively for pleasure recreation and other nonprofitable purposes no part of the net_earnings of which inures to the benefit of any private shareholder fraternal beneficiary societies orders or associations a operate under the lodge_system or for the exclusive benefit of the members of a fraternity itself operating_under_the_lodge_system and b provide for the payment of life sick accident or other_benefits to the members of such society order or association and their dependents form 886-a department of the treasury-internal revenue service catalog number 20810w - page_1 publish no irs gov schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number year period ended 20xx internal revenue regulation c -1 fraternal beneficiary societies a fraternal beneficiary society is exempt from tax only if operated under the lodge_system or for the exclusive benefit of the members so operating operating_under_the_lodge_system means carrying on its activities under a form of organization that comprises local branches chartered by a parent organization and largely self-governing called lodges chapters or the like that the society have an established system for the payment to its members or their dependents of life sick accident or other_benefits in order to be exempt it is also necessary revrul_63_190 1963_2_cb_212 states in part a non-profit organization not operated under the lodge_system which maintains a social_club for member and also provides sick and death_benefits for members and their beneficiaries does not qualify for exemption from federal_income_tax as either a social_club under sec_501 a civic league under sec_501 or a fraternal beneficiary society under sec_501 of the internal_revenue_code of operating_under_the_lodge_system as contemplated in sec_501 of the code means carrying out activities under a form of organization that comprises local branches chartered by a parent organization and largely self-governing called lodges chapters or the like the organization maintains a social_club for its members as described in sec_501 and in addition pays sick and death payments to its members the payment of sick and death_benefits is not a function of a social_club 23_tc_1017 affirmed fed 2d organizations described in sec_501 of the code comprise those not organized for profit but operated exclusively for purposes beneficial to the community as a whole and in general include organizations engaged in promoting the welfare of mankind sec_1 c of the income_tax regulations provides that an organization is not operated primarily for the promotion of social welfare if its primary activity is operating a social_club for the benefit pleasure or recreation of its members there is no provision in the code for exemption from income_tax of an organization having a combination of functions such as the one herein a case in point is allgemeiner arbeiter verin v commissioner 25_tc_471 affirmed fed 2d in that case the tax_court of the united_states had before it the question of exemption of an organization which was formed to provide mutual assistance of sickness or death of its members but which expanded its scope to include intensive social activities the court held that where one activity carried on by the organization prevents it from satisfying the requirements of sec_101 of the internal_revenue_code_of_1939 and sec_101 of the code the petitioner is not an exempt_organization notwithstanding that an organization carry on its sole activity either of the two principal functions carried on by the petitioner might qualify for an exemption under one of the two foregoing provisions form 886-a department of the treasury-internal revenue service publish no irs gov catalog number 20810w - page_2 schedule number or exhibit form 886-a rev date explanations of items tax identification_number year period ended name of taxpayer the court stated there is no statutory authority whatever the equities permitting the exemption of an organization however worthy which cannot fit itself within one of the various subdivisions of sec_101 of the now sec_501 of the code 20xx operating_under_the_lodge_system as contemplated in sec_501 of the code means carrying on activities under a form of organization that comprises local branches charter by a parent organization and largely self-governing called lodges chapters or the like sec_1_501_c_8_-1 of the regulations is not operated under the lodge_system in view of the foregoing the organization does not qualify for exemptions from federal_income_tax as organization described in sec_501 or of the code taxpayer’s position the organization has not declared a position government’s position and conclusion the organization is not operated under a lodge_system thus it fails to meet the requirements of sec_501 in which it must operate under the lodge_system or for the benefit of the members of a fraternity itself operating_under_the_lodge_system if you agree to this conclusion please sign the attached forms if you disagree please submit a statement of your position publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc tege eb ec-plr-118086-01 date date target acquiring acquiring sub date a date b date c year executive this is in reply to your letter dated date requesting rulings concerning the deduction limitation of sec_162 of the internal_revenue_code the facts as represented by acquiring are as follows on date a target entered into an agreement and plan of merger with acquiring and acquiring sub a wholly-owned subsidiary of acquiring pursuant to the agreement and plan of merger acquiring sub commenced a cash tender offer to purchase all the outstanding_stock of target following the stock purchase target merged with acquiring sub and target became a wholly-owned subsidiary of acquiring the merger occurred on date b and target’s final separate consolidated tax_year ended on that date target’s stock was deregistered as a listed security on date c acquiring represents that target will not be required to file any reports or statements with the securities_and_exchange_commission sec that disclose executive compensation under item of regulation s-k for its short_year that ends with the merger target will not file a summary compensation table disclosing the compensation of target’s ceo and target’s four highest paid officers for the short_year ending with the merger plr-118086-01 acquiring represents that none of the target executives will be included in the summary compensation table for year the year of the merger to be filed by acquiring thus the compensation paid and deducted by target in its short taxable_year ending with the merger will never be reported on a summary compensation table filed by either acquiring or target executive resigned in year executive may be listed pursuant to the executive compensation disclosure rules under the securities exchange act of exchange act as the chief_executive_officer or one of the highest compensated officers for year sec_162 of the code allows as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business including a reasonable allowance for salaries or other compensation_for_personal_services actually rendered sec_162 of the code provides that in the case of any publicly_held_corporation no deduction shall be allowed for applicable_employee_remuneration with respect to any covered_employee to the extent that the amount of the remuneration for the taxable_year exceeds dollar_figure sec_162 of the code defines covered_employee to mean any employee of the taxpayer if as of the close of the taxable_year such employee is the chief_executive_officer of the taxpayer or is an individual acting in such capacity or the total compensation of such employee for the taxable_year is required to be reported to shareholders under the exchange act by reason of such employee being among the highest compensated officers for the taxable_year other than the chief_executive_officer sec_1_162-27 of the income_tax regulations provides the general_rule for who is a covered_employee under the regulations a covered_employee means any individual who on the last day of the taxable_year is a the chief_executive_officer of the corporation or is acting in such capacity or b among the four highest compensated officers other than the chief_executive_officer whether an individual is the chief_executive_officer or one of the four highest compensated officers is determined pursuant to the executive compensation disclosure rules under the exchange act in the notice of proposed rulemaking containing the proposed_regulations under sec_162 the preamble contains the following language concerning the identification of covered_employee the regulations clarify which employees are covered employees for purposes of sec_162 the legislative_history to sec_162 provides that covered employees are defined by reference to the sec rules governing executive compensation disclosure under the exchange act under the regulations an individual generally is a covered_employee if the individual’s compensation is reported on the summary plr-118086-01 compensation table under the sec’s executive compensation disclosure rules as set forth in item of regulation s-k cfr under the exchange act however the regulations specifically provide that in order to be a covered_employee for sec_162 purposes an individual must be employed as an executive officer on the last day of the taxable_year thus only those employees who appear on the summary compensation table and who are also employed on the last day of the taxable_year are covered employees therefore based on the facts submitted we rule as follows for purposes of sec_162 of the code target’s officers will not be covered employees with respect to year of the merger because no summary compensation table is required to be filed by target with the sec for the year of the merger and those officers will not be listed on any summary compensation table filed by acquiring for the year of the merger for purposes of sec_162 of the code executive will not be a covered_employee with respect to year accordingly no compensation paid to executive with respect to year will be subject_to the sec_162 deduction limitation except as specifically ruled above no opinion is expressed as to the federal tax consequences of the transaction described above under any other provision of the code this ruling is directed only to the taxpayer s 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 the taxpayer sincerely yours robert b misner assistant chief executive compensation branch office of the division counsel associate chief_counsel tax exempt and government entities enclosure copy for purposes