t c memo united_states tax_court robert h tilden petitioner v commissioner of internal revenue respondent docket no filed date p’s petition for redetermination was delivered to the court by the u s postal service usps days after r mailed the notice_of_deficiency the envelope containing the petition bore a mailing label generated by p that included a postmark by stamps com of the 90th day the envelope also bore a certified mail sticker with a tracking number although the envelope did not bear a usps postmark usps tracking data for the envelope which data provides information regarding the flow of mailpieces through the mail system from arrival through delivery reflected an arrival date of the 92d day and a delivery date of the 98th day r filed a motion to dismiss for lack of jurisdiction on the ground that the petition was not timely filed held the stamps com postmark is disregarded in favor of usps tracking data boultbee v commissioner tcmemo_2011_11 sec_301_7502-1 proced admin regs held further the petition was not timely mailed and was therefore not timely filed r’s motion will be granted paul w jones for petitioner skyler k bradbury for respondent memorandum opinion armen special_trial_judge this action is one for redetermination of deficiencies and accuracy-related_penalties for and through see sec_6213 sec_6662 sec_6665 rules a a presently pending before the court is respondent’s motion to dismiss for lack of jurisdiction filed date in his motion respondent moves to dismiss this case upon the ground that the petition was not filed within the time prescribed by sec_6213 or sec_7502 on date petitioner filed a response to respondent’s motion in his response petitioner objects to the granting of respondent’s motion arguing that a stamps com postmark is the sum of the deficiency and penalty placed in dispute does not exceed dollar_figure for any of the four calendar years in issue see sec_7443a unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as amended and all rule references are to the tax_court rules_of_practice and procedure evidence of a timely filed petition pursuant to reg sec_301_7502-1 the parties further elaborated on their respective positions with respondent filing a reply to petitioner’s response and petitioner filing a response to respondent’s reply at the time that the petition was filed petitioner resided in the state of wisconsin background on date respondent sent by certified mail duplicate notices of deficiency to petitioner at least one if not both of the notices was received by petitioner the 90th day after the mailing of the notices of deficiency was date which was a tuesday and not a legal_holiday in the district of columbia petitioner sought to challenge respondent’s deficiency and penalty determinations by appealing to this court see sec_6213 the petition for redetermination of deficiency regular_tax court case was received by the except as to the four-digit extension to the five-digit zip code one of the two addresses is the same as petitioner’s current mailing address as alleged by him in paragraph of his petition filed date also a copy of only one of the notices of deficiency is in the record and it is dated date and not date as alleged by respondent in the motion that is now before the court court in the late morning of wednesday date and filed shortly before noon of that day the petition was sent via the u s postal service usps by first-class mail the envelope containing the petition bears a mailing label generated by a clerical employee in the office of petitioner’s counsel which label includes a postmark by stamps com of date the envelope also bears a certified mail sticker with a 20-digit tracking number the envelope does not bear a usps postmark although petitioner is a resident of the state of wisconsin the office of petitioner’s counsel is located in salt lake city utah a clerical employee in the office of petitioner’s counsel mailed the envelope containing the petition at a post office in salt lake city stamps com inc is a publicly traded company nasdaq stmp that is headquartered in el segundo california and that provides internet-based postage services the company’s online postage service provides a user the ability to buy and print usps-approved postage directly from the user’s computer see http www stamps com company-info simply log-in to stamps com print your postage then drop your letters and packages into any mailbox hand them to your postal carrier or schedule a usps pick-up right through the software see http www stamps com postage-online post-office it would appear that the certified mail sticker was applied to the envelope by the same clerical employee in the office of petitioner’s counsel regardless ps form_3800 certified mail receipt was not postmarked by a usps employee rather a clerical employee in the office of petitioner’s counsel handwrote the date in the portion of the receipt where a usps employee would otherwise have postmarked it the usps web site www usps com provides information regarding the flow of mailpieces through the mail system from arrival through delivery such information is made possible through tracking numbers that are assigned to individual mailpieces as stated above the envelope containing the petition in the instant case bears a 20-digit tracking number plugging that number into the tracking tool at the usps web site usps tracking or formerly usps track confirm yields tracking information regarding the mailpiece in question thus the first entry reflects an arrival date and time of date pincite p m at a usps facility in salt lake city utah and the last entry reflects a delivery date and time of date pincite a m at washington d c the latter zip code is the court’s dedicated zip code as previously stated respondent filed his motion to dismiss for lack of jurisdiction on date in his motion respondent relies on usps tracking information in arguing that the petition was not timely filed with the court petitioner objects to the granting of the motion and in his response filed date he argues that the envelope containing the petition bears a postmark date within the time for filing in support of that argument petitioner cites sec_301_7502-1 proced admin regs for the proposition that a postmark which although not made by the u s postal service still complies with the timely mailing timely filing rules of sec_7502 in his reply filed date respondent challenges petitioner’s reliance on the regulation and in his response filed date petitioner defends it discussion the tax_court is a court of limited jurisdiction and it may exercise jurisdiction only to the extent authorized by congress see sec_7442 85_tc_527 the court’s jurisdiction to redetermine a deficiency in income_tax depends on the issuance of a valid notice_of_deficiency and a timely filed petition rule a c 93_tc_22 90_tc_142 sec_6212 expressly authorizes the commissioner after determining a deficiency to send a notice_of_deficiency to the taxpayer by certified or registered mail the taxpayer in turn ha sec_90 days or days if the notice is addressed to a person outside the united_states to file a petition with this court for redetermination of the contested deficiency sec_6213 by virtue of sec_7502 a petition that is timely mailed may be deemed to be timely filed in the instant case there is no issue regarding the validity of the duplicate notices of deficiency and the parties agree that whether the court has or lacks jurisdiction turns on whether the petition was timely filed the parties also agree that the 90-day and not the 150-day filing window applies because neither notice was addressed to a person outside the united_states it is clear that respondent sent the notices of deficiency to petitioner by certified mail on date as demonstrated by the usps form_3877 firm mailing book for accountable mail that was attached as an exhibit to respondent’s motion to dismiss see 89_tc_321 n holding that usps form_3877 represents direct evidence of the date of mailing of the notice_of_deficiency see also 119_tc_183 overruling various challenges by a taxpayer to the introduction into evidence of a certified mail list--the equivalent of a usps form 3877--by the commissioner the 90th day after the date of mailing was tuesday date which was not a legal_holiday in the district of columbia see sec_7503 however the petition was not received and filed by the court until wednesday date the 98th day after the date that the notices were mailed thus the petition was not timely filed and respondent’s motion must be granted unless the petition is deemed to have been timely filed by virtue of having been timely mailed a petitioner’s position petitioner argues that the petition was timely mailed and therefore timely filed in that regard petitioner argues that the stamps com postmark appearing on the mailing label affixed to the envelope in which the petition was mailed constitutes a postmark that is governed by sec_301_7502-1 proced admin regs that section provides as follows b postmark made by other than u s postal service -- in general --if the postmark on the envelope is made other than by the u s postal service-- i the postmark so made must bear a legible date on or before the last date or the last day of the period prescribed for filing the document or making the payment and ii the document or payment must be received by the agency officer or office with which it is required to be filed not later than the time when a document or payment contained in an envelope that is properly addressed mailed and sent by the same class of mail would ordinarily be received if it were postmarked at the same point of origin by the u s postal service on the last date or the last day of the period prescribed for filing the document or mailing the payment b respondent’s position respondent counters by arguing that the stamps com shipping label used by petitioner in this case includes only the date of the purchase and does not indicate the place or date of sending or receipt in addition respondent argues that the governing regulation is not the one relied on by petitioner but rather is sec_301_7502-1 proced admin regs which provides as follows b postmark made by other than u s postal service -- document or payment received late --if a document or payment described in paragraph c iii b is received after the time when a document or payment so mailed and so postmarked by the u s postal service would ordinarily be received the document or payment is treated as having been received at the time when a document or payment so mailed and so postmarked would ordinarily be received if the person who is required to file the document or make the payment establishes-- i that it was actually deposited in the u s mail before the last collection of mail from the place of deposit that was postmarked except for the metered mail by the u s postal service on or before the last date or the last day of the period prescribed for filing the document or making the payment ii that the delay in receiving the document or payment was due to a delay in the transmission of the u s mail and iii the cause of the delay in respondent’s view petitioner has failed to satisfy the three requirements of sec_301_7502-1 through iii proced admin regs see eg ernest v commissioner tcmemo_2002_23 c analysis in the court’s view the jurisdictional issue for decision is controlled not by sec_301_7502-1 proced admin regs as argued