t c memo united_states tax_court douglas p and deborah j snow petitioners v commissioner of internal revenue respondent douglas p snow petitioner v commissioner of internal revenue respondent docket nos filed date josh o ungerman for petitioners candace m williams for respondent memorandum findings_of_fact and opinion dawson judge these consolidated cases were assigned to special_trial_judge stanley j goldberg pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_183 the court agrees with and adopts the opinion of the special_trial_judge which is set forth below opinion of the special_trial_judge goldberg special_trial_judge these consolidated cases are before the court on cross-motions to dismiss for lack of jurisdiction petitioners moved for dismissal on the grounds that the notices of deficiency are invalid because they were not mailed to their last_known_address respondent moved for dismissal on the grounds that the notices of deficiency were mailed to petitioners' last_known_address and the petitions were untimely filed a hearing was held on these motions in dallas texas findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the exhibits received into evidence are incorporated herein by this reference petitioners resided in plano texas at the time their petitions were filed petitioner douglas p snow mr snow filed his individual federal_income_tax return on date on date respondent mailed a notice_of_deficiency for the first notice to mr snow pincite6 audelia all section references are to the internal_revenue_code as amended unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure dallas texas the audelia address respondent withdrew the first notice_of_deficiency on date therefore the first notice is not at issue on date mr snow filed a second federal_income_tax return for the second return on both returns mr snow used the audelia address sometime after mr snow married petitioner deborah j snow mrs snow on date petitioners filed a joint federal_income_tax return for on that return petitioners used the audelia address in date petitioners moved to san mateo drive plano texas the san mateo address at some point they filed a change_of address form with the u s postal service postal service and requested that all mail sent to the audelia address be forwarded to the san mateo address they changed their telephone number they also added a recording to their old telephone number informing callers of their new number petitioners also changed the address on their driver's licenses to the san mateo address they did not send a letter to or specifically notify the internal_revenue_service irs of their move prior to using the san mateo address on their joint federal_income_tax return filed on date in late respondent examined mr snow's second return for the tax_year and petitioners' joint_return for the tax_year respondent sent seven letters to petitioners at the audelia address between date and date requesting information pertaining to the examinations four of the letters were sent by tommy joe parrish mr parrish respondent's agent assigned to examine petitioners' returns petitioners claim they did not receive any of the letters and were not aware of the examinations none of the letters were returned to mr parrish as undeliverable according to the irs computer on date the audelia address was petitioners' last_known_address on date mr parrish retrieved a telephone number for petitioners he wrote the telephone number in his notes from petitioners' case files and also wrote that the telephone number had changed mr parrish claims to have called the new number and left a message on an answering machine petitioners acknowledge that the number called is their new number at the san mateo address but contend they never received a message from mr parrish mr parrish also verified that petitioners had filed federal_income_tax returns for through on date petitioners mailed their joint federal_income_tax return using the san mateo address as their home address and stating the name and address of their tax preparer attached to the return were the following mr snow's form_w-2 showing the san mateo address mrs snow's form_w-2 showing the audelia address check no made payable to the irs with the pre-printed audelia address crossed out and the san mateo address handwritten on the check and a certified mail receipt acknowledging that the return was mailed on date the information provided on the return including petitioners' new address was processed by the irs and added to the computer on date on date respondent's agent checked the computer system for petitioners' address and found the audelia address on date respondent sent a notice_of_deficiency for to petitioners at the audelia address by certified mail on date based on the second return respondent mailed a second notice_of_deficiency for to mr snow at the audelia address by certified mail one envelope was returned to respondent on or about date stamped by the postal service moved left no address no further effort was made by respondent to contact petitioners until date on that date sharon stout a reviewer with the district_office sent two letters to petitioners