t c memo united_states tax_court estate of william g adams jr deceased gkorge w saenger executor petitioner v commissioner of internal revenue respondent docket no filed date george w saenger pro_se james be gray and steven webster for respondent memorandum findings_of_fact and opinion colvin judge respondent determined a dollar_figure deficiency in the estate_tax of the estate of william g adams jr decedent after concessions the sole issue for decision is whether the fair_market_value of decedent’ sec_61 59-percent interest in waddell sluder adams co inc wsa on september - - was dollar_figure as respondent determined or dollar_figure as the estate contends we hold that it was dollar_figure unless otherwise specified section references are to the internal_revenue_code as amended and in effect on the date of decedent’s death and rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and are so found a decedent and the executor decedent who lived in asheville north carolina died testate on date when he died he owned shares of wsa voting common_stock which was dollar_figure percent of its outstanding_stock voting common_stock was wsa’s only outstanding_stock when decedent died george w saenger the executor of decedent’s estate lived in asheville north carolina when the petition was filed b waddell sluder adams co inc insurance_business wsa has been an s_corporation since the early 1970s it has two components a retail insurance agency and a managing general insurance agency mga in the retail agency generated percent of wsa’s revenue and the mga generated percent the retail agency sells insurance to the public when decedent died and until the time of trial wsa had a contract with the maryland casualty co mcc to be an mga the contract provides that mcc is the sole supplier of insurance to the mga and that wsa has the exclusive right to sell personal and commercial lines of insurance for mcc in counties in western north carolina in to percent of wsa’s business came from personal lines wsa was mcc’s only mga in mcc or wsa could terminate the contract at any time by giving days’ written notice to the other party wsa sells insurance for mcc through about independent retail insurance agents independent agents may obtain insurance for their customers from any insurance_company wsa processes insurance applications from customers of the retail agents and makes underwriting decisions if wsa accepts an application it sets the premium issues the policy to the retail agent and pays the premium to mcc mcc then pays part of the premium to wsa wsa uses these funds to pay its expenses and the retail agents and keeps the excess as profit the retail agents have contracts with wsa which establish the amounts of commissions they will receive for selling mcc products wsa would not be a viable business without its relationship with mcc or if it could not sell personal lines of insurance key personnel a decedent decedent began working for wsa in the mid-1940s he became president of wsa around and he worked for wsa until april or date he worked fewer hours in his later years his primary function in those later years was to set wage and bonus levels for wsa officers b robert b gelder jr robert b gelder jr gelder was born in and has lived in asheville north carolina since he graduated from the university of north carolina he worked for years for ncnb now bank of america he began working for wsa in gelder spent his first year at wsa learning the insurance_business in wsa’s insurance underwriting was divided between property and casualty lines of coverage gelder became the manager for personal and commercial lines of casualty insurance after months at wsa he began to perform underwriting services ie to assess risk for applicants of property insurance policies around he developed marketing skills and gained experience in all aspects of underwriting for wsa he developed and maintained a close relationship with the independent agents who sold wsa products and with mcc personnel he became the sole liaison between wsa and mcc beginning around he began managing wsa around he became the general - manager and president of wsa in in his duties included maintaining wsa’s relationship with mcc and the retail agents in western north carolina he has performed all of the management functions for wsa since gelder has no written employment contract or noncompete agreement with wsa wsa had no other employee who could replace gelder in gelder’s compensation and dividends from wsa for were as follows wages dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dividends big_number big_number big_number big_number total big_number big_number big_number big_number big_number c julia adams slipher julia adams slipher slipher is decedent’s daughter slipher began working for wsa in as an assistant bookkeeper she later began underwriting personal lines of insurance and she was responsible for underwriting property insurance coverage for commercial middle markets not otherwise described in the record in slipher could not have done gelder’s job in officers and employees on date wsa’s officers were gelder president slipher vice president and secretary and decedent treasurer on that date wsa had employees in addition to gelder slipher and decedent -- - stock holdings on date on date decedent gelder and slipher owned wsa’s stock as follows percentage shareholder no of shares of total william g adams jr dollar_figure robert b gelder jr dollar_figure julia adams slipher dollar_figure total dollar_figure zurich insurance group’s purchase of mcc the zurich insurance group zurich purchased mcc in the late 1980s zurich considered implementing a service_center concept for mcc which would have caused wsa to lose underwriting authority eliminated the need for wsa to serve as an mga or as a retail agency and eliminated the work done with wsa by the independent agents throughout western north carolina wsa opposed imposition of the service_center concept in the counties which it serviced and zurich eventually abandoned the concept through considerable effort gelder maintained and improved wsa’s relationship with zurich pending litigation the north carolina rate bureau represents insurance_companies before the insurance commissioner of north carolina in the rate bureau commenced litigation with the insurance commissioner which potentially affected wsa if the rate bureau had prevailed wsa would have been required to pay about dollar_figure - to zurich to be refunded to wsa’s customers that litigation was pending on date opinion a contentions of the parties the estate contends that the value of decedent’ sec_178 shares of wsa stock a 59-percent interest on date was dollar_figure respondent contends that the value was dollar_figure on that date a tax is imposed on the fair_market_value of the decedent’s property on the date of death sec_2001 sec_2031 the fair_market_value of property is the price at which the property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts sec l b estate_tax regs sec_25_2512-1 gift_tax regs the estate bears the burden_of_proof rule a both parties rely on the testimony of experts to establish the fair_market_value of decedent’s wsa stock we may accept or reject expert testimony according to our own judgment and we may ' in objecting to the estate’s proposed ultimate finding of fact respondent contends that the fair_market_value was dollar_figure however respondent’s proposed ultimate finding of fact is that the value of decedent’s interest in wsa was dollar_figure the value that respondent determined respondent does not explain this difference the estate concedes that sec_7491 does not apply because the examination began before date --- - be selective in deciding what parts of an expert's opinion if any we accept 304_us_282 herbert t spiro spiro testified for respondent f foster shriner shriner testified for the estate shriner and spiro estimated and computed the present_value of future returns an investor would receive from an investment in wsa they did so by calculating the present_value of the stream of estimated future cashflows to wsa spiro concluded that the fair_market_value of the shares at issue was dollar_figure on date shriner concluded that it was dollar_figure b spiro’s and shriner’s expert reports we believe that shriner’s approach for estimating the value of wsa stock before applying a discount for lack of marketability was more thorough than spiro’s spiro did not speak with anyone from mcc or investigate the pending kevin m stipe also testified for the estate however the estate does not rely on stipe’s estimate even though it was more favorable to the estate than shriner’s estimate we do not consider stipe’s estimate of value --- - litigation shriner did those things and reasonably concluded that it was unlikely that wsa would survive without gelder cc whether shriner properly estimated gelder’s future compensation respondent contends that shriner underestimated future net cashflows by overestimating future compensation to gelder on the basis of spiro’s testimony respondent contends that shriner should have used dollar_figure per year as gelder’s future compensation we disagree gelder’s salary in was dollar_figure and his salary and dividends totaled dollar_figure spiro acknowledged that gelder was a key_employee and that no one would buy wsa without gelder we do not believe that gelder could have been replaced for dollar_figure per year respondent contends that wsa could have found a suitable replacement for gelder in and that gelder had no attractive employment alternative we disagree slipher testified that it was unlikely that anyone could assume gelder’s responsibilities because few people understood as well as did gelder the market the industry underwriting and management as they affect wsa in his report spiro said not having interviewed persons in authority at the maryland in it is impossible to determine conclusively whether or not the maryland would have cancelled or materially modified wsa’s personal lines underwriting authority upon the transfer of mr adams’ interest to another party -- - spiro projected gelder’s future salary based on the salary of the top percent of underwriters even though gelder spent only or percent of his time underwriting spiro’s methodology ignores the fact that gelder did much more than underwriting shriner used insurance industry data for officers and managers to estimate gelder’s future compensation that data shows that officers of companies in the insurance industry with assets of dollar_figure million received compensation of percent of gross revenues shriner estimated that future compensation of wsa officers would be percent of wsa’ss gross revenues we believe that shriner reasonably estimated gelder’s future compensation respondent contends that shriner should have assumed that wsa would make payouts to investors at the middle of the year midyear convention rather than at the end of the year yearend convention respondent contends that shriner’s approach is incorrect because he artificially treats net cashflows as not received until the end of each year we disagree there is support for use of the yearend convention on the grounds that payment at the end of the year is better than payment in the middle of the year because payment at the end of the year enables the managers to see how the year has turned out pratt cost of capital estimations and applications we do not apply the midyear convention here because respondent offered no