by petitioner nor by sec_301_7502-1 proced admin regs as argued by respondent but rather by sec_301_7502-1 proced admin regs the latter section provides as follows u s and non-u s postmarks --if the envelope has a postmark made by the u s postal service in addition to a postmark not so made the postmark that was not made by the u s postal service is disregarded and whether the envelope was mailed in accordance with this paragraph c iii b will be determined solely by applying the rule_of paragraph c iii a of this section the rule_of paragraph c iii a of this section appears in sec_301 c iii a proced admin regs and as immediately relevant provides that the usps postmark is conclusive in determining whether the document was timely mailed see sanchez v commissioner tcmemo_2014_223 holding mark from stamps com disregarded in favor of usps postmark admittedly in the instant case no postmark made by the usps appears on the envelope in which the petition was mailed to the court however usps tracking formerly usps track confirm reflects that the envelope entered the u s mail system on date in boultbee v commissioner tcmemo_2011_11 wl at the court expressly decided that usps track if the postmark does not bear a date on or before the last date or the last day of the period prescribed for filing the document or making the payment the document or payment is considered not to be timely filed or paid regardless of when the document or payment is deposited in the mail sec_301 c iii a proced admin regs emphasis added confirm data which represents official records of the u s postal service can serve as the functional equivalent of or be tantamount to a usps postmark see also sec_7502 regarding the treatment of private delivery services and the use of corporate records electronically written to a database as a postmark after all both usps tracking data and the more traditional postmark are products of the usps and nothing would suggest that the former is not as reliable and accurate as the latter when it comes to determining the time of mailing see id as we stated in boultbee v commissioner wl at the u s postal service track and confirm service provides reliable data from a neutral third-party source that is not susceptible to manipulation by the parties see also 91_tc_1019 regarding adapting the law to reflect technological advancements petitioner argues that usps tracking data does not accurately reflect either where or when the envelope first entered the usps mailstream but this is no different from the argument made in other cases that the usps failed to promptly place a traditional postmark on an envelope containing a petition either because the postmarking was performed at a postal facility other than the one where the envelope was placed into the mailstream or because the usps was dilatory in postmarking the envelope e g 554_f2d_736 5th cir holding that a petition mailed on the 90th day from a post office in galveston texas but postmarked in houston on the following day which regional postmarking led to the delay in postmarking was nevertheless untimely thereby justifying the dismissal of the case aff’g an unpublished order of this court sanchez v commissioner tcmemo_2014_223 holding that a postmark made by the usps in salt lake city utah was definitive notwithstanding the fact that the petition was mailed from bountiful utah some miles distant as sec_301_7502-1 proced admin regs makes clear the sender who relies upon the applicability of sec_7502 assumes the risk that the postmark will bear a date on or before the last date or the last day of the period prescribed for filing the document the regulation goes on to advise that such risk may be avoided by using registered mail or by using certified mail and having the sender’s receipt postmarked by the postal employee to whom the document is presented similarly sec_301_7502-1 proced admin regs advises that the risk that the document or payment will not be postmarked on the day that it is deposited in the mail may be eliminated by the use of registered or certified mail see brown v commissioner tcmemo_1982_165 holding that in the case of certified mail such risk may be eliminated only if the sender’s receipt is postmarked by a usps employee such risk may also be avoided through the judicious use of a designated_delivery_service see sec_7502 sec_301_7502-1 proced admin regs notice_2004_83 2004_2_cb_1030 in the instant case the sender’s receipt for certified mail was not postmarked by a usps employee but rather was handwritten by an employee of petitioner’s counsel therefore sending the petition by certified mail afforded petitioner no guarantee of a timely postmark and he assumed the risk that the postmark would bear a date on or before the last day of the 90-day period prescribed for filing the petition unfortunately for petitioner the stamps com postmark upon which he relies is superseded by usps tracking data which tracking data serves as a postmark see boultbee v commissioner tcmemo_2011_11 and is therefore conclusive in determining whether the petition was timely mailed see sec_301_7502-1 proced admin regs in the instant case usps tracking data demonstrates that the petition was not timely mailed the substance of notice_2004_83 2004_2_cb_1030 now appears in notice_2015_38 2015_21_irb_984 which was effective date after the petition in the instant case was filed conclusion the petition in this case was neither filed nor mailed within the requisite day period accordingly the court is constrained to grant respondent’s motion to dismiss however it bears mention that although petitioner cannot pursue his case in this court he is not without a judicial remedy specifically petitioner may pay the tax file a claim_for_refund with the internal_revenue_service and if his claim is denied sue for a refund in the appropriate federal district_court or the u s court of federal claims see 55_tc_138 n see also 138_tc_348 to give effect to the foregoing an order granting respondent’s motion and dismissing this case for lack of jurisdiction will be entered


t c memo united_states tax_court liberty vending incorporated petitioner v commissioner of internal revenue respondent john poulos petitioner v commissioner of internal revenue respondent docket nos filed date karl j smith and joel s gilbert for petitioners donna c hansberry and victoria s crosley for respondent memorandum findings_of_fact and opinion foley judge respondent determined the following deficiencies in petitioners' federal income taxes liberty vending inc docket no year deficiency dollar_figure big_number john poulos docket no year deficiency dollar_figure all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure the issue for decision is whether petitioners are entitled to deduct amounts paid for legal fees we hold that liberty vending inc may not and that john poulos may to the extent provided below findings_of_fact some of the facts have been stipulated and are so found at the time petitioners filed their petitions liberty vending's principal_place_of_business and john poulos' residence were in palatine illinois john poulos was the sole shareholder and operator of galaxy inc galaxy a subchapter_s_corporation and liberty vending inc liberty a subchapter_c_corporation galaxy and liberty operated video game arcades and on a weekly basis collected receipts from the video games remitted a portion of such receipts to the games' manufacturers and notified the manufacturers how often each game was used galaxy had four employees and liberty had two employees in june of mr poulos experienced heart problems and was hospitalized for or days while mr poulos was in the hospital mrs poulos filed for divorce obtained a temporary restraining order against him and obtained an ex_parte order of protection that gave her emergency possession of liberty and galaxy and placed petitioners' bank accounts in escrow at american national bank anb under the supervision of the circuit_court of cook county illinois domestic relations division mrs poulos and her boyfriend then went to galaxy's and liberty's place of business fired all of the employees took large quantities of cash and equipment and removed the corporations' books_and_records mr poulos learned of his wife's actions while in the hospital after the hospital released him he attempted to enter the businesses but discovered that the locks had been changed to regain possession of his businesses mr poulos retained the services of two law firms greenburg hermann greenburg and schiller ducanto and fleck schiller mr poulos' corporate attorney george ritsos also assisted in the matter on date mr poulos' attorneys filed a motion to dissolve the order of protection and the temporary restraining order while this motion was pending mr poulos received notices of nonpayment from galaxy's and liberty's creditors in addition video game manufacturers notified mr poulos that his corporations were not fulfilling their service obligations and therefore contracts with his companies would be canceled if he could not rectify this problem payments from the anb escrow account to liberty's and galaxy's creditors could not be made without a court order and mr poulos had no other funds with which to make these payments as a result mr poulos filed a motion with the court to order such payments in november of the court issued an order giving mr poulos possession of liberty and galaxy mr poulos and his attorneys continued their attempts to regain possession of the corporate assets that had been taken by mrs poulos and her boyfriend in addition they also represented mr poulos in his divorce action with mrs poulos the following table delineates legal expenses paid_by galaxy in and mr poulos in greenburg schiller mr ritsos dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number approximately percent of schiller's and percent of greenburg's fees related to the services performed on behalf of galaxy on their respective income_tax returns liberty deducted legal fees of dollar_figure for and dollar_figure for and galaxy deducted legal fees of dollar_figure for and dollar_figure for because galaxy was a s_corporation the latter deductions passed through to mr poulos' tax returns for the years in issue respondent disallowed the deductions opinion petitioners contend that liberty and galaxy are entitled to deduct as ordinary and necessary business_expenses the portion of the legal fees attributable to regaining possession of the corporations see sec_162 petitioners further contend that mr poulos may deduct such fees because they were incurred for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income see sec_212 respondent contends that the legal expenses relate to mr poulos' divorce proceeding and therefore are personal expenses that should be disallowed see sec_262 petitioners' legal expenses are deductible if the origin of the claim arose from their profit seeking rather than mr poulos' personal activities see 372_us_39 mr poulos' legal fees were incurred for the purpose of establishing his right to possession of or participation in the income from the corporations and therefore such expenses arose from mr poulos' profit-seeking activities see eg hahn v commissioner tcmemo_1976_113 allowing a deduction for legal fees relating to obtaining possession of and participation of income from a business already owned by the taxpayer while the protective_order was in place employees were fired the corporations' creditors were not paid and services were not performed in addition the corporations could not pay creditors without the divorce court's permission thus the corporations' profit-seeking activities were curtailed see eg 605_f2d_1146 10th cir holding that legal expenses of a corporation arising out of a divorce proceeding between the shareholder-owner and his wife were deductible to the extent that the costs were incurred to resist actions that interfered with the business activities of the corporation accordingly mr poulos is entitled to deductions including pass-through deductions for the portion of the legal fees relating to the protective_order ie dollar_figure for and dollar_figure for liberty however is not entitled to deduct any of its alleged legal expenses because it has not established that it paid such expenses to reflect the foregoing decisions will be entered under rule