at the san mateo address ms stout informed them that the time for filing petitions with the tax_court with respect to the second notice and the notice expired on august and respectively petitioners filed an amended joint federal_income_tax return on date petitioners filed petitions with this court disputing the second notice and the notice on date in the second notice respondent determined a deficiency in mr snow's federal_income_tax of dollar_figure and an addition_to_tax for failure_to_file a timely return under sec_6651 of dollar_figure in the notice respondent determined a deficiency in petitioners' joint federal_income_tax of dollar_figure an addition_to_tax under sec_6651 of dollar_figure and an accuracy-related_penalty under sec_6662 of dollar_figure prior to the hearing petitioners paid the deficiencies additions to tax and penalties in full assuming arguendo that the second notice and the notice are valid the 90-day periods for filing petitions with this court expired on august and respectively which dates were not legal holidays in the district of columbia the petitions for each year as noted above were not filed until date opinion sec_6212 authorizes the secretary or_his_delegate upon determining that there is a deficiency in income_tax to send a notice_of_deficiency to the taxpayer by certified mail or registered mail sec_6212 provides that a notice_of_deficiency in respect of an income_tax shall be sufficient if it is duly mailed to the taxpayer at his last_known_address generally the commissioner has no duty to effectuate delivery of the notice after it is mailed 93_tc_22 neither sec_6212 nor the regulation promulgated thereunder sec_301_6212-1 proced admin regs defines what constitutes a taxpayer's last_known_address we have defined it as the address to which in light of all the surrounding facts and circumstances the commissioner reasonably believed the taxpayer wished the notice_of_deficiency to be sent 74_tc_430 see also 907_f2d_517 5th cir revg 92_tc_949 and cases cited therein generally a taxpayer's last_known_address is the address shown on his most recently filed and properly processed return absent clear and concise notice of a different address 91_tc_1019 our holding in abeles v commissioner supra reiterated this court's position as stated in 62_tc_367 affd without published opinion 538_f2d_334 9th cir that what is significant is what the commissioner knew or should have known at the time the notice_of_deficiency was mailed abeles v commissioner supra see also ward v commissioner supra pincite thus where the commissioner is aware before mailing the notice_of_deficiency that the taxpayer has moved the commissioner is required to exercise reasonable care and diligence to discover and mail the notice_of_deficiency to the correct address monge v commissioner supra see also ward v commissioner supra pincite citing 855_f2d_208 5th cir revg and remanding t c memo whether the commissioner has exercised reasonable care and diligence is a question of fact 81_tc_42 and cases cited therein see also mulder v commissioner supra in ward v commissioner supra the taxpayer mailed a letter to the irs service_center notifying the service_center of his new address while the address change was pending the irs mailed a notice_of_deficiency to the taxpayer at his old address which was still posted in the central computer the court_of_appeals for the fifth circuit the court to which these cases are appealable observed that a properly instructed agent would have recognized a notation code on the computer record indicating a change_of address was pending for the taxpayer because the irs knew of the address change the court_of_appeals held that the irs was required to exercise reasonable diligence in finding the taxpayer's last_known_address and concluded that the irs had failed to do so the court_of_appeals noted however that the situation is different if a taxpayer chooses to inform the irs of an address change solely by placing the new address on the taxpayer's most recently filed return without otherwise drawing the attention of the irs to the information in such cases notice of the new address is effective as of the date that the irs properly processes the return rather than as of the date the irs receives the tax_return provided that the irs inputs the information without unreasonable delay in ward v commissioner supra pincite the court noted the irs receives millions of tax returns annually it would be unreasonable to expect the irs to notice a new address among these returns before the irs had processed the information since the taxpayer elects to run the risk that the irs will issue a notice_of_deficiency before the irs inputs the new information the only burden placed on the irs is to process the returns in a reasonable amount of time petitioners argue that respondent knew that their address had changed prior to mailing the notices of deficiency they contend that such knowledge resulted from receipt of petitioners' federal tax_return on or around date which reflected the san mateo address the knowledge of respondent's agent that petitioners had changed their telephone number