evidence that wsa would pay its investors at the middle of the year rather than at the end of the year d estimating the discount and capitalization rates shriner used the income capitalization method and spiro used the discounted cashflow method to estimate the fair_market_value of wsa stock in the discounted cashflow method a discount rate is applied to a series of future cashflow periods eg each year in the future that the asset will produce a return on investment to estimate present_value in the income capitalization method the future cashflow of a single period eg the next year is estimated an estimated growth rate is applied to project the cashflow for that single period into the future an estimated discount rate is applied to reduce the projected future cashflows to present_value a capitalization rate combines the estimated growth rate and the discount rate it is applied to the estimated future cashflow of the single period neither party contends that the other’s method is inappropriate here both experts began their analyses by estimating a discount rate to apply to wsa’s projected net cashflow using the build- up method they both used a rate of return on risk-free investments risk-free rate of dollar_figure percent which was the year treasury rate for date added risk premiums both experts increased the 86-percent rate to account for risks that an investor in wsa would assume ie added risk premiums spiro and shriner both added a 03-percent equity risk premium to account for the fact that the rate of return on stock is less certain than on u s treasury obligations they obtained this value which is based on investment returns of c corporations from stocks bonds bills and inflation yearbook by ibbotson associates inc both experts added a 25-percent risk premium to account for the fact that wsa was a small company both experts based this added risk premium on data from ibbotson associates spiro also added a 10-percent risk premium to account for potential loss of personal lines of underwriting authority and the fact that wsa is an s_corporation shriner added a percent risk premium dollar_figure percent for wsa’s tenuous relationship with zurich and percent for its thin management and the importance of gelder the sum of the risk-free rate and added risk premiums equaled a discount rate of dollar_figure percent for spiro and dollar_figure percent for shriner adding the equity risk premium to the risk-free rate is a widely accepted method brealey myers principles of corporate finance 5th ed pratt cost of capital estimation and application sec_62 deriving a capitalization rate shriner derived a capitalization rate of dollar_figure percent from his estimated discount rate and from his estimated future average annual growth rate of dollar_figure percent for wsa respondent does not dispute shriner’s estimated growth rate or capitalization rate we accept shriner’s estimate of a capitalization rate of dollar_figure percent however we do not accept an increase that shriner made to that rate for reasons discussed next whether shriner properly converted the capitalization rate from an after corporate tax_rate to a before corporate tax_rate the net cashflow and the capitalization rate used to compute the fair_market_value of the wsa stock should have the same tax character e before corporate tax or after corporate tax see gross v commissioner tcmemo_1999_254 both the discount rate and cashflow should be before shareholder tax or after shareholder tax affd 272_f3d_333 6th cir see generally black issom associates fundamentals techniques and theory of capitalization discount rates ch pincite ibbotson associates stocks bonds bills and inflation valuation edition yearbook pratt supra pincite the capitalization rate is generally derived by reducing the discount rate by the expected long-term stable growth rate of net cashflows to the investment being valued pratt supra pincite the estate contends that shriner’s estimates of wsa’s prospective net cashflows are before corporate tax the estate also contends that shriner properly converted the capitalization rate from an after corporate tax_rate to a before corporate tax_rate to match estimated prospective net cashflows and that the conversion increased his capitalization rate from dollar_figure percent to dollar_figure percent we disagree with the estate on both points we disagree that shriner’s estimates of wsa’s prospective net cashflows are before corporate tax because it is appropriate to use a zero corporate tax_rate to estimate net cashflow when the stock being valued is stock of an s_corporation gross v commissioner supra wsa is an s_corporation and its cashflows are subject_to a zero corporate tax_rate thus shriner’s estimates of wsa’s prospective net cashflows are after corporate tax zero corporate tax_rate and not before corporate tax as the estate contends we disagree that shriner properly converted the capitalization rate because there was no need to do so the parties agree that shriner’s estimated capitalization rate before he converted it to before corporate tax is an after corporate tax_rate thus as in gross the tax character of shriner’s estimate of wsa’s prospective net cashflows matches that of the unconverted capitalization rate because both are after corporate tax it follows that shriner should not have -- - converted the capitalization rate from after corporate tax to before corporate tax because the tax character of both his estimated net cashflows for wsa and unconverted capitalization rates is after corporate tax we conclude that shriner improperly increased the capitalization rate from dollar_figure percent to dollar_figure percent ’ conclusion the following shows the value of decedent’s interest in wsa on date before applying a discount for lack of marketability normalized net cashflows dollar_figure capitalization rate capitalized net cashflows - total entity dollar_figure equity_interest of dollar_figure percent x value of decedent’s interest big_number dollar_figure dollar_figure before discount for lack of marketability be discount for lack of marketability both experts applied a discount for lack of marketability because there was no ready market for wsa stock on date we agree that a discount for lack of marketability is appropriate ’ the result here of a zero corporate tax on estimated prospective cashflows and no conversion of the capitalization rate from after corporate tax to before corporate tax is identical to the result in gross v commissioner tcmemo_1999_254 affd 272_f3d_333 6th cir of zero corporate tax_rate on estimated cashflows and a discount rate with no conversion from after corporate tax to before corporate tax -- - shriner applied a 20-percent discount for marketability to calculate the marketability discount he first derived a percent discount by averaging the discounts found in various restricted_stock studies he reduced that amount to percent to account for his belief that the insurance industry was more stable than the general market like shriner spiro found that the average marketability discount based on restricted_stock studies was between and percent spiro also found that initial_public_offering studies show an average marketability discount of nearly percent spiro considered the fact that wsa’s very specialized operations would limit potential buyers and detract from the stock’s marketability he also considered the size of the block of stock and elements of control which could enhance marketability after listening to testimony at trial he stated that a discount for lack of marketability of or percent would be appropriate to account for the risk due to the pending rate bureau litigation we conclude that a 35-percent discount for lack of marketability applies we disagree with shriner’s reduction from about percent to percent because we do not believe wsa was as stable as the insurance industry average we disagree with spiro’s increase from percent to percent not because the rate bureau litigation should not be considered but because we believe a - percent discount adequately takes into account wsa’s vulnerabilities f conclusion the fair_market_value of decedent’s interest in wsa on date is dollar_figure dollar_figure x because of concessions and the foregoing decision will be entered under rule


department of the treasury internal_revenue_service release number release date ‘ commerce dallas texas nusus bs 501-dollar_figure in reply refer to te_ge review staff person to contact identification_number contact telephone number dear a final adverse determination as to your exempt status under sec_501 of the this is internal_revenue_code our adverse determination was made for the following reasons failure to provide records of the organization and failure to meet the reporting requirements under sec_6001 and sec_6033 of the internal_revenue_code a matter of legislative grace and taxpayers have the burden of exemption from income_tax is establishing their entitlement to exemptions sec_6033 requires organizations exempt from tax to keep such records and render such statements as are required by such rules and regulations as the secretary may prescribe sec_1_6033-2 h requires organizations exempt from tax to submit such additional information as may be required by the internal_revenue_service for the purpose of inquiring into the organization’s exempt status despite numerous requests to you to provide information to conduct an examination of your form no requested information has been provided to for the year ended us and fails to meet the requirement for exemption under sec_501 and sec_1_501_c_4_-1 of the income_tax regulations which states an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the community based on the above we are revoking your organization's exemption from federal_income_tax under sec_501 of the internal_revenue_code effective january f ‘ you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for all years beginning after december you are required to file form_1120 u s_corporation income_tax return form_1120 must be filed by the day of the third month after the end of your annual_accounting_period a penalty of dollar_figurea day is charged when a return is filed late unless there is reasonable_cause for the delay however the maximum penalty charged cannot exceed dollar_figure or percent of your gross_receipts for the year whichever is less this penalty may also be charged if a return is not complete so please be sure your return is complete before you file it you have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by calling or writing to taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter das a marsha a ramirez director eo examinations attached copy of 886-a department of the treasury internal_revenue_service m s p o box ogden ut tax_exempt_and_government_entities_division date rm a7 s form s taxpayer_identification_number tax_year s ended december person to contact d number contact numbers telephone fax certified mail -- return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your organization’s exempt status is necessary if you do not agree with our position you may appeal your case the enclosed publication the examination process explains how to appeal an internal_revenue_service irs decision also includes information on your rights as a taxpayer and the irs collection process publication if you request a conference we will forward your written_statement of protest to the appeals_office and they will contact you for your