id office uilc cca_2012060414415053 number release date from ------------------- sent monday june pm to ----------------- cc --------------------------------------------------------------------------- subject ------------------------------ ------------ pursuant to your request the following provides a discussion of the legal authorities applicable to your case if you have any questions please do not hesitate to contact me or ------------------------ in ------ whether a partnership exists is a matter of federal_law whether a partnership exists for federal tax purposes is a matter of federal not state law 327_us_280 an entity’s status under local law is not determinative for federal tax purposes 42_tc_1067 the internal_revenue_code supersedes local law and prescribes its own standards for determining whether a partnership exists id sec_301_7701-1 provides that the internal_revenue_code prescribes the classification of various organizations for federal tax purposes and that whether an organization is an entity separate from its owners for federal tax purposes is a matter of federal tax law and does not depend on whether the organization is recognized as an entity under local law whether a partnership exists for federal tax purposes sec_761 provides that the term partnership includes a syndicate group pool joint_venture or other unincorporated organization through or by means of which any business financial operation or venture is carried on and which is not a corporation trust or estate as a threshold matter an entity separate from its owner must exist before the service will recognize an arrangement as a partnership for federal tax purposes sec_301_7701-1 provides that a joint_venture or other contractual arrangement may create a separate_entity for federal tax purposes if the participants carry on a trade business financial operation or venture and divide the profits therefrom for example a separate_entity exists for federal tax purposes if co-owners of an apartment building lease space and in addition provide services to the occupants either directly or through an agent however mere co-ownership_of_property that is maintained kept in repair and rented or leased does not constitute a separate_entity for federal tax purposes see also revrul_75_374 1975_2_cb_261 sec_301_7701-2 provides that a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust sec_301_7701-2 provides that for federal tax purposes the term partnership means a business_entity that is not a corporation under sec_301_7701-2 and that has at least two members in this case taxpayers hold a --- limited_partnership_interest as tenants_by_the_entirety an llc holds the remaining -- interest therefore the entity at issue has at least two members a partnership exists for federal tax purposes when one or more persons join together to carry on a trade_or_business and share in the profits and losses of that trade_or_business tower u s pincite the primary inquiry is whether considering all of the facts the parties in good_faith and acting with a business_purpose intended to join together in the present conduct of a business_enterprise 337_us_733 the following factors none of which is conclusive provide evidence of the parties’ intent the agreement of the parties and their conduct in executing its terms the contributions if any which each party has made to the venture the parties' control_over income and capital and the right of each to make withdrawals whether each party was a principal and co- proprietor sharing a mutual proprietary interest in the net profits and having an obligation to share losses or whether one party was the agent or employee of the other receiving for his services contingent_compensation in the form of a percentage of income whether business was conducted in the joint names of the parties whether the parties filed federal partnership returns or otherwise represented to respondent or persons with whom they dealt that they were joint venturers whether separate books of account were maintained for the venture and whether the parties exercised mutual control_over and assumed mutual responsibilities for the enterprise luna t c pincite1078 the commissioner may challenge abusive partnership transactions under various judicial doctrines and statutory rules including sham_transaction economic_substance business_purpose substance over form step transaction clear_reflection_of_income and the partnership_anti-abuse_rules under sec_1_701-2 exam has not provided specific support for the assertion of any of these theories however in the event that they do we are available to review their proposed arguments we note that under the substance_over_form_doctrine a taxpayer is free to organize his affairs as he chooses but is bound by the tax consequences of his choice commissioner v nat’l alfalfa dehydrating milling co 417_us_132 in the present case taxpayers organized their ------------------------business as a partnership and must comply with the rules of subchapter_k generally and in determining each partner’s distributive_share of income gain loss deduction or credit similarly sec_1_701-2 example finds that under general facts ------------------------------------------------- the arrangement satisfies the business_purpose substance over form and clear_reflection_of_income requirements as those requirements are incorporated into the partnership_anti-abuse_rules allocation of income between husband and wife holding property as tenants_by_the_entirety sec_704 provides the rules for determining a partner’s distributive_share of income gain loss deduction and credit however the sharing of income between husband and wife holding a partnership_interest as tenants_by_the_entirety is governed by local law see 182_f2d_649 8th cir finney v comm’r t c memo citing 23_tc_237 applicability of tefra partnership rules as the entity filed forms for the relevant tax periods regardless of whether the entity was a partnership the tefra partnership procedures are applicable unless the small_partnership_exception of sec_6231 is applicable or the returns were filed for the sole purpose of making a sec_761 election sec_301_6233-1 it is our understanding that the entity did not file the subject forms to make a sec_761 election the small_partnership_exception is not applicable because one of the purported partners identified on the schedules k-1 is a pass-thru_entity sec_6231 sec_301_6231_a_1_-1 this is true regardless of whether the pass-thru_partner is a disregarded_entity see revrul_2004_88 the service could reasonably determine based upon the subject partnership returns that the tefra partnership procedures are applicable see sec_6231 if on the basis of a partnership return for taxable_year the secretary reasonably determines that this subchapter applies to such partnership for such year but such determination is erroneous then the provisions of this subchapter are hereby extended to such partnership and its items for such taxable_year and to partners of such partnership note that sec_6231 and the regulations thereunder sec_301_6231_c_-1 through provide for removal of certain partners from application of tefra partnership procedures under certain circumstances based on the information provided it does not appear that any of those circumstances are present here however we recommend review of that code section and those regulations we are happy to provide further assistance if necessary under the tefra partnership procedures prior to assessing the tax_liability of the partners the internal_revenue_service determines the tax treatment of partnership items in a partnership-level proceeding sec_6221 and sec_6225 determinations at the partnership level are binding upon all direct and indirect partners of the partnership 95_tc_243 in the absence of a partnership-level proceeding the service is bound by the partnership items as reported on the partnership return 94_tc_853 the existence of a valid partnership is a partnership_item tigers eye trading llc v comm’r t c no wl at the service should not issue an affected_item notice_of_deficiency before the conclusion of a partnership- level proceeding regarding partnership items that affect the items in the notice_of_deficiency 114_tc_519 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------- -------------------------------------------------------------------------------------------------------------------------------------------- ----------------------


t c summary opinion united_states tax_court samuel c and linda p johnson petitioners v commissioner of internal revenue respondent docket no 20072-08s filed date kathryn s crawford for petitioners brandon s cline for respondent dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure respondent issued a notice_of_deficiency to petitioners in which he determined the following deficiencies additions to tax and penalty year deficiency dollar_figure big_number additions to tax and penalty a a dollar_figure -0- dollar_figure -0- -0- after concessions the issues for decision are whether petitioners are entitled to a loss deduction of dollar_figure million for and corresponding net_operating_loss nol carryforwards for and liable for a sec_6651 addition_to_tax for and and liable for a sec_6662 accuracy-related_penalty for 1petitioners and respondent signed a stipulation of settled issues for petitioners concede that they failed to file their federal_income_tax return timely failed to report taxable rental income of dollar_figure failed to report cancellation of debt income of dollar_figure and failed to report on schedule c profit or loss from business income of dollar_figure for petitioners concede that they failed to file their federal_income_tax return timely that they failed to report taxable rental income of dollar_figure and that they were liable for a computational adjustment to their claimed medical_expense_deduction that was based on an increase in adjusted_gross_income for petitioners concede that they failed to report ordinary_income of dollar_figure and that they were liable for computational adjustments to their claimed medical_expense_deduction and claimed earned_income_credit that were based on an increase in adjusted_gross_income background some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by reference petitioners resided in alabama when they filed their petition johnson associates mortgage co inc johnson associates was incorporated in delaware on date it was a full-service mortgage company that originated