and petitioners' failure to respond to any of the seven letters from respondent's agents here the facts do not show that respondent knew or should have known that petitioners' address had changed prior to the date the notices of deficiency were mailed because petitioners informed respondent of their address change solely by placing their new address on their return filed on date respondent is deemed to have notice of the address change as of the date the return was processed provided that respondent properly processed the tax_return information respondent processed petitioners' return and updated the record on petitioners in her computer system to reflect the san mateo address as of date the parties have stipulated that returns received by the irs between february and june are considered properly processed if processed on date and this is within the guidelines for properly processed returns as set forth in revproc_90_18 1990_1_cb_491 thus as of may and the dates on which the notices of deficiency were issued respondent did not have notice of petitioners' change_of address based on their federal_income_tax return petitioners also argue that respondent's agent mr parrish knew or had reason to know that they had changed their address after mr parrish the agent assigned to examine petitioners' returns retrieved petitioners' most recent address the audelia address from the irs computer system he went further and obtained petitioners' current telephone number mr parrish recognized that petitioners' telephone number had changed and he wrote the new telephone number in his notes from petitioners' case file it is not clear from the record how mr parrish obtained petitioners' current telephone number nonetheless he did obtain the new telephone number prior to the issuance of the notice_of_deficiency however we do not believe that this information was sufficient to give respondent reason to know that petitioners had moved mr parrish also knew that petitioners had filed federal_income_tax returns for through and that seven letters sent to the audelia address had garnered no response four of the seven letters were sent by mr parrish it is presumed that a properly addressed letter placed in the care of the postal service has been delivered to the addressee see mulder v commissioner f 2d pincite 75_tc_318 affd without published opinion 673_f2d_1332 7th cir moreover there is no evidence in the record that any of the letters were returned to respondent respondent was not aware that petitioners had changed their address before the notices of deficiency were mailed respondent exercised due diligence in determining petitioners' last_known_address at the time the notices of deficiency were mailed by relying on the information contained in the irs central computer petitioners argue however that respondent did not exercise reasonable care and diligence in determining and mailing the notices of deficiency to their last_known_address they contend that because respondent did not contact a number of sources including petitioners' tax_return_preparer the texas department of motor vehicles and mr snow's employer in order to obtain petitioners' new address respondent failed to exercise diligence relying upon mulder v commissioner supra in mulder the irs mailed two letters to the taxpayer using the address which appeared on the taxpayer's return filed for the year at issue both letters were returned as undeliverable thereafter the irs issued and mailed a notice_of_deficiency certified return receipt requested to the same address the taxpayer did not receive the notice_of_deficiency but instead learned of the deficiency determination when the irs mailed a statement of taxes due to his new address the court_of_appeals for the fifth circuit observed that the irs could have determined the taxpayer's home address by contacting a number of sources and that such efforts were within the reasonable exercise of diligence required when the irs knows or should know that the address on the subject tax_return is no longer current mulder v commissioner supra pincite this obligation does not arise however unless the irs is aware that the taxpayer has changed addresses because we find that respondent did not know that petitioners had moved respondent was not obliged to make these additional inquiries in exercising reasonable diligence at least one of the date notices of deficiency mailed to petitioners' audelia address was returned to respondent on or about date stamped moved left no address in 864_f2d_1191 5th cir the court_of_appeals for the fifth circuit stated the relevant statutes simply require that the deficiency be mailed to the taxpayer's last_known_address not that it be received id pincite taxpayers argued that the irs should have checked its administrative file after a notice_of_deficiency sent to the address on their most recently filed return was returned undelivered in addition the court_of_appeals reiterated that 'the focus is on the information available to the irs at the time it issued the notice_of_deficiency ' id quoting mulder v commissioner supra pincite thus under this standard we do not believe that respondent was required to investigate further when one of the notices of deficiency was returned undelivered monge v commissioner t c pincite for the reasons set forth above respondent's motions to dismiss will be granted and petitioners' motions to dismiss will be denied petitioners are not without_recourse because they paid the deficiencies interest and penalties in full on date the time for filing a claim_for_refund has not yet run sec_6511 if a timely refund claim is disallowed by respondent petitioners could file a suit_for_refund in the u s district_court or the u s court of federal claims and thus litigate the merits of their tax_liabilities for the years in question appropriate orders and orders of dismissal for lack of jurisdiction will be entered