convenience an envelope is enclosed if you and appeals do not agree on some or all of the issues after your appeals_conference or if you do not request an appeals_conference you may file suit in united_states tax_court the united_states court of federal claims or united_states district_court after satisfying procedural and jurisdictional requirements as described in publication letter rev catalog number v you may also request that we refer this matter for technical_advice as explained in publication exempt_organization appeal procedures for unagreed issues if a determination_letter is issued to you based on technical_advice no further administrative appeal is available to you within the irs on the issue that was the subject of the technical_advice if you accept our findings please sign and return the enclosed form_6018 consent to proposed adverse action we will then send you a final letter revoking your exempt status if we do not hear from you within days from the date of this letter we will process your case on the basis of the recommendations shown in the report of examination and this letter will become final in that event you will be required to file federal_income_tax returns for the tax period s shown above file these returns with the ogden service_center within days from the date of this letter unless a request for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have 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 if you have any questions please call-the contact person at the telephone number shown in the heading of this letter contact you if you write please provide a telephone number and the most convenient time to call if we need to thank you for your cooperation sincerely marsha ramirez director eo examinations enclosures publication publication form 6018-a report of examination envelope letter rey catalog number 34801v report of examination schedule number or exhibit tax identification_number year period ended name of taxpayer form 886-a rev date issue name tax exempt status per return per exam december issue whether the organization’s tax-exempt status under sec_501 should be revoked because it failed to provide necessary information to complete the examination of its form_990 for the tax periods shown above facts the organization failed to respond to the internal_revenue_service attempts to obtain information to perform an examination of form_990 for the tax period s ending december and december the service requested information as follows e march the organization was sent an examination letter letter with form_4549 information_document_request idr and was contacted by phone revenue_agent the president at the time to discuss the parameters of ' stated that she agreed to provide the the treasurer secretary would be the called to discuss the ongoing examination the idr which was the organization did not respond or provide the information and documents answered the examination the rights of the organization outlined in publication were also discussed at that time primary contact person for the organization during the examination march sent with the examination letter was discussed with documents and information requested of the organization she indicated that the information would be provided by march april that were requested of it the organization was contacted by phone the phone and indicated that day april the irs agent called she had left a voice message with the agent on april received may agent called the organization and left a message with the receptionist may organization was called and a second message was left with the receptionist the receptionist indicated that may to discuss the status of the examination she indicated that - no information or documents were received from the organization the irs -- the organization did not reply to the phone message left on april - the organization did not reply to the messages left on may and may committed to faxing the documents and information requested by april the organization did not reply to the message left on may would return the phone call shortly by latest the next no such message was would return the call the e e e e e form 886-a catalog number 20810w page publish nv irs gov department of the treasury-internal revenue service form 886-a rev januar report of examination schedule number or exhibit name of taxpayer tax identification_number year period ended the organization was called to discuss the status of the examination committed to provide the documents the importance of providing the information was -- the organization did not provide the information or documents requested of it indicated that she had not compiled any of the information because she was attending to the needs of her sick uncle she requested an extension of time to provide the information she committed to faxing the information by may june the organization was contacted by phone and information by june emphasized to june -- the organization did not provide the information or documents requested of it the organization was contacted by phone when the revenue_agent asked to speak with the receptionist held her hand over the phone and it appeared that she was talking the individual told the receptionist to tell the revenue_agent that she was not to there a message was then left with the receptionist to have agent june organization was once again contacted by phone and a message was left with the receptionist june the organization did not reply to the messages left on june and june the organization did not reply to the message left on june call the revenue the the revenue_agent then attempted to contact to discuss with her the status of the examination and the lack of cooperation that the organization was providing when the revenue_agent asked the receptionist if he could speak with answered the phone -- a follow-up letter was sent certified mail the organization was informed indicated that she was put in as the new president of the organization and that all correspondence should go through her she also indicated that she would not provide the documents that were requested of the organization and that she felt that the irs had not rights to those documents june that the ‘scope of the examination had been broadened the organization was given until july july july document request july of it the organization was contacted by phone to discuss the status of the examination -- the organization faxed a request to extend the due_date from july to provide the information requested of it from the june the organization failed to provide the information and documents requested the certified receipt was signed by to information indicated that she had mailed all of the information requested from the organization on the package that july august indicated that she mailed on july was not received the irs agent called the organization and left a message with the receptionist august the irs agent called the organization and left a second message with the receptionist ogtaber august the organization failed to respond to the message left on august the irs agent called the organization and left a third message with the -- the organization failed to respond to the message left on august and forin 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service form 886-a rev january report of examination schedule number or exhibit name of taxpayer tax identification_number year period ended e receptionist october august and october agent asked to speak with an officer of the organization other than -- the organization failed to respond to the message left on august the organization was contacted by phone the revenue the organization’s current treasurer indicated that is the only individual -- the organization has failed to provide any of the documents that were authorized to discuss tax matters november requested of it during the examination the irs agent called the organization and left a message with the receptionist january revocation of their exempt status due to lack of response the report was sent certified mail the organization was issued a draft report of examination proposing a law sec_6033 of the code provides except as provided in sec_6033 every organization exempt from tax under sec_501 shall file an annual retum stating specifically the items of gross_income receipts and disbursements and such other information for the purposes of carrying out the internal revenue laws as the secretary may by forms or regulations prescribe and keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe sec_6001 of the code provides that every person liable for any_tax imposed by the code or for the collection thereof shall keep adequate_records as the secretary_of_the_treasury or_his_delegate may from time to time prescribe sec_1_6001-1 of the regulations states that the books_or_records required by this section shall be kept at all time available for inspection by authorized internal revenue officers or employees and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law sec_1 h of the regulations provides that every organization which has established its right to exemption from tax whether or not it is required to file an annual return of information shall submit such additional information as may be required by the district_director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter_f sec_501 and the following chapter of the code and sec_6033 rey rul 1959_1_cb_627 concerns an exempt_organization that was requested to produce a financial statement and statement of its operations for a certain year however its records were so incomplete that the organization was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise to comply with the provisions of sec_6033 of the code and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service form 886-a rev date name of taxpayer org schedule number or exhibit report of examination tax identification_number year petiod ended december 20xx of the code and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status government's position in accordance with the above-cited provisions of the code and regulations under sec_6001 and sec_6033 otganizations recognized as exempt from federal_income_tax must meet certain reporting requirements these requirements relate to o i filing of a complete and accurate annual information and other required federal tax orm sec_2 the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated_business_income_tax and the availability of these records for inspection by authorized intemal revenue officers or employees the organization failed item to make available the records for inspection by authorized internal revenue officers or employees by refusing to provide the necessary information as requested and refusing to respond to the efforts of the service to obtain necessary information thetefote item and are also failed in that they could not be determined to have been met it is the irs's position that the organization's exempt status should be revoked based on according to revrul_59_95 1959_1_cb_627 as stated above the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status taxpayer's position the organization was issued a draft report of examination proposing a revocation of their exempt status due to lack of response the organization failed to respond to the draft report and has not provided its position conclusion the government concludes that the organization does not qualify for exemption from federal_income_tax under irc as a result of this finding the organization will be subject_to the income_tax imposed by sec_11 and is required to file forms for all tax periods ending after january 20xx form 886-a catalog number 20810w page publish no irs zov department of the treasuty-internal revenue service