underwrote closed and serviced single-family residential mortgages johnson associates’ initial capital was big_number shares of stock with a par_value of dollar_figure per share on date johnson associates filed for a certificate of authority to conduct business in alabama as a foreign_corporation the application_for the certificate reflects big_number issued shares mr johnson petitioner was the president chief operating officer and chief_executive_officer of johnson associates he was a salaried employee of johnson associates and upon its incorporation his compensation included a monthly salary of dollar_figure plus bonuses petitioner and his father were johnson associates’ majority shareholders johnson associates took out lines of credit with several banks in birmingham alabama including regions bank regions the line of credit from regions was used for operating capital johnson associates began to experience financial difficulties in either or it did not pay petitioner a salary at that time because it did not have enough profits to pay his salary and other employees’ salaries in regions called for payment of johnson associates’ line of credit after the debt reached over dollar_figure million petitioner and his father negotiated a new promissory note with regions on date under the new agreement petitioner in his personal capacity his father and petitioner as president of johnson associates are listed as the borrowers on a regions promissory note for dollar_figure the loan called for interest- only payments until after petitioner’s father’s death several mortgages held by johnson associates and a dollar_figure life_insurance_policy that petitioner’s father owned and that petitioner was the beneficiary of were given as collateral for the loan petitioner’s father died on date in date the life_insurance_company issued a check to regions for dollar_figure in date petitioner signed another promissory note for dollar_figure with regions petitioner signed the promissory note in his individual capacity as executor of his father’s estate and as president of johnson associates this promissory note also called for accrued interest-only payments and was secured_by the same mortgages that served as collateral for the first promissory note the maturity_date of the second promissory note was date at which time the unpaid principal balance and accrued interest would be due on date petitioner wrote a personal check to regions to pay the balance of the second promissory note the funds to pay the second promissory note were obtained from petitioner’s personal checking account his inheritance from his father’s estate and loans from his children petitioners reported a loss of dollar_figure on line other income of their form_1040 u s individual_income_tax_return see statement is typed on line of form_1040 statement form_1040 line other income lists petitioners’ other income as the following description amount dollar_figure nol_carryover to murphy johnson i llc big_number bank one--debt cancellation big_number chase--debt cancellation big_number mbna--debt cancellation big_number operating loss johnson associates big_number less expenses big_number miles big_number total big_number petitioners reported an nol_carryover of dollar_figure on line of their form_1040 the statement accompanying the return is for schedule e supplemental income and loss and does not include any additional information concerning the nol only page of schedule e is attached to the return no other statements accompany the return petitioners reported a loss of dollar_figure on line of their form_1040 see statement is typed on line statement lists petitioners’ other income as the following description debt cancellation--usaa savings hare wynn newell and newton prior year nol total amount dollar_figure big_number big_number big_number respondent issued petitioners a notice_of_deficiency for and that disallowed their initial loss claim for and their nol carryforwards for and respondent also determined that petitioners were liable for a sec_6651 addition_to_tax for and and a sec_6662 accuracy-related_penalty for discussion generally the commissioner’s determinations are presumed correct and the taxpayer bears the burden of proving that those determinations are erroneous rule a see 503_us_79 290_us_111 in some cases the burden_of_proof with respect to relevant factual issues may shift to the commissioner under sec_7491 petitioners did not argue or present evidence that they satisfied the requirements of sec_7491 therefore there is no burden shift under sec_7491 i the loss claim and the and nol carryforwards petitioners argue that they should be allowed a deduction for a bad_debt because petitioner had to personally guarantee both of the promissory notes petitioners’ argument that the loan payments constitute a bad_debt is wrong petitioner was listed as a separate borrower on both of the regions promissory notes he was not a guarantor of the loans but instead was primarily liable for each of them in his personal capacity ‘deductions are not permitted on account of the repayment of loans ’ 62_tc_878 quoting 11_bta_1299 deductions are allowed under sec_162 for the ordinary and necessary expenses of carrying on an activity that constitutes the taxpayer’s trade_or_business 91_tc_713 affd 905_f2d_241 8th cir 47_tc_483 the performance of services as an employee constitutes a trade_or_business 91_tc_352 when deciding which taxpayer an individual or a corporation is entitled to deduct certain expenses it is important to remember that a corporation is a separate_entity from its shareholders for tax purposes see 319_us_436 it is well established that officers employees or shareholders may not deduct the payment of corporate expenses on their individual returns craft v commissioner tcmemo_2005_197 citing 308_us_488 269_f2d_108 4th cir affg tcmemo_1958_60 and 51_tc_746 such payments constitute either capital contributions or loans to the corporation and are deductible if at all only by the corporation gantner v commissioner supra pincite citing deputy v du pont supra pincite and rink v commissioner supra pincite during his testimony petitioner often referred to the royal we when discussing whether he his father or johnson associates took certain actions petitioner introduced no evidence that the payment of the loan was an ordinary_and_necessary_expense related to his trade_or_business of being an employee of johnson associates petitioner testified that he felt a moral obligation in addition to the legal_obligation to repay the loan and that he did not want to ruin his name and reputation in the real_estate community the repayment of the loan does not morph into a deductible expense just because petitioner made the payment to protect his reputation see brenner v commissioner supra pincite even if petitioner had paid off the loan to protect his equity_interest in johnson associates the payments would be capitalized and not considered deductible expenses to petitioner see craft v commissioner supra petitioner has failed to prove that the repayment of the regions loan was any more than that the repayment of a loan therefore respondent’s determination to disallow the loss claim and subsequent and nol carryforwards is sustained ii additions to tax and accuracy-related_penalty a sec_6651 additions to tax for failure_to_file tax_return timely petitioners concede that they failed to file their and returns timely a taxpayer will not be responsible for an addition_to_tax under sec_6651 if the taxpayer can show that the failure_to_file was due to reasonable_cause and not due to willful neglect 469_us_241 reasonable_cause exists when a taxpayer exercises ordinary business care and prudence and is nonetheless unable to file his or her return within the date prescribed by law sec_301_6651-1 proced admin regs willful neglect is defined as a conscious intentional failure or reckless indifference united_states v boyle supra pincite 2because the court finds that petitioners did not incur losses that might give rise to nols we need not discuss whether petitioners properly elected to waive their nol carrybacks before claiming nol carryforwards petitioners did not provide any evidence that their failure_to_file their and returns timely was due to reasonable_cause and not due to willful neglect accordingly respondent’s determination of the failure_to_file additions to tax for and is sustained b sec_6662 accuracy-related_penalty sec_6662 and b imposes a 20-percent accuracy- related penalty on the portion of an underpayment that is attributable to a substantial_understatement_of_income_tax an understatement of income_tax is the excess of the amount of income_tax required to be shown on the return for the taxable_year over the amount of income_tax that is shown on the return reduced by any rebate see sec_6662 an understatement is substantial if it exceeds the greater of percent of the tax required to be shown on the return for the taxable_year or dollar_figure see sec_6662 the commissioner bears the burden of production with respect to the applicability of an accuracy-related_penalty determined in a notice_of_deficiency sec_7491 in order to meet that burden the commissioner need only make a prima facie case that imposition of the penalty is appropriate 116_tc_438 once that burden is met 3the court need not determine whether petitioners are liable for the accuracy-related_penalty due to negligence the taxpayer bears the burden of proving that the accuracy- related penalty does not apply because of reasonable_cause substantial_authority or the like sec_6662 sec_6664 higbee v commissioner supra pincite respondent has met his burden of production for an accuracy-related_penalty based on a substantial_understatement_of_income_tax because petitioners’ understatement of income_tax exceeds dollar_figure an accuracy-related_penalty is not imposed on any portion of the underpayment as to which the taxpayer acted with reasonable_cause and in good_faith sec_6664 sec_1 b income_tax regs incorporates a facts_and_circumstances_test to determine whether the taxpayer acted with reasonable_cause and in good_faith the most important factor is the extent of the taxpayer’s effort to assess his or her proper tax_liability id petitioners provided no evidence that they acted in good_faith and with reasonable_cause additionally petitioners conceded that they failed to report tens of thousands of dollars of income for the years in issue accordingly respondent’s determination of the accuracy-related_penalty is sustained we have considered the parties’ arguments and to the extent not mentioned we conclude the arguments to be moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent


internal_revenue_service number release date index number - ----------------------- --------------------------------- ----------------------------- ------------ - department of the treasury washington dc person to contact ---------------------- id no --------------- telephone number ------------------- refer reply to cc intl br1 - plr-125750-04 date date ----------- ty ------- ---------------------- -------------------------- a ----------------------- ------------------------------------------------------------------------------ date b country c date d dear --------------- surrender of his green card expatriation did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code the information submitted for consideration is substantially as set forth below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination a was born in country c on date b a is citizen and resident of country c where he is fully subject_to country c tax on his worldwide income a expatriated on date d on the date of his expatriation a’s net_worth exceeded the applicable_amount set forth in sec_877 this is in response to your letter dated date requesting a ruling that a’s a former u s citizen whose net_worth or average tax_liability exceeds these sec_877 generally provides that a citizen who loses u s citizenship or a u s plr-125750-04 long-term_resident who ceases to be taxed as a lawful permanent resident individuals who expatriate within the 10-year period immediately preceding the close of the taxable_year will be subject_to the special rules of sec_877 for such taxable_year unless such loss did not have for one of its principal purposes the avoidance of u s taxes sec_2107 and sec_2501 provide special estate and gift_tax regimes respectively for individuals who expatriate with a principal purpose to avoid u s taxes a former u s citizen or former u s long-term_resident will be treated as having expatriated with a principal purpose to avoid u s taxes for purposes of sec_877 sec_2107 and sec_2501 if the individual's average income_tax_liability or the individual's net_worth on the date of expatriation exceed certain thresholds see sec_877 sec_2107 and sec_2501 thresholds however will not be presumed to have a principal purpose of tax_avoidance if that former citizen is described within certain statutory categories and submits a request for a ruling within one year of the date of loss of u s citizenship for the secretary's determination as to whether such loss had for one of its principal purposes the avoidance of u s taxes see sec_877 sec_2107 and sec_2501 former long-term_resident whose net_worth or average tax_liability exceeds the applicable thresholds will not be presumed to have a principal purpose of tax_avoidance if that former resident is described within certain categories and submits a complete and good_faith request for a ruling as to whether such loss had for one of its principal purposes the avoidance of u s taxes notice_98_34 requires that certain information be submitted with a request for a ruling that an individual's expatriation did not have for one of its principal purposes the avoidance of u s taxes and resident fully subject_to tax in country c the country in which he was born modified by notice_98_34 including additional information requested by the service after review of the submission accordingly based solely on the facts submitted and the representations made we conclude that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 therefore a will not be presumed under sec_877 to have had as one of his principal purposes for expatriating the avoidance of under notice_98_34 1998_2_cb_29 modifying notice_97_19 1997_1_cb_394 a a is eligible to request a ruling pursuant to notice_98_34 because he is a citizen a submitted all of the information required to be submitted by notice_97_19 as except as expressly provided herein no opinion is expressed or implied plr-125750-04 u s taxes we further conclude that a will not be treated under sec_877 as having had as one of his principal purposes for expatriating the avoidance of u s taxes because the information submitted clearly establishes the lack of a principal purpose to avoid taxes under subtitle a or b of the code concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition no opinion is expressed as to a's u s tax_liability for the taxable years prior to or after his expatriation under sections of the code other than sec_877 sec_2107 and sec_2501 which a obtained the ruling whether or not a is otherwise required to file a return the code provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer requesting it sec_6110 of a copy of this letter must be attached to a's u s income_tax return for the year in sincerely ________________ m grace fleeman senior counsel cc intl br1


t c memo united_states tax_court william gregory samples petitioner v commissioner of internal revenue respondent docket no filed date william gregory samples pro_se lynette mayfield for respondent memorandum opinion dawson judge this case is before the court on a petition for redetermination of a deficiency and additions to tax for the year in a notice dated date respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax for and additions to tax pursuant to sec_6651 of dollar_figure and sec_6651 of dollar_figure in an amendment to answer filed date respondent alleged and claimed for an increased deficiency of dollar_figure and an increased addition_to_tax under sec_6651 of dollar_figure the issues for decision are whether petitioner received in wages and other compensation of dollar_figure and business income of dollar_figure all of which is includable in his gross_income and subject_to tax whether petitioner is liable for an addition_to_tax pursuant to sec_6651 for failing to file a federal_income_tax return for whether petitioner is liable for an addition_to_tax pursuant to sec_6651 for failing to pay federal_income_tax for and whether petitioner should be required to pay a penalty to the united_states pursuant to sec_6673 background there is no stipulation of facts however respondent’s exhibits 1-r through 5-r were received in evidence and are incorporated herein by this reference petitioner resided in tennessee at the time he filed his petition in petitioner was employed by bluegreen corp bluegreen of boca raton 1unless otherwise indicated all section references are to the internal_revenue_code as amended and in effect for the tax_year at issue and all rule references are to the tax_court rules_of_practice and procedure the failure to pay addition is at the rate of percent for each month or fraction thereof that the failure to pay continues not exceeding percent in the aggregate florida as provided by sec_6041 and d bluegreen reported to respondent that it paid wages and other compensation to petitioner during it issued to petitioner a form_w-2 wage and tax statement for showing wages and other compensation of dollar_figure federal_income_tax withheld of dollar_figure social_security_tax withheld of dollar_figure and medicare_tax withheld of dollar_figure petitioner did not timely file a form_1040 u s individual_income_tax_return for and did not report the income received for that year from bluegreen on or about date petitioner submitted to respondent’s fresno service_center for filing as a purported form_1040 a document to which petitioner attached a letter and a 7-page affidavit of frivolous arguments the purported return showed dollar_figure as wages received income of dollar_figure from schedule c profit or loss from business and total income of dollar_figure petitioner reported his adjusted_gross_income as zero and his total_tax as zero the fresno service_center determined that the purported return was unprocessible and rejected it as a frivolous document on date respondent sent a letter to petitioner cautioning him that if the frivolous document was not withdrawn and a proper return was not filed within days a civil penalty for filing a frivolous tax_return would be imposed petitioner did not withdraw his document submitted on date accordingly a civil penalty of dollar_figure for filing a frivolous tax_return was imposed pursuant to sec_6702 and it was assessed by respondent on date respondent then prepared a substitute for return for petitioner pursuant to sec_6020 and the return was audited upon audit since the parties did not agree respondent issued a notice_of_deficiency on date petitioner filed his petition and made the same frivolous arguments that caused the civil penalty for filing a frivolous tax_return to be imposed for on date respondent’s counsel sent petitioner a letter cautioning him that if he continued to make the same frivolous and groundless arguments at trial respondent would request the court to impose sanctions pursuant to sec_6673 on or about date petitioner sent to the court and to respondent his pretrial memorandum in which he cited the same authorities for his previously rejected frivolous and groundless arguments he continued to repeat them in his statements and testimony at trial consequently respondent filed at trial a motion to impose sanctions under sec_6673 discussion throughout this case petitioner presented tax-protester arguments stating that he is not liable for the federal_income_tax deficiencies and additions to tax determined in respondent’s notice and asserted in his amendment to answer i parties’ contentions in summary petitioner argues that the income_tax is an indirect excise_tax excise_taxes can be laid only upon certain specified events or on privileges the labor and income of a natural_person are his property and a natural right not a privilege granted by government and since none of his income was produced from taxable activity ie the manufacture sale or consumption of commodities and he is a natural_person not a corporation none of the income he earned in is taxable to the contrary respondent points out that petitioner’s arguments are erroneous for several reasons first petitioner’s reliance on the historical discussion contained in 240_us_1 of direct versus indirect taxes as supporting his position is misguided and does not sustain it as explained by the supreme court in brushaber the purpose of the 16th amendment to the constitution was to eliminate the source from which taxed income was derived as the criterion by which to determine the applicability of the constitutional requirement for the apportionment_of_taxes thus the brushaber holding negates petitioner’s attempt to recharacterize his wages and other compensation income as property on which no income_tax may be imposed second petitioner’s contention that his wages and other compensation are not taxable because they are property and that an indirect income_tax on property is impermissible under the constitution is merely a variation on the frivolous argument that wages are not income third courts of appeals have consistently rejected as frivolous the argument that wages are not income e g 965_f2d_383 7th cir 898_f2d_942 3d cir we agree with respondent in 80_tc_1111 this court thoroughly analyzed explained and rejected the same frivolous and groundless arguments made by petitioner ii wages and other compensation sec_61 defines gross_income for purposes of calculating taxable_income as all income from whatever source derived including but not limited to the following items compensation_for services including fees commissions fringe_benefits and similar items sec_61 provides for gross_income derived from business sec_1 imposes a tax on taxable_income received by an individual the liability for the payment of the income_tax is on the individual earning the income 281_us_111 the evidence clearly shows that petitioner received wages and other compensation totaling dollar_figure as an employee of bluegreen in he also received dollar_figure as gross_income with no claimed expenses in his business as an alternative health educator in 746_f2d_1187 6th cir affg tcmemo_1983_474 the u s court_of_appeals for the sixth circuit decided in a per curiam opinion the same issues involved in the instant case by rejecting the taxpayer’s claims that wages paid for