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division significant index no fe sec_26 xxxxxkxkkxxxkkkkxkkxkxakxkkkkk xxxxxkxkxkxxkkxxkxkxkkxkxkxakkkk xxxxxxkxxxxkkxkkxkkkxkkxkkk tep pat legend decedent taxpayer a taxpayer b taxpayer c taxpayer d taxpayer e county state j trust m trust n pian account v ira ira z custodian m xxxxxkkxkxkxkxkkkkxkkkk xxxxkxkxxkxkkxkkkkk kkk xxxxxxxxxxxxkxxkxkk xxkxxxkxkkkxkxkkkkxkkkk xxxxxxxkxxxkxkxkkkkkkk xxkxxxkxkxkkkkkxkkkkkk xxxxxxxxkxkxxxkkkxkxkk xxxxkxkxkxkxxkxkxkkkxkkkk xxxkxkxxkxkkxkkkkxkxkxkkk xxxkxkxkxkkxkkxkkkkkkkkk this is in response to your request for a private_letter_ruling dated date as supplemented by correspondence dated december and date representations in support of your request you have submitted the following facts and in decedent owned plan account v a qualified_retirement_plan account with a balance of approximately dollar_figure account with a balance of approximately dollar_figure estate was the sole beneficiary of the ira and the plan account v decedent received a complete distribution from the plan account v that he rolled over tax-free into ira y a separate ira rollover account and an individual retirement at that time decedent's in january decedent attained the age of in decedent's required_beginning_date under sec_401 of the internal_revenue_code code for purposes of required minimum distributions was date on ‘ prior to his required_beginning_date decedent named his three daughters - taxpayers a b and c - as designated beneficiaries of ira y minimum required distributions were made to decedent through calendar_year over the joint life expectancy of decedent and the oldest named designated_beneficiary taxpayer a on date trust m was created by written_agreement executed by decedent as sole settlor and as one of the co-trustees decedent transferred ira y to ira z and executed a new beneficiary designation form naming trust m as the beneficiary of ira z you represent that on or about date decedent furnished a complete copy of trust m to custodian m the custodian of ira z beginning in decedent began to receive annual distributions from ira z calculated using his individual recalculated life expectancy annual distributions continued to be made from ira z through calendar_year on september decedent died on - decedent's last will and testament will gives his residuary_estate to trust m residuary_estate as defined in decedent a’s will means all property in which may have any interest that is disposed of under the provisions of this will decedent's will was admitted to probate in county of state j on - trust m provides that all assets which are subject_to the terms of this agreement shall be held administered and distributed as an irrevocable_trust paragraph of trust m named decedent as the sole beneficiary of trust m during his lifetime paragraph of trust m specified that trust m would xxxxkxxxkxkxkkxkxkxkxk terminate upon the death of decedent and that the trust estate would be disposed of as specified in paragraph of trust m sec_112 of the state j property code provides that a_trust terminates if by its terms the trustee is to continue only until the expiration of a certain period or until the happening of a certain event and the period of time has elapsed or the event has occurred if an event of termination occurs the trustee may continue to exercise the powers of the trustee for the reasonable period of time required to wind up the affairs of the trust and to make distribution of its assets to the appropriate beneficiaries the continued exercise of the trustee’s powers after an event of termination does not affect the vested rights of beneficiaries of the trust section of trust m provides that the trust estate shall be disposed of to taxpayer e certain partnership interests to decedent's descendants as follows a specific_bequest of dollar_figure dollar_figure who survive him a gift of decedent's principal_residence and dollar_figure n and the remaining trust estate to decedent's descendants decedent's descendants as defined by article are his adult daughters taxpayers a b and c to taxpayer d a specific_bequest of to trust thus including dollar_figure of liquid_assets including ira z remained in trust m for documentation submitted shows that decedent's total gross_estate was of liquid_assets such as stocks bonds cash dollar_figure notes life_insurance_proceeds and ira z cash required