t c memo united_states tax_court pennel phlander irwin petitioner v commissioner of internal revenue respondent docket no filed date pennel phlander irwin pro_se daniel j parent for respondent memorandum findings_of_fact and opinion panuthos chief special_trial_judge this case was heard pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_182 respondent determined deficiencies inpetitioner's federal income taxes and accuracy-related_penalties as follows all section references are to the internal_revenue_code as amended unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure sec_6662 year deficiency accuracy-related_penalty dollar_figure dollar_figure big_number big_number after a concession by petitioner the issues for decision are whether respondent's determination in the notice_of_deficiency was arbitrary whether petitioner has any remedy in this court in regard to respondent's purported misconduct in the course of examining petitioner's returns whether petitioner is entitled to claimed schedule c deductions for various expenses_incurred pursuant to his activities as a free- lance writer whether petitioner is liable for self- employment_taxes with respect to his net_income earned as a free- lance writer and whether petitioner is liable for the accuracy-related_penalty under sec_6662 findings_of_fact some of the facts have been stipulated and those facts are so found the stipulated facts and attached exhibits are incorporated herein by reference at the time of the filing of the petition petitioner resided in lodi california during the years in issue petitioner worked as an electronics training instructor for the department of defense at that time petitioner was also a self-employed writer reporting items of income and deductions on schedules c petitioner concedes that slot machine winnings of dollar_figure reported on schedule c for should be recharacterized as other income petitioner received a b a degree in history from california state university at sacramento he has written five unpublished novels including great woods poppy trappers forever three friday positively people and atla one the first of a trilogy with respect to his activities as a self-employed writer editor educator petitioner reported income and claimed expenses on schedules c as follows expenses car and truck expenses dollar_figure dollar_figure dollar_figure insurance big_number big_number big_number legal and professional service sec_139 office expense big_number big_number vehicle lease big_number big_number big_number lease of other business property big_number big_number big_number repairs and maintenance taxes and licenses travel meals and entertainment big_number big_number utilities big_number big_number big_number postage research big_number big_number big_number writing experimentation telephone total expenses big_number big_number big_number gross_income big_number big_number big_number net_income loss big_number big_number big_number petitioner now concedes that this amount constituted gambling income unrelated to his writing activities see supra note the items and amounts listed are taken from petitioner's amended returns form sec_1040x for the years and on the amended returns petitioner claimed larger deductions than claimed on his original returns the notice_of_deficiency specifically disallows the amounts claimed on both the original and the amended returns petitioner's claimed deductions include inter alia the costs related to leasing petitioner's purported home_office a five-room modular building located on a 5-acre compound where petitioner and his wife also resided all utility costs associated with the purported home_office the costs associated with furnishing petitioner's purported home_office including the costs related to purchasing a television washing machine bed and hot tub the cost of purchasing an insurance_policy on petitioner's life all costs associated with three cars used by petitioner and members of his family including the costs incurred in driving between petitioner's job location as a military instructor in sacramento california and his purported home_office in lodi california expenses_incurred in traveling to michigan where he attended his mother's funeral his daughter's dormitory expenses at college dental expenses for himself and his family and all costs associated with the telephone in petitioner's home_office which was the only telephone line in the dwelling as indicated in the notice_of_deficiency respondent denied all of petitioner's claimed deductions with the exception of expenses for postage and depreciation attributable to the cost of certain office equipment respondent determined that the respondent allowed petitioner deductions for postage in the amounts of dollar_figure in dollar_figure in and dollar_figure in respondent allowed deductions for depreciation expenses in the expenses underlying the denied deductions were either personal in nature or inadequately substantiated on the other hand in a 2-page document entitled the audit of '91 by pennel p irwin petitioner states in part because of the nature of the business_expenses vary depending upon the type of writing being done for non-fiction writing expenses are limited to just those items directly related to the subject being researched for fiction writing all personal experiences and observations are all business experiences and observations so there is no distinction between personal and business costs example upon awaking in the morning the toiletry and dressing process carried out by myself and observed in others is research whose end observations are included in the fictional writing for similar actions carried on by the various characters and therefore different grooming products would be justifiable research expenses as well as different clothing that conveys fit and feel thus all expenses i incur are either for business research or business maintenance or business production though i have out of choice not declared all of these---such as food clothing toiletries or amusements in an attempt to substantiate his claimed deductions petitioner provided copies of canceled checks drawn on his personal account petitioner however failed to indicate the precise nature of the expenses underlying many of the checks for example petitioner lists many of the expenses under the broad rubric research materials without specifying the expenditure in any detail during the course of the examination of petitioner's return respondent sought certain materials including a log or diary to amounts of dollar_figure in and dollar_figure in attributable to the costs of a computer disk drive and a cabinet substantiate where petitioner had traveled and the business_purpose of his travel_expenses respondent also requested an itemized list of petitioner's business-related telephone calls petitioner refused to provide the requested materials to respondent's agents at trial petitioner reiterated the same objections made during the course of the examination arguing that respondent engaged in prior restraint of free speech in violation of the first amendment of the u s constitution by seeking to examine petitioner's works in progress and that respondent's examination of petitioner's copyrighted literary works resulted in copyright infringement petitioner also argued that respondent's determinations in the notice_of_deficiency were arbitrary and without foundation in short petitioner fervently believes that because his activities involve writing the first amendment and copyright protections entitle him to deduct any expenses which he deems ordinary and necessary without being questioned general opinion petitioner makes various claims of illegal and unconstitutional conduct by agents of respondent we have attempted to limit our discussion to those matters with a hint of plausibility with respect to the more frivolous claims however we perceive no need to refute these arguments with somber reasoning and copious citation of precedent to do so might suggest that these arguments have some colorable merit 737_f2d_1417 5th cir a arbitrariness of respondent's determinations in notice_of_deficiency petitioner repeatedly claims that respondent's notice_of_deficiency was arbitrary capricious and without foundation generally the notice_of_deficiency is presumed correct and the taxpayer carries both the burden_of_proof and the burden of going forward with evidence 83_tc_269 when a taxpayer establishes that a statutory notice is arbitrary or without foundation however the commissioner bears the burden of going forward with evidence alanis v commissioner tcmemo_1995_263 the cases dealing with arbitrary determinations however involve issues of omitted income where the commissioner failed to introduce any substantive evidence indicating that the taxpayer had received income as determined in the notice_of_deficiency e g 596_f2d_358 9th cir revg 67_tc_672 in this case respondent's determination was based upon petitioner's failure to establish that he is entitled to claimed deductions deductions are a matter of legislative grace and petitioner bears the burden of proving entitlement to any claimed deductions rule a 503_us_79 this is not a situation where respondent determined that petitioner had omitted income and it is evident that the notice_of_deficiency was based upon an examination of petitioner's returns as such we reject petitioner's claim that the determination in the notice_of_deficiency was arbitrary b respondent's actions in conducting the examination we now turn to petitioner's claim that respondent engaged in an unconstitutional prior restraint of speech in her attempt to examine confidential details of petitioner's research in regard to his works in progress petitioner appears to object to respondent's request for information during the examination of the returns respondent in an attempt to ascertain the correctness of a taxpayer's return may examine any books papers records or other data which may be relevant or material to such inquiry sec_7602 even if the confidential materials in question were somehow not subject_to examination petitioner must present other evidence sufficient to meet his burden of proving entitlement to the deductions in question coulter v commissioner 82_tc_580 mayo v commissioner a memorandum opinion of this court dated date disallowing deductions for lack of substantiation where petitioner refused to provide records invoking fifth_amendment for the foregoing reasons we reject petitioner's assertions petitioner also contends that respondent in the course of the examination abridged petitioner's copyright interest in a article entitled the audit of '91 petitioner's copyright infringement claims have no foundation respondent is entitled to examine petitioner's literary works in order to establish whether there was a connection between petitioner's claimed business deductions and petitioner's business as a writer accordingly we reject petitioner's arguments schedule c deductions we now turn to the question of whether petitioner may properly claim the deductions in question as explained supra petitioner bears the burden of proving entitlement to any claimed deductions in this regard taxpayers must keep sufficient records to establish