his labor were nontaxable receipts and the 16th amendment does not permit an imposition of tax on wages the court_of_appeals stated these assertions are totally without merit first gross_income means all income from whatever source derived including compensation_for services sec_61 and sec_61 348_us_426 75_sct_473 99_led_483 240_us_1 36_sct_236 60_led_493 687_f2d_264 8th cir wages received for services are taxable as income second sec_61 is in full accordance with congressional authority under the sixteenth_amendment to the constitution to impose taxes on income without apportionment among the states id pincite the decision of the court_of_appeals in the perkins case controls the disposition of the issues in this case in addition there are of course numerous decisions by other courts of appeals holding that wages received for services are taxable as income see eg 848_f2d_1007 9th cir 785_f2d_928 11th cir 761_f2d_1113 5th cir accordingly on the basis of this record we sustain respondent’s determination of the deficiency and the asserted increased deficiency iii additions to tax a burden of production respondent bears the burden of production with respect to petitioner’s liability for the additions to tax see sec_7491 116_tc_438 to meet his burden of production respondent must come forward with sufficient evidence indicating it is appropriate to impose the additions to tax see higbee v commissioner supra pincite once respondent meets his burden of production petitioner must come forward with evidence sufficient to persuade the court that respondent’s determinations are incorrect see id pincite b sec_6651 respondent determined that petitioner is liable for an addition_to_tax pursuant to sec_6651 for sec_6651 imposes an addition_to_tax for failure_to_file a return on the date prescribed determined with regard to any extension of time for filing unless such failure is due to reasonable_cause and not due to willful neglect petitioner did not file a return for thus respondent has met his burden of production petitioner must come forward with evidence sufficient to persuade the court that respondent’s determination is incorrect or that an exception applies see rule a 290_us_111 see also higbee v commissioner supra pincite petitioner alleged no error in his petition with respect to the sec_6651 addition_to_tax furthermore he presented no evidence that his failure_to_file was due to reasonable_cause and not due to willful neglect therefore we hold that petitioner is liable for the addition_to_tax pursuant to sec_6651 c sec_6651 sec_6651 provides for an addition_to_tax where payment of tax is not timely unless it is shown that such failure is due to reasonable_cause and not due to willful neglect respondent prepared a substitute for return for that satisfied sec_6020 after the substitute return was audited and the parties failed to agree respondent determined a deficiency of dollar_figure which was later increased to dollar_figure in an amended answer petitioner has paid only a portion of the tax due on the basis of the evidence we find that petitioner did not pay on time some of his tax due for petitioner also did not present evidence indicating that his failure to pay was due to reasonable_cause and not due to willful neglect see higbee v commissioner supra pincite stating that the taxpayer bears the burden_of_proof regarding reasonable_cause accordingly we sustain respondent’s determination on this issue and hold that petitioner is liable for the addition_to_tax pursuant to sec_6651 iv penalty under sec_6673 sec_6673 authorizes the court to require a taxpayer to pay to the united_states a penalty in an amount not to exceed dollar_figure if the taxpayer has instituted or maintained a proceeding primarily for delay or the taxpayer’s position is frivolous or groundless we think petitioner obviously brought this proceeding to delay payment of the income_tax he owes moreover his case is groundless and his arguments are frivolous a taxpayer’s position is frivolous if it is contrary to established law and unsupported by a reasoned colorable argument for change in the law e g 115_tc_523 petitioner has offered no plausible argument that he is exempt from federal_income_tax his arguments simply employ familiar tax-protester rhetoric that has been universally rejected by this and other courts see eg 737_f2d_1417 5th cir 114_tc_136 see also rodriguez v commissioner tcmemo_2009_92 wagenknecht v commissioner tcmemo_2008_288 during the present difficult economic situation when the courts are confronted with resolving an increasing number of legitimate tax controversies what we stated years ago in 68_tc_895 bears repeating in recent times this court has been faced with numerous cases such as this one which have been commenced without any legal justification but solely for the purpose of protesting the federal tax laws this court has before it a large number of cases which deserve careful consideration as speedily as possible and cases of this sort needlessly disrupt our consideration of those genuine controversies many citizens may dislike paying their fair share of taxes everyone feels that he or she needs the money more than the government on the other hand as justice oliver wendell holmes so eloquently stated taxes are what we pay for civilized society 275_us_87 the greatness of our nation is in no small part due to the willingness of our citizens to honestly and fairly participate in our tax collection system which depends upon self-assessment any citizen may resort to the courts whenever he or she in good_faith and with a colorable claim desires to challenge the commissioner’s determination but that does not mean that a citizen may resort to the courts merely to vent his or her anger and attempt symbolically to throw a wrench at the system petitioner’s actions and arguments have resulted in a waste of limited judicial and administrative resources that could have been devoted to resolving bona_fide claims of other taxpayers and his insistence on making such discredited and meritless contentions has shown an unwillingness to comply with the tax laws of the united_states accordingly we shall grant respondent’s motion to impose sanctions and we shall require petitioner to pay a penalty of dollar_figure to the united_states pursuant to sec_6673 to reflect the foregoing an appropriate order and decision will be entered for respondent


department of the treasury int ernal revenue service washington d c date o f f i c e o f c h i e f c o u n s e l number release date cc intl b05 tl-n-3608-00 uilc internal_revenue_service national_office field_service_advice memorandum for cc lm fsh har b attn matthew root from jeffrey dorfman chief branch office of associate chief_counsel international cc intl b05 subject this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent legend taxpayer parent x and y llc state country x treaty year date date date date rate rate amount amount amount amount amount amount amount amount tl-n-3608-00 issue sec_1 whether a u s subsidiary is entitled to deduct interest_expense under sec_163 when the recipient of the payment a foreign_corporation that owns all the stock of the u s subsidiary reports the payment as a dividend on its foreign_income_tax return whether the foreign corporation’s transfer of an existing promissory note to its u s subsidiary in exchange for a new note and the deemed issuance of stock of the u s subsidiary causes the u s subsidiary to recognize income conclusion sec_1 the inconsistent characterization of the payment by the u s subsidiary and its parent while relevant is not a controlling factor in determining whether the u s subsidiary may deduct the payment under sec_163 based on the facts provided the u s subsidiary has not taken a position invoking the substance of a transaction that is contrary to its form and thus has not disavowed the form of the transaction it has chosen further at present the doctrine_of the duty_of_consistency does not apply because the u s subsidiary has not taken a position in one year and a contrary position in a later year after the limitations_period has run in that first year the foreign corporation’s transfer of an existing promissory note to its u s subsidiary in exchange for a new note and the deemed issuance of stock of the u s subsidiary does not cause the u s subsidiary to recognize income or gain facts taxpayer is a domestic wholly owned subsidiary of parent a canadian corporation during the year at issue x and y two canadian subsidiaries of parent formed llc a limited_liability_company under the laws of the state of new york and contributed amount to llc llc’s business was financing the operations of taxpayer and taxpayer’s domestic subsidiaries on or about date of year llc loaned taxpayer amount the note that taxpayer gave to llc old note bore interest at rate which was compounded and payable semi- annually and the principal_amount was to be paid in full on or before date six years after date also on date of year taxpayer loaned a total of amount to three of its subsidiaries all of which executed notes with the same terms as the note between llc and taxpayer except for the principal_amount of each of the three loans tl-n-3608-00 during year taxpayer accrued interest payments of amount to llc and llc accrued the same amount in interest_income during this year llc distributed_amount to its partners x and y on date of year x and y were liquidated into parent as a result parent owned a percent membership interest in llc the law of state permits the existence of single member limited_liability companies the single member llc did not elect to be treated as a corporation for u s tax purposes according to llc’s final u s partnership return the liquidation caused the technical_termination of llc resulting in a deemed_distribution of all of llc’s assets to parent upon termination llc’s assets which consisted of the loan receivable with a face_amount of amount and a receivable for accrued but unpaid interest of amount were distributed to parent on the same date parent contributed in a purported sec_351 transaction its percent ownership_interest in llc to taxpayer in exchange for stock in taxpayer with a fair_market_value of amount and a new note with a face value of amount new note which was slightly less than the face value of the old note except for the principal_amount many of the terms of the old and new loans were the same for example both notes accrued interest at rate per year compounded and payable semi-annually both matured in six years and both had the same terms with respect to prepayment and events of default on an unidentified date after taxpayer issued the new note taxpayer paid parent amount the note’s face_amount of which amount was purportedly interest it is unclear whether taxpayer’s payment was made in year or a later taxable_year under the treaty taxpayer withheld at rate on the interest payment on its year u s return taxpayer claimed an amount deduction parent however reported this payment as a deductible dividend rather than interest_income for country x tax purposes taxpayer stated that under country x law parent cannot report on its country x tax_return interest_income earned by a limited_liability_company rather parent is treated as having sold shares in llc and the excess of the selling_price over basis is treated as a dividend up to the amount of the limited_liability company’s undistributed