for administration_expenses debts and marital and charitable_bequests totaled dollar_figure over dollar_figure distribution to taxpayers a b and c as residuary beneficiaries of trust m after satisfaction of bequests to taxpayer d taxpayer e and trust n the value of decedent's ira z at his date of death was approximately dollar_figure the iraz proceeds were not applied to the payment of marital and charitable_bequests debts or administration_expenses required to be funded by trust m article of trust m protection and collection of proceeds from life_insurance and employee benefit plans provides in pertinent part at sec_3 that a third party shall have no right to enforce any claim against assets distributed under the provisions of this article employee benefit plans as described in article includes individual_retirement_accounts such as ira z further you have asserted that under state j statutes neither taxpayer d nor taxpayer e had the right to draw on the assets of ira z for their interests the remaining of liquid_assets has been partially distributed and will continue to be distributed in equal portions to taxpayers a b and c over the balance of trust m's administration period based on the foregoing facts and representations you request the following rulings xxxxxxxxxxxxxkxkxkx trust m satisfies the requirements of proposed_regulations sec_1_401_a_9_-1 q a d-5 such that taxpayers a b and c beneficiaries of trust m with respect to trust m's interest in ira z may be considered designated beneficiaries of ira z for purposes of determining the distribution period under sec_401 of the code decedent's daughters taxpayers a b and c are the beneficiaries of trust m's interest in ira z and are the sole individuals whose life expectancies need to be considered for purposes of determining who is the designated_beneficiary of ira z under sec_401 of the code and for purposes of satisfying the minimum_required_distribution rules of sec_401 of the code made applicable to iras pursuant to sec_408 of the code distributions from ira z to taxpayers a b and c as beneficiaries of ira z may be distributed based on the life expectancy of taxpayer a the oldest beneficiary code sec_408 defines an ira as a_trust which meets the requirements of sec_408 through a sec_408 of the code generally provides that under regulations prescribed by the secretary_of_the_treasury rules similar to the rules of sec_401 of the code and the incidental death_benefit requirements of sec_401 shall apply to the distribution of the entire_interest of an individual for whose benefit the trust is maintained sec_1_408-8 q a a-1 of the proposed income_tax regulations proposed_regulations states that individual retirement plans are subject_to the distribution rules for qualified_plans provided in sec_401 of the code and sec_1_401_a_9_-1 of the proposed_regulations sec_401 of the code generally provides that a plan will not be qualified under sec_401 unless that plan provides that the entire_interest of each employee i will be distributed to such employee not later than the required_beginning_date or ii will be distributed beginning not later than the required_beginning_date in accordance with regulations over the life of such employee or over the joint lives of such employee and a designated_beneficiary or over a period not extending beyond the life expectancy of such employee or the joint life expectancies of such employee and a designated_beneficiary sec_401 a c of the code provides in relevant part that for purposes of this paragraph the term required_beginning_date means april of the calendar_year following the calendar_year in which the employee ira holder attains age xxxxxkxxkxxxxkxkxxkxxkx sec_401 of the code provides that where distributions have begun over life expectancies in accordance with subparagraph a ii a_trust shall not constitute a qualified_trust under this section unless the plan provides that if the employee dies before his her entire_interest has been distributed to him her the remaining portion of such interest will be distributed at least as rapidly as under the method of distribution being used under subparagraph a ii as of the date of death sec_401 -1 of the proposed_regulations q a d-3 provides that for purposes of calculating the distribution period for distributions that begin prior to death the designated beneficiaries will be determined as of the plan participant's ira holder's required_beginning_date sec_1_401_a_9_-1 of the proposed_regulations q a d-2 a provides in pertinent part that designated beneficiaries are only individuals who are designated as beneficiaries under the plan individual may be designated as a beneficiary under the plan either by the terms of the plan or if the plan provides by an affirmative election by the employee or the employee's surviving_spouse specifying the beneficiary a beneficiary designated as such under the pian is an individual who is entitled to a portion of an employee's benefit contingent on the employee's death or another specified event in general it provides that an sec_1_401_a_9_-1 of the proposed_regulations q a d-5 provides in part a a pursuant to d-2a of this