the amount_of_deductions or other matters required to be shown on the taxpayer's return sec_1_6001-1 income_tax regs sec_162 generally allows a deduction for ordinary and necessary expenses_incurred while carrying_on_a_trade_or_business respondent does not appear to question that petitioner's writing activities constitute a trade_or_business respondent however argues that petitioner has failed to prove that the deductions claimed are ordinary and necessary expenses arising from petitioner's writing activities an ordinary_and_necessary_expense is one which is appropriate and helpful to the taxpayer's business and which results from an activity which is common and accepted practice 77_tc_1124 affd without published opinion 9th cir where taxpayers establish that they have incurred trade_or_business_expenses but are unable to substantiate the precise amount of the expenses we may estimate the amount of the deductible expenses 39_f2d_540 2d cir however we cannot estimate deductible expenses unless the taxpayer presents evidence sufficient to provide some rational basis upon which estimates may be made 85_tc_731 sec_262 denies a deduction for any personal living or family_expenses the distinction between deductible trade_or_business_expenses on the one hand and nondeductible personal expenses on the other is based on a weighing and balancing of the facts and circumstances of each case r r hensler inc v commissione73_tc_168 with respect to deductions under sec_162 the taxpayer bears the burden of proving that an expense was incurred for business rather than personal reasons 72_tc_433 specifically taxpayers must show that the expense was incurred primarily to benefit their business and there must have been a proximate rather than remote or incidental relationship between the claimed expense and petitioner's business id we have also recognized that some expenditures are so inherently_personal that they are never deductible regardless of the relative importance of the expenditures in connection with the taxpayer's trade_or_business 55_tc_320 affd 454_f2d_399 7th cir as we noted in 23_tc_803 where we held that the taxpayer could not deduct the cost of a hearing aid we believe that a hearing aid is so personal as to come within the meaning of sec_24 even if it is used in petitioner's business the device is so personal as to preclude it from being a business_expense a businessman's suit a saleslady's dress the accountant's glasses are necessary for their businesses but the necessity does not overcome the personal nature of these items and make them a deductible expense in this case petitioner suggests that his status as a writer of fiction can convert otherwise personal expenses into deductible business_expenses simply because the expenditure is related to something petitioner may wish to write about we shall address separately each category of claimed expenses a home_office_deductions petitioner describes his entire five-room modular home as a business location and claims deductions for all expenses relating to rent utilities maintenance furnishings and insurance sec_280a provides that generally taxpayers may not deduct expenses that are otherwise allowable with respect to the use of a dwelling_unit that also serves as the taxpayer's residence during the taxable_year there are several exceptions to this rule the limitations imposed by sec_280a do not apply to expenses attributable to any portion of a taxpayer's dwelling_unit used both exclusively and on a regular basis as the principal place of petitioner's trade_or_business sec_280a in the present instance respondent argues that petitioner has failed to show that the business use of his residence was regular and exclusive in order for a taxpayer to establish use on a regular basis the business use must be more than occasional or incidental 76_tc_696 a taxpayer exclusively uses a portion of his dwelling in a trade_or_business if the portion in question is not used for other than business purposes sec_1 280a-2 g proposed income_tax regs fed reg date hefti v commissioner tcmemo_1993_128 petitioner has not offered sufficient evidence regarding the amount of time and nature of the work conducted at his home to establish regular use browning v commissioner tcmemo_1988_293 affd 890_f2d_1084 9th cir furthermore petitioner has failed to prove that any portion of his home was used exclusively for his writing activities browning v commissioner f 2d pincite8 petitioner has failed to establish that the business use of his home is within the exception provided in sec_280a as such petitioner's dwelling_unit does not qualify as a home_office and we deny petitioner's claims for deductions related to his home b car and truck expenses petitioner claims automobile expense deductions with respect to three vehicles used during the years and petitioner's automobile logs offered as substantiation for these expenses were not prepared contemporaneously petitioner claims that all the vehicles in question were used exclusively for business purposes nissan sentra for petitioner claims that he used his nissan exclusively for business purposes the total mileage for the year is big_number miles of this amount big_number miles are travel between petitioner's teaching job in sacramento and his residence in lodi we find that petitioner's primary motivation in traveling between sacramento and lodi was to commute to and from the home where he and his family resided petitioner would have returned to his lodi residence regardless of whether it also the remaining big_number miles relate to travel away from petitioner's home and are separately discussed infra served as his writing compound as such the expenses in question were nondeductible personal commuting expenses 73_tc_766 57_tc_427 affd per curiam 465_f2d_1399 2d cir affd without opinion 467_f2d_943 2d cir toyota pickup petitioner's wife ms irwin was a teacher who also assisted petitioner with his writing activities on a part-time basis ms irwin was the primary driver of a toyota pickup leased by petitioner petitioner claims big_number business miles driven in big_number in and big_number in apart from identifying each log entry as writing research travel petitioner offers no evidence regarding the business_purpose of any of the miles driven as such we deny petitioner's claims for deductions with respect to the toyota pickup toyota camry for the years and petitioner claims that he used his toyota camry for business purposes the purported business mileage is big_number for and big_number for of these amounts petitioner's commuting mileage totals big_number in and big_number in as explained supra expenses relating to commuting are nondeductible in attempt to substantiate the remaining mileage petitioner introduces a copious amount of material including insurance policies gas station receipts and canceled checks while these materials establish the amounts expended petitioner has completely failed to specify the business_purpose of each expense underlying the receipt or canceled check thus petitioner has failed to provide any specific evidence that would indicate that he used the car in pursuit of his writing activities petitioner's claimed deductions relating to the toyota are not allowable 77_tc_1096 telfeyan v commissioner tcmemo_1988_425 affd without published opinion 881_f2d_1086 11th cir c dues and publications petitioner claims deductions for various magazine subscriptions and membership dues petitioner must provide evidence sufficient to establish a specific connection between the expenditures and petitioner's trade_or_business as a writer gorman v commissioner tcmemo_1986_344 petitioner has failed to establish any connection and we sustain respondent's determination on this issue d insurance petitioner claims a deduction for a life_insurance_policy providing dollar_figure in benefits upon his death generally the cost of life_insurance is not deductible sec_1_262-1 income_tax regs therefore we sustain respondent on this issue we also reject petitioner's claims for deductions related to the expense of insuring his vehicles as previously discussed petitioner has failed to establish any business use of the vehicles in question therefore we sustain respondent on this issue e office expenses supplies petitioner claims deductions for supplies related to his literary activities most of these expenses such as furniture for his residence a washing machine and a microwave oven are inherently_personal sec_262 precludes such deductions the record however indicates that petitioner incurred deductible expenses for stationery and envelopes we allow petitioner a deduction with regard to these expenses in amounts equal to dollar_figure in and dollar_figure in f travel meals and entertainment taxpayers may deduct travel_expenses incurred while away from home in pursuit of a trade_or_business sec_162 traveling expenses however are governed by the strict substantiation requirements of sec_274 under sec_274 petitioner must substantiate the amount of the expense the time and place of the travel and the business_purpose of the expense if petitioner fails to meet the provisions of sec_274 we cannot employ the principles of 39_f2d_540 2d cir to estimate petitioner's travel_expenses keating v commissioner tcmemo_1995_101 sec_1_274-5 income_tax regs petitioner claims deductions with respect to trips to reno nevada in and a trip to michigan in including expenses for his daughter employed as a research assistant trips to lake tahoe nevada in and and a trip to pacific grove california in in a misguided attempt to protect the names of purported writing sources petitioner has refused to provide sufficient evidence such as contemporaneously prepared logs or diaries from which we could ascertain the business_purpose of his travel sec_1 5t c temporary income_tax regs fed reg date furthermore we are convinced that some of petitioner's expenditures such as the costs of travel to michigan with his daughter to attend petitioner's mother's funeral and conduct research for great woods poppy were undoubtedly personal in nature as petitioner has failed to meet the substantiation requirements of sec_274 we sustain respondent's denial of all travel_expenses g research petitioner introduced canceled checks attributable to a variety of expenditures purportedly related to his literary research while petitioner lists the amounts of expenditures he failed to present any detailed evidence concerning the specific nature of each expenditure many of these expenditures are inherently_personal in nature including the cost of his family's dental work the cost of his daughter's college education ates v commissioner tcmemo_1985_469 personal grooming expenses 74_tc_1266 and the cost of a television used in his home o'connor v commissioner tcmemo_1986_444 sec_1_262-1 income_tax regs these expenses are nondeductible with respect to the remaining expenditures petitioner's testimony was vague and self-serving as petitioner has failed to specify the business_purpose of any item of expense we sustain respondent's determination disallowing deductions for all research expenses h telephone expenses petitioner claims deductions for telephone expenses petitioner testified that one telephone line was located at his residence sec_262 provides that the cost of basic local_telephone_service provided to the first telephone line at the taxpayer's residence is a nondeductible expense furthermore petitioner has refused to provide details regarding the