surplus taxpayer also stated that parent was entitled to claim a deduction under a country x provision similar to the u s dividends received deduction to the extent that the dividend paid_by a non- country x payor taxpayer and received by a country x corporation parent i sec_1 the fsa request notes that taxpayer has inconsistently identified the transferee of the llc interest as parent in some instances and parent’s foreign parent in others and that taxpayer has made varying representations concerning the value of the new note while the amount shown on the note itself was amount a date letter from taxpayer represents that the amount was amount and taxpayer’s year return states that the note’s fair_market_value was amount tl-n-3608-00 paid out of exempt surplus and the country x corporation owns at least rate of the voting_stock of the non-country x payor law and analysis a whether the service may disallow taxpayer’s interest_deduction based on the inconsistent characterization of the payment by taxpayer and parent disavowal of form in general the substance rather than the form of a transaction governs for federal_income_tax purposes 324_us_331 293_us_465 however courts have long recognized that a taxpayer is free to structure his transactions as he chooses but once having done so must accept the consequences of his choice whether contemplated or not and may not enjoy the benefit of some other route he might have chosen to follow but did not 417_us_134 citations omitted the case law recognizes that taxpayers are advantaged by having both the power to structure transactions in any form they choose and the access to the facts that reflect the underlying substance the service on the other hand is disadvantaged because it does not have direct access to such facts accordingly the commissioner must be allowed to rely on representations made by taxpayers in their returns and to evaluate tax consequences based on such disclosures for this reason the courts have generally subjected taxpayers to a heightened standard of proof among other requirements before permitting them to disavow the form they chose and have the transaction taxed in accordance with substance see eg 641_f2d_376 5th cir 99_tc_561 fnma v commissioner 90_tc_405 aff’d 896_f2d_580 d c cir cert_denied 499_us_974 87_tc_1417 aff’d 896_f2d_580 d c cir little v commissioner tcmemo_1993_281 65_tcm_3025 aff’d 106_f3d_1445 9th cir you have asked us whether taxpayer is subject_to this heightened standard of proof based on the facts provided taxpayer has not disavowed the form it originally chose it characterized the amount that it received from parent as a loan the new note taxpayer treated the amount payment to parent as interest_withholding at rate under the applicable treaty and claiming an interest_expense_deduction for such payment we do not know whether taxpayer also treated the payment as interest for financial reporting purposes the fact that the counterparty taxpayer’s parent characterized for country x tax reporting purpose sec_2 the field has not requested chief_counsel_advice with respect to any issues regarding the application of sec_163 tl-n-3608-00 the same payment as a dividend rather than interest is not sufficient for us to conclude that taxpayer disavowed its form thus the heightened standard of proof does not apply here duty_of_consistency related to the principle that a taxpayer cannot generally disavow its chosen form the judicial doctrine_of the duty_of_consistency prevents a taxpayer from taking one position in one year and a contrary position in a later year after the limitations_period has run in that first year the duty_of_consistency applies when the taxpayer made a representation or reported an item for u s income_tax purposes in one year the commissioner acquiesced in or relied on that representation or report for that year and the taxpayer attempts to change that representation or report in a subsequent year after the statute_of_limitations has expired with respect to the year of the representation or report and the change is detrimental to the commissioner 854_f2d_755 5th cir spencer medical associates automotive ventures inc v commissioner tcmemo_1997_130 73_tcm_2309 aff’d 155_f3d_268 4th cir the first element is present as taxpayer has characterized the payment to parent as interest on its tax_return however the second and third elements are absent with respect to the tax years at issue the commissioner has not yet acquiesced or relied on taxpayer’s representation and the statute_of_limitations has not yet expired without an audit of those tax years taxpayer has also not yet attempted to change this representation in a subsequent year after the statute_of_limitations has expired with respect to the year of the representation thus the duty_of_consistency doctrine does not presently apply b whether parent’s transfer of an existing promissory note to taxpayer in exchange for a new note and the deemed issuance of stock of taxpayer results in taxable_income or gain to taxpayer taxpayer does not recognize cancellation_of_indebtedness_income from parent’s transfer of the old note to taxpayer in exchange for the new note and the deemed issuance of stock of taxpayer sec_61 of the code provides that gross_income includes income from the discharge_of_indebtedness see 284_us_1 generally a debtor realized discharge_of_indebtedness income to the extent the fair_market_value of property or the amount of money given in satisfaction of a debt is less than the face_amount of the indebtedness that is canceled adjusted for unamortized premium or discount we assume that the purported debt is debt in fact as we do not have facts represented that clearly suggest otherwise tl-n-3608-00 if a debtor discharges an unsecured liability by transferring appreciated capital assets there is deemed to be a sale_or_exchange of the transferred property and the debtor realizes capital_gain or loss on this transaction measured by the difference between its adjusted_basis in the property and the face_amount of the liability discharged however if the debtor discharges its liabilities by issuing new stock or an obligation in place of the old obligation an entirely different situation is presented in substance there has been no cancellation of the old obligation but merely a continuation or substitution of the liability in a new form a use of a new debt_instrument to discharge debt sec_108 provides generally that for purposes of determining discharge_of_indebtedness income a debtor is treated as having satisfied a debt with an amount of money equal to the issue_price of a new debt where the debtor issues a new debt_instrument in satisfaction of the old debt_instrument sec_108 provides that for purposes of sec_108 the issue_price is determined by applying sec_1273 and sec_1274 for purposes of determining issue_price sec_1273 is applied by reducing the stated redemption price of any instrument by the portion of the stated redemption price that is treated as interest where neither the new nor the old indebtedness is publicly traded and sec_1274 does not apply the issue_price of a debt_instrument issued for property for purposes of determining whether there is original_issue_discount is its stated redemption value at maturity sec_1273 to the extent that a debtor_corporation does not fully satisfy the debt with new debt it will generally recognize income even if the new debt and the cancelled debt constitute securities within the meaning of sec_354 sec_355 or sec_356 and the exchange qualifies for nonrecognition treatment under one of these sections b use of debtor corporation’s stock to discharge debt a solvent corporate debtor does not realize taxable cancellation_of_indebtedness_income on the issuance of stock in exchange for its debt obligation unless there is a difference between the amount of debt discharged and the value of the stock for transfers occurring after date in determining the amount of cancellation_of_indebtedness_income upon the exchange of qualified_stock for debt debt will be treated as having been satisfied with money equal to the fair_market_value of the stock sec_108 if a debtor exchanges appreciated_property to cancel debt the debtor is generally subject_to gain_or_loss recognition under sec_1001 however sec_1032 provides an exception to the general recognition rule where a corporation receives money or other_property in exchange for its own stock c taxpayer’s use of debt and stock to discharge debt tl-n-3608-00 on date of year taxpayer owed parent amount of principal and amount of accrued but unpaid interest on the old note on this date parent contributed this note to taxpayer in exchange for a new note with a face_amount of amount bearing the same interest terms as the old note and a deemed issuance of common_stock of taxpayer if the service accepts that there was a deemed issuance of stock of taxpayer with a fair_market_value equal to the outstanding balance of the old note taking into account the issuance of the new note the old note is repaid in full and thus there is no cancellation_of_indebtedness_income if the service does not respect the deemed issuance of stock however there would be cancellation_of_indebtedness_income to the extend of the difference between the amount of the new note amount and the old note amount sec_1 and parent’s transfer of the old note to taxpayer in exchange for the new note and the deemed issuance of stock of taxpayer qualifies as a nonrecognition exchange under sec_368 the definition of a reorganization under sec_368 includes a recapitalization which refers to the readjustment of the financial structure of a single corporation a recapitalization and therefore a reorganization takes place if a corporation with dollar_figure par_value of bonds outstanding instead of paying them off in cash discharges them by issuing preferred shares to the bondholders sec_1_368-2 the transaction would similarly qualify as a recapitalization if common_stock were issued for the bonds or if the instrument given up were debentures long-term notes or other_securities bittker and eustice federal income_taxation of corporations and shareholders 6th ed at p a hereinafter bittker in addition an exchange of debt of a corporation for debt of the same corporation qualifies as a recapitalization pursuant to sec_368 although sec_368 does not require that the exchanged debt qualify as a security the operative nonrecognition_provision for the debtholder in a sec_368 transaction sec_354 does under sec_354 both the old debt and new debt must be securities the term securities lacks a precise definition the analysis is based on facts and circumstances with term-to-maturity generally considered the most important element debt with a term of five years or more is generally a security debt with a shorter term may not be see generally bittker at p in an exchange of old securities for new securities where the principal_amount of the securities received exceeds the principal_amount of those securities surrendered the fair_market_value of the excess_amount is taxable boot under sec_354 and sec_356 sec_1_356-3 exs and thus under sec_356 and sec_356 the taxpayer eg parent if it were a u s taxpayer would realize gain to the extent of boot the gain would generally be capital_gain if the securities are capital assets in the hands of the taxpayer since tl-n-3608-00 the transaction would not have the effect of a distribution