section only an individual may be a designated_beneficiary for purposes of determining the distribution period under sec_401 of the code consequently a_trust itself may not be the designated_beneficiary even though the trust is named as a beneficiary however if the requirements of paragraph b of this d-5a are met distributions made to the trust will be treated as paid to the beneficiaries of the trust with respect to the trust's interest in the employee's benefit and the beneficiaries of the employee_trust will be treated as having been designated as beneficiaries of the employee under the plan for purposes of determining the distribution period under sec_401 if as of any date on or after the employee's required_beginning_date a_trust is a named beneficiary of the employee and the requirements in paragraph b of this d-5a are not met the employee will be treated as not having a designated_beneficiary under the plan for purposes of sec_401 consequently for calendar years beginning after that date distribution must be made over the employee’s life or over the period which would have been the employee’s remaining life expectancy determined as if no beneficiary had been designated as of the employee's required_beginning_date xxxxxkxxxxkxxkxkkxkxk b the requirements of this paragraph b are met if as of the later of the date on which the trust is named as a beneficiary of the employee or the employee's required_beginning_date and as of all subsequent periods during which the trust is named as a beneficiary the following requirements are met the trust is a valid trust under state law or would be but for the fact that there is no corpus the trust is irrevocable or will by its terms become irrevocable upon the death of the employee the beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s benefit are identifiable from the trust instrument within the meaning of d-2 the documentation described in d-7 of this section has been provided to the plan_administrator c in the case of payments to a_trust having more than one beneficiary see e-5 of this section for the rules for determining the designated_beneficiary whose life expectancy will be used to determine the distribution period sec_1_401_a_9_-1 q a d-6 of the proposed_regulations provides in part that in the case in which a_trust is named as the beneficiary of an employee all beneficiaries of the trust with respect to the trust's interest in the employee's benefit are treated as designated beneficiaries of the employee under the plan for purposes of determining the distribution period under sec_401 and iv if the requirements in paragraph a of d-5 above are satisfied as of the date of the employee's death or in the case of the documentation described in d-7 of this section by the end of the ninth month beginning after the employee's death with respect to your first and second ruling requests decedent named trust m as the beneficiary of ira z after his required_beginning_date however if the requirements of sec_1_401_a_9_-1 of the proposed_regulations q a d-5a b are met distributions made to a_trust will be treated as paid to the beneficiaries of the trust with respect to the trust's interest in the employee's benefit and the beneficiaries of the employee_trust will be treated as having been designated as beneficiaries for purposes of determining the distribution period under sec_401 of the code trust m is a valid trust under the laws of state j trust m by its terms provides that all assets subject_to the terms of the trust agreement shall be held administered and distributed as an irrevocable_trust in addition trust m except for the period of time needed to wind up the affairs of the trust by its terms xxxxxxxkxxxxxkxxkxkxx ‘ terminated upon decedent's death the ira z account balance was not used to pay any expenses or specific bequests of the decedent taxpayer a taxpayer b and taxpayer c were referenced and identifiable in trust m as the beneficiaries of decedent's residuary_trust estate finally you represent that a complete copy of trust m was given to custodian m within nine months of the decedent's death in accordance with sec_1_401_a_9_-1 q a d-7 b of the proposed_regulations based on the above we conclude with respect to your first and second ruling requests that trust m is a see-through trust described in sec_1 a -1 of the proposed_regulations q a d-5 and d-6 as discussed above and is a named beneficiary of ira z as of the date of decedent's death and that taxpayer a taxpayer b and taxpayer c the beneficiaries of trust m with respect to trust m's interest in ira z may be considered designated beneficiaries for purposes of determining the distribution period for payment of benefits from ira z under sec_401 of the code and that taxpayer a taxpayer b and taxpayer c are the individuals whose life expectancies need to be considered for purposes of determining the distribution period under sec_401 with respect to your third ruling_request sec_1_401_a_9_-1 of the proposed_regulations q a e-5 provides in pertinent part that if more than one individual is designated as a beneficiary with respect to an employee as of the applicable_date for determining