nature of long distance calls invoking the first amendment as discussed supra we rejected petitioner's arguments concerning constitutional violations and we accordingly uphold respondent's disallowance of all telephone expenses i charitable_contributions during petitioner contributed dollar_figure to a public radio station and dollar_figure to the roman catholic church generally contributions to charitable organizations are deductible as itemized_deductions sec_170 sec_67 petitioner claims that these expenses were incurred for the purpose of collecting research for his writing activities thereby rendering the expenses deductible under sec_162 petitioner however has failed to specify the precise nature of the research materials he received in consideration for the payments in question as such we regard the payments as charitable_contributions under sec_170 petitioner did not elect to itemize deductions on his return therefore he is not entitled to a charitable_contribution_deduction self-employment_tax with regard to his writing activities petitioner reported self-employment_income in and respondent asserts that these amounts are subject_to the self-employment_tax imposed by sec_1401 petitioner has the burden of proving that respondent erroneously determined liability for the self- employment_tax snyder v commissioner tcmemo_1995_285 petitioner has failed to address this issue as such we sustain respondent's determination imposing the self-employment_tax on the schedule c income accuracy-related_penalty under sec_6662 respondent determined that petitioner is liable for the accuracy-related_penalty provided under sec_6662 the accuracy-related_penalty is equal to percent of any portion of underpayment attributable to a taxpayer's negligence or disregard of rules and regulations sec_6662 b the term negligence includes any failure to do what a reasonable and ordinarily prudent person would do under the same circumstances 85_tc_934 the term disregard includes any careless reckless or intentional disregard sec_6662 the penalty does not apply to any portion of an underpayment for which there was reasonable_cause and with respect to which the taxpayer acted in good_faith sec_6664 respondent's determination imposing the accuracy- related penalty is presumed correct and taxpayers bear the burden of proving that they are not liable for the accuracy- related penalty imposed by sec_6662 rule a 92_tc_501 while petitioner may honestly believe that he is entitled to deductions for the expenses in question his position is not reasonable under the circumstances prudent individuals in petitioner's position would be aware that engaging in the trade_or_business of a writer does not transform personal expenses into deductible business_expenses simply because life's experiences are incorporated into their literary materials additionally petitioner offered little evidence to substantiate the business relationship between the expenses and his literary activities petitioner has not met his burden_of_proof with respect to the accuracy-related_penalty and respondent is accordingly sustained on this issue to reflect the foregoing decision will be entered under rule


_department of the treasury internal_revenue_service washington d c feb tax_exempt_and_government_entities_division uniform issue list tep a t legend taxpayer a ira b fund c financial_institution d financial_institution e company f company g individual h city x city y amount dear this is in response to your request dated date as supplemented by correspondence dated date in which you request through your authorized representative a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a represents that she received a distribution equal to amount from ira b which was maintained by financial_institution d taxpayer a asserts that her failure to accomplish a rollover within the 60-day period prescribed by sec_408 of the code was due to the failure to receive notification that financial_institution d would no longer serve as the custodian for ira b in taxpayer a inherited her deceased husband’s sep-ira ira b subsequently ira b was retitled in taxpayer a’s name the assets of ira b consisted of units shares in a private equity firm fund c with financial_institution d serving as custodian of ira b company f was the investment_advisor to fund c company g was responsible for managing investor relations for company f and for issuing certain financial statements to investors in fund on date taxpayer a sold her residence in city x and moved to a temporary residence in city y current home which is also located in city y beginning in april of through december of financial_institution d mailed notices informing taxpayer a that it would no longer serve as custodian for ira b however these notices were mailed to taxpayer a’s former city x address and were not forwarded to taxpayer a’s new city y address in january of taxpayer a purchased her in december of financial_institution d requested that the managers of fund c confirm that the shares were transferred from financial_institution d as the custodian of ira b to taxpayer a individual h the managing partner and director of operations for fund c signed the confirmation request on date however individual h neglected to notify taxpayer a of the transfer the form 1099-r for the ‘taxable year showing the distribution from ira b was sent to taxpayer a’s city x address and was not forwarded to taxpayer a’s current city y address company g however sent taxpayer a monthly financial statements to her correct city y address through and these statements indicated the shares were still held in ira b consequently taxpayer a believed that the shares continued to be held in ira b taxpayer a first discovered that the shares were no longer held in ira b when she received a notice cp2000 from the internal_revenue_service service dated date relating to her itax return taxpayer a represents that the assets in ira b have not been used for any other purpose taxpayer a also represents that financial_institution e has agreed to serve as an ira custodian for the shares if taxpayer a receives a waiver from the service based on the above facts and representations taxpayer a requests a waiver of the 60-day requirement contained in sec_408 of the code with respect to the distribution of amount from ira b sec_408 of the code defines an ira to mean a_trust created or organized in the united_states and requires that the trustee be a bank or an approved non- bank trustee sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money or any other_property is paid into an ira for the benefit of such individual not later than the 60th day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 ‘ sec_408 of the code provides that the secretary_of_the_treasury may waive the 60-day requirement under sec_408 and sec_408 where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement revproc_2003_16 2003_4_irb_359 provides that the service will issue a ruling waiving the 60-day rollover requirement in cases where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the taxpayer in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a are consistent with her assertion that the failure to complete a rollover of the distribution of amount from ira b was due to postal error therefore pursuant to sec_408 of the code the service waives the 60-day rollover period with respect to amount provided all other requirements of sec_408 except the 60-day requirement will be met with respect to the contribution of amount to an ira amount will be considered a rollover_contribution with the meaning of sec_408 this ruling does not authorize the rollover of amounts that are required to be distributed by sec_408 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter 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 pursuant to a power_of_attorney on file with this office a copy of this letter_ruling is being sent to your authorized representative if you wish to inquire about this ruling please contact please address all correspondence to se t ep ra t1 sincsrely yours carlton a watkins manager employee_plans technical group enclosures notice of intention to disclose deleted copy of this letter cc


t c memo united_states tax_court dean russell cates and teresa stinnett cates petitioners v commissioner of internal revenue respondent docket no filed date dean russell cates and teresa stinnett cates pro sese brianna b taylor john w sheffield iii ashley y smith and madeline morgan student for respondent memorandum findings_of_fact and opinion ashford judge respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax and an accuracy-related_penalty pursuant to section a of dollar_figure for the taxable_year the issues for decision are whether petitioners were required to report as income the entire amount of a dollar_figure distribution received from a qualified_retirement_plan if so whether petitioners are liable for the additional tax imposed by sec_72 on early distributions from a qualified_retirement_plan whether petitioners are entitled to a deduction for unreimbursed employee business_expenses not originally claimed on their federal_income_tax return for the year at issue and whether petitioners are liable for the accuracy-related_penalty we resolve all issues in favor of respondent findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioners resided in georgia at the time the petition was filed with the court teresa stinnett cates petitioner is a college graduate having received a bachelor’s degree in finance from the university of tennessee during petitioner worked for two different insurance_companies from to march or date she was employed at fcci insurance group fcci as a marketing 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure underwriter starting in date she was employed at harleysville insurance co harleysville as a commercial lines territory manager shortly after joining harleysville petitioner enrolled in a master of business administration m b a program at walden university at the time of trial she was still finishing that program despite having left harleysville a little over a year after joining that company to work for selective insurance co her then-current employer petitioner was a participant in fcci’s sec_401 profit-sharing_plan which was administered by vanguard fiduciary trust co vanguard it is undisputed that petitioner received a distribution of dollar_figure from vanguard during as of the close of that year petitioner was under 59½ years of age vanguard sent the internal_revenue_service irs and petitioner a form 1099-r distributions from pensions annuities retirement or profit-sharing_plans iras insurance contracts etc for reflecting the dollar_figure distribution as an early distribution with no known exception the form also reflected federal tax withheld of dollar_figure walden university sent the irs and petitioner a form 1098-t tuition statement for reflecting petitioner’s student status as at least a half-time graduate student zero payments received for qualified_tuition_and_related_expenses and dollar_figure billed for qualified_tuition_and_related_expenses petitioners prepared and timely filed their joint form_1040 u s individual_income_tax_return for joint_return reporting as relevant here receipt of the entire distribution from the vanguard-administered plan specifically on line 16a of the joint_return petitioners reported dollar_figure as the amount of pensions and annuities however on line 16b they