of a dividend the term principal_amount as used in sec_356 does not necessarily refer to the face_amount of the securities but rather to the amounts that are treated as principal by the tax law for interest_income and deduction purposes ie the issue_price of the new debt and the adjusted_issue_price of the old debt id at p b if the excess principal_amount is a method of discharging arrears in interest on the security the security holder’s gain is taxable separately as ordinary interest_income sec_1032 generally provides that no gain_or_loss shall be recognized to a corporation on the receipt of money or other_property in exchange for stock including treasury_stock of such corporation here parent’s exchange of the old note for a new note and the deemed issuance of taxpayer’s stock qualifies as a reorganization pursuant to sec_368 the principles of sec_368 sec_354 and sec_356 as discussed above would apply to parent if parent were a u s taxpayer assuming parent has no u s trade_or_business or permanent_establishment it would not be subject_to u s tax on any capital_gain under domestic law as well as the treaty as to taxpayer to the extent that there is no cancellation_of_indebtedness_income in connection with the sec_368 reorganization see discussion above in part b c taxpayer does not recognize gain on the exchange in addition pursuant to sec_1032 taxpayer recognizes no gain_or_loss to the extent that it receives the old note in exchange for taxpayer stock case development hazards and other considerations tl-n-3608-00 this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views please call if you have any further questions by john staples associate chief_counsel international jeffrey dorfman chief branch office of associate chief_counsel international


department of the treasury internal_revenue_service washington d c xempt and government entities division jun uniform issue list tep wat legend taxpayer a individual b ira c financial_institution d ira e financial_institution f account g ira h individual individual j amount amount amount amount amount amount - o b dear this letter is in response to a request for a letter_ruling dated date as supplemented by additional correspondence dated september october and date and date from your authorized representative in which you have requested a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a age represents that she took distributions of amount from ira c and amount from ira h taxpayer a asserts that her failure to accomplish a rollover within the 60-day period prescribed by code sec_408 was due to several instances of miscommunication between herself and financial_institution f taxpayer a was married to individual b individual b maintained ira c and ira e individual_retirement_accounts iras under sec_408 of the code with financial institutions d and f respectively individual b passed away on date a few weeks later taxpayer a called individual a branch manager at financial_institution f to discuss the status of her deceased husband's ira accounts she was going to be receiving a death beneficiary check from ira c and wondered what she should do with it initially taxpayer a considered this beneficiary check to be more like the payment of life_insurance_proceeds individual recommended that taxpayer a delay at least until she received the beneficiary check from ira c before making any financial decisions on date taxpayer a received a check totaling amount dated date for funds distributed from ira c financial_institution d reported a distribution of amount on form 1099-r the check included earnings_of amount which accrued during the distribution process she immediately called individual to discuss individual b’s iras individual arranged for taxpayer a to meet individual j an investment counselor with the financial services department of financial_institution f who was a paid consultant but not an employee the meeting occurred on date and included a discussion in which individual j suggested that taxpayer a could achieve her objective of maintaining liquidity in the funds coming from ira c and ira e if she invested these funds in certificates of deposit cd on date taxpayer a deposited the distribution check from ira c totaling amount into account g a non ira account maintained with financial_institution f soon after this deposit she used amount to purchase a cd also in her dealings with financial_institution f concerning the disposition of her deceased spouse’s ira e taxpayer a indicated that she wanted her husband’s name removed from ira e and her name substituted as it was her desire to establish a spousal_ira in her own name she was advised that financial d a f institution f requires that in order for a surviving_spouse beneficiary to withdraw funds from a deceased spouse's ira the beneficiary must fill out a form on which he or she elects total distribution’ or rollover_distribution taxpayer a then received a letter dated date which contained the election form on date taxpayer a completed the form by electing total_distribution and returned it to financial_institution f by letter dated date financial_institution f notified taxpayer a that it had transferred amount from ira e to a temporary ira opened in taxpayer a’s name ira h this is automatically done pursuant to in-house procedures of financial_institution f on date amount was distributed from ira h and deposited into account g in accordance with taxpayer a's instructions on the election form financial_institution f then closed the temporary ira ira h on date amount was used to purchase a cd taxpayer a received form 1099-r showing a distribution of amount from ira h taxpayer a represents that she did not understand the tax consequences of these transactions while she wanted and intended that the funds in both ira c and ira e be put in an ira in her own name she did not know how to accomplish a rollover the meeting with individual j at financial_institution f had the effect of reaffirming in taxpayer a’s mind that if she used funds from her deceased spouse's iras to purchase cds the investments would remain in a retirement_plan she was given no guidance as to how to fill out financial_institution f’s distribution election form so that she would make a proper election to transfer the funds in ira e to a spousal_ira in taxpayer a’s name upon filling out the form as advised by financial_institution f taxpayer a checked total_distribution she believed total_distribution meant that no funds would be left in individual b’s name and by investing the funds in cds within the 60-day time period she believed she had kept the funds in a tax deferred account in her name based on the above facts and representations you request that the internal_revenue_service service waive the 60-day rollover requirement contained in sec_408 of the code with respect to the distributions of amount sec_3 and sec_408 of the code provides that except as otherwise provided in sec_408 of the code 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 of the code sec_408 of the code provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code 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 and any other_property is paid into an ira for the benefit of such individual not later than the 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 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 of the code sec_408 of the code provides that sec_408 of the code does not apply to any amount described in sec_408 of the code 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 of the code from an ira which was not includible in gross_income because of the application of sec_408 of the code sec_408 of the code provides in summary that in the case of an inherited ira sec_408 shall not apply to any amount received by an individual from such account and no amount transferred from such account to another ira shall be excluded from income by reason of such transfer and such inherited account shall not be treated as an ira for purposes of determining whether any other amount is a rollover_contribution sec_408 of the code provides that the term inherited ira means an ira obtained by an individual other than the ira owner's spouse as a result of the death of the ira owner thus under circumstances that conform with the requirements of sec_408 a surviving_spouse who acquires a decedent's ira after and as a result of the death of an ira owner will be able to roll over the decedent's ira into an ira set up and maintained in the name of the surviving_spouse sec_1_408-8 of the income_tax regulations q a-5 provides that a surviving_spouse is the only individual who may elect to treat a beneficiary interest in an ira as the beneficiary's own account this election is made by the surviving_spouse re-designating the account as an account in the name of the surviving_spouse as ira owner rather than as beneficiary q a-5 further provides in pertinent part that an election will be considered to have been made by a surviving_spouse if either of the following occurs any required amounts in the account including any amounts that have been rolled over or transferred in accordance with the requirements of sec_408 into an ira for the benefit of such surviving_spouse have not been distributed within the appropriate time period applicable to the decedent under sec_401 or any additional_amounts are contributed to the account or to the account or annuity to which the surviving_spouse has rolled such amounts over as described in above which are subject or deemed to be subject_to the distribution_requirements of sec_401 the result of such an election is that the surviving_spouse shall then be considered the ira owner for whose benefit the trust is maintained 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 of the code sec_408 of the code provides that the secretary may waive the day requirement under sec_408 and sec_408 of the code 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 only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 ilr b date provides that 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 the documentation submitted by taxpayer a is consistent with her assertion that her failure to accomplish a timely rollover of amount sec_3 and was due to miscommunication between herself and financial_institution f which resulted in the funds being placed in a non-ira account therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount from ira c and amount from ira h taxpayer a is granted a period of days from the issuance of this letter_ruling to contribute not more than the sum of amount sec_3 and into a rollover ira provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contribution the contribution will be considered a rollover_contribution within the meaning of 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 ' s this ruling does not authorize the rollover of amounts that are required to be distributed by sec_408 of the code this letter is directed only to the taxpayer who requested it sec_61 k of the code provides that it may not be used or cited as precedent a copy of this letter_ruling has been sent to your authorized representative pursuant to a power_of_attorney on file in this office this ruling please contact if you wish to inquire about i d at sincerely yours cnllor witins manager employee_plans technical group enclosures deleted copy of this letter notice of intention to disclose notice cc