the designated_beneficiary the designated_beneficiary with the shortest life expectancy will be the designated_beneficiary for purposes of determining the distribution period sec_1_401_a_9_-1 of the proposed_regulations q a f-3a provides in part that with respect to individual_account_plans from which distributions have commenced prior to the employee's death post death distributions will comply with the at least as rapidly as under the method of distribution being used under sec_401a ii rule if said distributions are made in accordance with q a f-1 sec_401 of the code permits an employee and his her spouse to recalculate their life expectancies annually sec_1_401_a_9_-1 of the proposed_regulations q a e-8 a provides guidance on how an employee's life expectancy is recalculated and provides that upon the death of the employee the recalculated life expectancy of the employee or the employee's spouse will be reduced to zero in the calendar_year following the calendar_year of death reduced to zero the plan must distribute the remaining interest prior to the last day of such year in order to satisfy sec_401 a in any calendar_year in which the last applicable life expectancy is xxxkxxxxxxxkxkxxkkxkk sec_1_401_a_9_-1 of the proposed_regulations q a e-8 b provides guidance on calculating the applicable life expectancy when the employee's life expectancy is recalculated and the life expectancy of the employee or his her beneficiary is not being recalculated it provides in relevant part that if the designated_beneficiary is not the employee's spouse and the life expectancy of the employee is being recalculated annually the applicable life expectancy for determining the minimum distribution for each distribution calendar_year will be determined by recalculating the employee's life expectancy but not recalculating the beneficiary's life expectancy such applicable life expectancy is the joint life and last survivor expectancy using the employee's attained age as of the employee's birthday in the distribution calendar_year and an adjusted age of the designated_beneficiary the adjusted age of the designated_beneficiary is determined as follows the beneficiary's applicable life expectancy is calculated based on the beneficiary's attained age as of the beneficiary's birthday in the calendar_year described in sec_1_401_a_9_-1 of the proposed_regulations q a e-1 reduced by one for each calendar_year which has elapsed since that calendar_year the age rounded if necessary to the higher age in table v of sec_1_72-9 is then located which corresponds to the designated beneficiary's applicable life expectancy such age is the adjusted age of the designated_beneficiary as provided in paragraph a upon the death of the employee the recalculated life expectancy of the employee is reduced to zero in the calendar_year following the calendar_year of the employee's death thus for determining the minimum distribution for such calendar_year and subsequent calendar years the applicable life expectancy is the applicable life expectancy of the designated_beneficiary determined under this paragraph sec_1_401_a_9_-1 of the proposed_regulations q a e-1 a provides generally that for required distributions under sec_401 of the code life expectancies are calculated using the employee's and the designated beneficiary's attained age as of the employee's birthday and the designated beneficiary's birthday in the calendar_year in which the employee attains sec_1_401_a_9_-1 of the proposed_regulations q a f-5 provides generally that in the case of an individual_account the benefit used in determining the minimum distribution for a distribution calendar_year is the account balance as of the last valuation_date in the calendar_year immediately preceding any distribution calendar_year sec_1_408-8 of the proposed_regulations q a a-5 provides that for purposes of determining the minimum distribution required to be made from an ira in any calendar_year the account balance of the ira as of the december of the calendar_year immediately preceding the calendar_year for which distributions are being made will be substituted in sec_1_401_a_9_-1 f-1 for the benefit of the employee the account balance as of the december of such calendar_year is the value of the ira upon close of business on such december however for purposes of determining the minimum distribution for the second distribution calendar_year for an individual the account balance as of december of such calendar_year must be reduced by any distribution as described in sec_1_401_a_9_-1 f-5 c made to satisfy the minimum distribution_requirements for the individual's first distribution calendar_year after such date because decedent's life expectancy was being recalculated upon his death in accordance with q a e-8 a of sec_1_401_a_9_-1 of the proposed_regulations his life expectancy was reduced to zero as of the end the calendar_year following the calendar_year of his death although his benefit was paid in the form of a single life expectancy upon his death his life expectancy was not the last applicable life expectancy because he timely designated his beneficiary by his required_beginning_date