reported dollar_figure as the taxable_amount and they included that amount in taxable_income petitioners attached to the joint_return form_5329 additional taxes on qualified_plans including iras and other tax-favored accounts in part i of the form they reported the dollar_figure amount as early distributions included in income dollar_figure thereof as not subject_to the additional tax imposed by sec_72 because of exception distributions due to an irs levy on the qualified_retirement_plan dollar_figure as the amount subject_to the additional tax and dollar_figure as the amount of the additional tax petitioners also reported the dollar_figure amount on line in the section for other taxes on the joint_return petitioners also attached to the joint_return a schedule a itemized_deductions on which they reported among other items dollar_figure of unreimbursed employee business_expenses however because this reported amount did not exceed of their adjusted_gross_income they were unable to deduct these expenses finally petitioners neither reported on line of the joint_return any amount for tuition and fees nor attached to the joint_return form_8917 tuition_and_fees_deduction relying on the vanguard form 1099-r respondent sent petitioners a notice_of_deficiency on date determining that the entire amount of the dollar_figure distribution was taxable and subject_to the sec_72 additional tax and that they were liable for the substantial_understatement_of_income_tax_penalty under sec_6662 and b on date petitioners timely petitioned this court for redetermination of the deficiency and the penalty contending that dollar_figure of the dollar_figure distribution was nontaxable because those funds were rolled over to a new sec_401 plan and used for educational expenses at a time not established by the record after petitioning this court but before trial of this case petitioners submitted to respondent a revised joint_return which they signed and dated date as relevant here petitioners reported on line 16b of this form that dollar_figure of the dollar_figure distribution was taxable in addition they claimed on this form an increased deduction for additional unspecified schedule a expenses then at a later time also not established by the record but before trial of this case petitioners submitted to respondent a joint form 1040x amended u s individual_income_tax_return for which they signed but did not date this form reflects adjusted_gross_income that includes the entire dollar_figure distribution as taxable and an additional schedule a itemized_deduction of dollar_figure i burden_of_proof opinion in general the determinations of the commissioner in a notice_of_deficiency are presumed correct and except for the burden of production in any court_proceeding with respect to a taxpayer’s liability for any penalty addition_to_tax or additional_amount see sec_7491 the taxpayer bears the burden of proving that the commissioner’s determinations are erroneous see rule a 290_us_111 this burden of production and proof remains on the taxpayer even with respect to the additional tax under sec_72 because the sec_72 additional tax is a tax and not a penalty addition_to_tax or additional_amount within the meaning of sec_7491 see 144_tc_140 citing ross v commissioner tcmemo_1995_599 tax ct memo lexi sec_597 at under sec_6201 if a taxpayer asserts a reasonable dispute with re- spect to an item_of_income reported on an information_return filed by a third party eg a form 1099-r and the taxpayer meets certain other requirements the commissioner bears the burden of producing reasonable and probative evidence in addition to the information_return concerning the portion of the deficiency attributable to the income item petitioners have not raised any dispute with respect to the accuracy of the form 1099-r that vanguard sent the irs and petitioner for nor do they contend that they have met the other requirements under sec_6201 accordingly the burden of production with respect to the income in this case does not shift to respondent under sec_6201 petitioners do not contend that the burden_of_proof should shift to respondent under sec_7491 nor have they established that the requirements for shifting the burden_of_proof under sec_7491 have been met accordingly the burden_of_proof with respect to the income and the sec_72 additional tax also remains on petitioners ii taxability of retirement distribution sec_402 provides that any amount actually distributed to any distributee by any employees’ trust described in sec_401 which is exempt from tax under sec_501 shall be taxable to the distributee in the taxable_year of the distributee in which distributed under sec_72 relating to annuities it is undisputed that petitioner received a distribution of dollar_figure in from the vanguard-administered plan a qualified_retirement_plan accordingly the entire distribution is taxable to petitioners unless some exclusion applies petitioners contend that dollar_figure of the dollar_figure distribution is nontaxable because that amount should be reflected as a rollover to the nationwide savings_plan which was administered by charles schwab for nationwide insurance co nationwide the company into which harleysville merged shortly after petitioner joined harleysville sec_402 provides a rollover exception to the sec_402 general_rule under sec_402 any portion of an eligible_rollover_distribution as defined in sec_402 that is paid to an employee and which the employee transfers to an eligible_retirement_plan as defined in sec_402 is excluded from gross_income for the taxable_year in which the distribution is paid however this rollover exception is not available for any transfer of a distribution made after the 60th day following the day on which the distributee received the property distributed sec_402 sec_1_402_c_-2 q a-11 income_tax regs thus to avail themselves of the rollover exception petitioners must show that some portion of the dollar_figure distribution was transferred within days of petitioner’s receipt of the distribution to another eligible_retirement_plan petitioner asserted at trial that dollar_figure of the dollar_figure distribution was set_aside specifically for a rollover but acknowledged that the proper paperwork was not actually completed to reflect a rollover of this amount into the nationwide savings_plan according to petitioner this failure occurred because of harleysville’s merger into nationwide consequently as evidence that this rollover occurred she instead pointed to documentation in the record from vanguard showing that as of date her vested balance in fcci’s sec_401 profit-sharing_plan was dollar_figure and from nationwide showing that as of date her vested balance in the nationwide savings_plan was dollar_figure this documentation does not establish that petitioner rolled over dollar_figure or any other amount to a nationwide qualified_retirement_plan much less that a rollover was effected within days of her receipt of the dollar_figure distribution from the vanguard-administered plan accordingly the entire dollar_figure distribution is includable in petitioners’ gross_income for iii additional tax under sec_72 sec_72 imposes an additional tax on early distributions from a qualified_retirement_plan see sec_72 the additional percent tax however does not apply to certain enumerated distributions see sec_72 as relevant here the additional tax does not apply to the extent that early distributions are used for qualified_higher_education_expenses of the taxpayer in the year of the early distributions see sec_72 qualified_higher_education_expenses generally include expenses for tuition fees books supplies and equipment and in limited circumstances room and board see sec_72 sec_529 petitioner suggested at trial that dollar_figure of the dollar_figure distribution qualifies for this exception because that amount was used to pay expenses related to the m b a program she was enrolled in at walden university in however there is no evidence in the record that petitioners in fact made any tuition and related payments to walden university in for petitioner’s m b a studies there the form 1098-t that walden university sent the irs and petitioner for shows only amounts billed for qualified_tuition_and_related_expenses indeed the form also shows that zero payments were received for qualified_tuition_and_related_expenses without some documentation to support petitioner’s vague testimony we cannot conclude that she used any portion of the dollar_figure distribution she received from the vanguard-administered plan to pay m b a expenses or that the expenses even if paid are qualified_higher_education_expenses within the meaning of sec_72 and sec_529 on the record before us we find that none of the enumerated statutory exceptions applies here and thus petitioner’s entire dollar_figure distribution is subject_to the sec_72 additional tax iv schedule a unreimbursed employee business_expenses tax deductions are a matter of legislative grace and are allowable only as specifically provided by statute see 503_us_79 292_us_435 sec_262 expressly denies a deduction for personal living or family_expenses on the other hand under sec_162 a taxpayer may deduct unreimbursed employee business_expenses as an ordinary and necessary business_expense 79_tc_1 54_tc_374 whether an expense is deductible under sec_162 is a question of fact and the taxpayer must demonstrate that the purpose of the expense was primarily business rather than personal and that the business in which the taxpayer is engaged benefited or was intended to be benefited by the expense 74_tc_1266 48_tc_358 sec_1_162-5 income_tax regs provides that a taxpayer may deduct educational expenses as ordinary and necessary business_expenses if the education maintains or improves skills required by the individual in his or her employment or other trade_or_business or meets the express requirements of the individual’s employer or the requirements of applicable law or regulations imposed as a condition to the retention by the individual of an established employment relationship status or rate of compensation a taxpayer may not deduct any expenses under sec_162 to the extent that the taxpayer is entitled to but does not claim reimbursement from his or her employer for expenditures related to his or her status as an employee lucas v commissioner t c pincite in this regard such expenses are not considered necessary 788_f2d_1406 9th cir aff’g tcmemo_1984_533 24_tc_21 petitioner at trial contended that petitioners should be allowed a deduction for various unreimbursed employee business_expenses to wit tuition and related expenses to walden university dues for professional membership organizations and travel including vehicle and meals and entertainment_expenses petitioner testified that these expenses related to her employment with either fcci or harleysville with the bulk of them associated with her employment with fcci she further testified that these expenses were not reimbursable or reimbursed however petitioners did not produce a copy of harleysville’s reimbursement policy despite petitioner’s acknowledging at trial that harleysville had such a policy they did produce and introduce into the record a copy of the employee handbook of fcci however that handbook states that fcci will reimburse employees for business travel including lodging meal and transportation charges and registration or tuition fees for educational conferences conventions and training seminars subject_to prior supervisory approval of those fees the handbook also states that fcci will pay for salaried employees’ membership in professional organizations so long as the organization is relevant to the employee’s current fcci job the employee has been employed with fcci for days and the employee obtains supervisory approval of membership in the organization the handbook further states that subject_to certain time in service and employee performance conditions fcci will reimburse an employee up to dollar_figure per year for the cost of a college education program including an m b a program at a regionally accredited educational_institution at the conclusion of a successfully completed course petitioners have failed to show the court why petitioner’s expenses are necessary when it seems contrary to what she may have believed that she in fact could have sought reimbursement for them although her testimony also implies that she may have sought reimbursement for some of the expenses but was denied petitioners did not produce any supporting documentation to that effect because petitioner’s general testimony alone is insufficient to prove that petitioners are entitled to a deduction for her unreimbursed employee business_expenses we find in favor of respondent on this issue v accuracy-related_penalty under sec_6662 we now address whether petitioners are liable under sec_6662 and b for an accuracy-related_penalty on an underpayment due to a substantial_understatement_of_income_tax sec_6662 imposes a accuracy-related_penalty on any portion of an underpayment_of_tax required to be shown on a return if as provided by sec_6662 the underpayment is attributable to any substantial_understatement_of_income_tax the term substantial_understatement means an understatement of income_tax that exceeds the greater of of the tax required to be shown on the 2furthermore as to the tuition and related expenses to walden university petitioner’s testimony was such that these expenses would not meet the deductibility requirements under sec_1_162-5 income_tax regs and as indicated supra p there is no evidence in the record that petitioners actually made any tuition and related payments to walden university in any event neither have petitioners produced adequate substantiation of petitioner’s travel_expenses see sec_274 sec_1_274-5 income_tax regs sec_1_274-5t temporary income_tax regs fed reg date return or dollar_figure sec_6662 the commissioner bears the burden of production regarding a taxpayer’s liability for the accuracy-related_penalty and thus is required to come forward with sufficient evidence indicating that imposition of the penalty is appropriate see sec_7491 116_tc_438 once the commissioner meets his burden of production the taxpayer bears the burden of proving through persuasive evidence that the commissioner’s penalty determination is incorrect see rule a welch v helvering u s pincite higbee v commissioner t c pincite respondent has discharged his burden of production by providing sufficient evidence showing that petitioners’ understatement of income_tax for exceeds the greater of of the tax that was required to be shown on the joint_return or dollar_figure application of the accuracy-related_penalty may be avoided with respect to any portion of an underpayment if it is shown there was reasonable_cause for such portion and the taxpayer acted in good_faith with respect to such portion sec_6664 higbee v commissioner t c pincite the determination of whether the taxpayer had reasonable_cause and acted in good_faith depends upon the pertinent facts and circumstances of a particular case sec_1_6664-4 income_tax regs we consider among other factors the experience education and sophistication of the taxpayer however the principal consideration is the extent of the taxpayer’s efforts to assess the proper tax_liability id see also higbee v commissioner t c pincite taking into consideration the taxpayer’s experience education and sophistication an honest misunderstanding of fact or law may indicate reasonable_cause and good_faith higbee v commissioner t c pincite citing remy v commissioner t c memo in addition reliance on professional advice may indicate reasonable_cause and good_faith if in the light of all the facts and circumstances such reliance was reasonable and the taxpayer acted in good_faith id pincite at trial petitioner who has a bachelor’s degree in finance and is pursuing her m b a appeared sincere but confused particularly about the tax treatment of the dollar_figure distribution she admitted receiving from the vanguard-administered plan in petitioner stated that petitioners did consult with an accountant in preparing the joint_return this statement alone however is insufficient evidence as to the application of the accuracy-related_penalty including that they had reasonable_cause and good_faith because the underpayment was by definition substantial we will sustain the penalty 3dean russell cates did not appear at trial we have considered all of the arguments made by the parties and to the extent they are not addressed herein we find them to be moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent


department of the treasury employer_identification_number contact person - id number contact telephone number uil internal_revenue_service p o box cincinnati oh number release date date legend x name of high school y country m number n number p dollars amount r dollars amount dear you asked for advance approval of your scholarship grant procedures under sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax you requested approval of your scholarship program to fund the education of certain qualifying students our determination we approved your procedures for awarding scholarships based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding scholarships meet the requirements of code sec_4945 as a result expenditures you make under these procedures will not be taxable also awards made under these procedures are scholarship or fellowship grants and are not taxable to the recipients if they use them for qualified_tuition_and_related_expenses subject_to the limitations provided in code sec_117 description of your request you seek to provide scholarships to qualified individuals enrolled in a program for an advanced degree in an accredited y public or private university or college letter catalog number 58263t the criteria used by your scholarship committee in selecting recipients are must be a graduating senior at x who will attend a two or four year college or university must have attended x for at least two years required to submit an essay and complete an application along with one letter of recommendation from a teacher counselor employer or community leader have financial need past scholarship recipients are also eligible to reapply renew the scholarship for attending a college or university priority will be given to those recipients who have satisfactorily progressed in their studies and have used their scholarship for its intended purpose specific requirements or conditions consist of attendance at a university or college a current essay of their status and experience and the updating of any new information in their ongoing correspondence the scholarship awards are available for a minimum of m to a maximum of n number of recipients annually the number of scholarships will depend in part on your earnings being significant enough to warrant scholarship distributions the scholarship awards are available for a minimum of dollar_figurep to a maximum of dollar_figurer dollars for each scholarship scholarships will be provided on an annual basis the scholarship will provide for an individual's partial tuition costs books and living_expenses scholarship applications are distributed directly to x through the college center your web site also publicizes the scholarships all scholarships will be awarded without reference or regard to an individual's race color creed sex age employment status or national origin members of your scholarship committee your officers directors or substantial contributors and their relatives are not eligible for awards made under your scholarship program you pay scholarships directly to a school under an arrangement whereby the school will apply the scholarship funds only for enrolled students who are in good standing the recipient will be required to file an annual report with the scholarship committee detailing the recipient's personal perspective of his or her progress your board_of directors and committee members follow the progress of the individual scholarship and to review each report submitted by the recipient to make a determination whether the scholarship purposes are being or have been fulfilled and to inquire into any questions requiring further investigation you initiate an investigation if no report is received within thirty days after the close of the scholarship year if the report received significantly deviates from the recipient's stated intention or if it appears from the report that that scholarship is being misused or that the funds are improperly diverted letter catalog number 58263t if you discover that the funds are being misused or diverted or if a report is not received within the required time frame you will withhold any further funds until your scholarship committee receives the required report or assurances that diversion of the funds will not continue you will upon completion of your scholarship committee's investigation in such instances recommend what action is to be taken to recover the misused or diverted funds you represent that you will maintain all records relating to individual grants including information obtained to evaluate recipients identify whether a recipient is a disqualified_person establish the amount and purpose of each grant and establish that you undertook the supervision and investigation of grants basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a scholarship to an individual for travel study or other similar purposes however a scholarship that meets all of the following requirements of code sec_4945 is not a taxable_expenditure the foundation awards the scholarship on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the scholarship the scholarship is a scholarship or fellowship subject_to the provisions of code sec_117 the scholarship is to be used for study at an educational_organization described in code sec_170 a ii other conditions that apply to this determination this determination only covers the scholarship program described above this approval will apply to succeeding scholarship programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as a precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes to your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot award scholarships to your creators officers directors trustees foundation managers or members of selection committees or their relatives letter catalog number 58263t all funds distributed to individuals must be made on a charitable basis and further the purposes of your organization you cannot award scholarships for a purpose that is inconsistent with code sec_170 b you should keep adequate_records and case histories so that you can substantiate your scholarship distributions with the irs if necessary please keep a copy of this letter in your records if you have questions please contact the person listed at the top of this letter sincerely director exempt_organizations letter catalog number 58263t