in accordance with q a d-3 a of the proposed_regulations therefore pursuant to q a e-8 b of sec_1_401_a_9_-1 of the proposed_regulations for purposes of determining the minimum distribution in the calendar_year after the death of decedent the applicable life expectancy is the life expectancy of the designated_beneficiary as determined under that section decedent died on therefore the calendar_year after the death of decedent namely the calendar_year ending date is the date by which distributions must begin to be made from ira z to the beneficiaries thereof using the life expectancy of his designated beneficiaries because decedent named trust m as his beneficiary of ira z and is a_trust that meets the requirements of q a d-5a b of the because trust m proposed_regulations the distributions from ira z made to trust m will be treated as having been paid to the beneficiaries of trust m and as stated above with respect to trust m's interest in ira z and the beneficiaries of trust m will be treated as having been designated as beneficiaries of ira z for purposes of determining the distribution period under sec_401 of the cade since more than one individual was designated as a beneficiary with respect to ira z pursuant to sec_1_401_a_9_-1 of the proposed_regulations q a e-5 a the beneficiary who is the oldest and who has the shortest life expectancy will be the designated_beneficiary for purposes of determining the distribution period under ira z taxpayer a had the shortest life expectancy of the three designated beneficiaries on decedent's required_beginning_date therefore taxpayer a is the designated_beneficiary whose life expectancy will be used when determining the minimum distribution period under ira z for the calendar_year commencing after the year of decedent's death and for all subsequent years thereafter xxxxxxxxxkxkxxxkkxxkxk 2yv0z21056 thus with respect to your third ruling_request we conclude that for purposes of satisfying the minimum_required_distribution rules of sec_401 of the code made applicable to iras pursuant to sec_408 distributions from ira z to taxpayer's a b and c who shall be treated as having been designated beneficiaries of ira z may be distributed based on the life expectancy of taxpayer a the oldest beneficiary these rulings are based upon the assumption that ira z otherwise meets the requirements of sec_408 of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited by others as precedent in accordance with a power_of_attorney on file in this office a copy of this ruling is being sent to your authorized representative if additional information is needed please contact xxxxxxxxxxxxxx t ep ra t2 at xxxxxxxxxxxkxxkkxkx sincerely yours signed joyce b flovd joyce e floyd manager employee_plans technical group tax_exempt_and_government_entities_division enclosures deieted copy of letter_ruling notice of intention to disclose


t c memo united_states tax_court specialty transport delivery services inc petitioner v commissioner of internal revenue respondent docket no filed date joseph h o’donnell jr for petitioner pamela j arthur-gerlach for respondent memorandum findings_of_fact and opinion cohen judge the petition in this case was filed in response to a notice_of_determination concerning worker classification under sec_7436 notice_of_determination regarding petitioner’s liabilities pursuant to the federal_insurance_contributions_act fica and the federal_unemployment_tax_act futa for and the issues for decision are whether john f ludlow ludlow was an employee of petitioner for federal employment_tax purposes during through and if so whether petitioner is entitled to relief under sec_530 of the revenue act of publaw_95_ 92_stat_2885 as amended sec_530 unless otherwise indicated 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 for convenience fica and futa taxes are collectively referred to as employment_taxes findings_of_fact some of the facts were deemed stipulated pursuant to rule f certain additional facts have been stipulated by the parties the stipulated facts are incorporated in our findings by this reference petitioner’s organization and operations ludlow has been in the business of providing hauling services since he subsequently decided to incorporate his business on account of the protections afforded by limited_liability in that a corporation’s debts are generally not assessed against individual shareholders since the trucking business involves a high degree of potential liability in the event of an accident petitioner was incorporated in pennsylvania on date and has at all relevant times operated as an s_corporation petitioner’s principal_place_of_business has been located in levittown pennsylvania at the address of ludlow’s personal_residence from the time of its incorporation to the present since its organization petitioner has provided pickup and delivery services to distributors wholesalers and manufacturers of steel steel coil and steel-related products this activity was and is petitioner’s only business and only source_of_income ludlow has been the sole shareholder of petitioner from the time of its incorporation and throughout and ludlow has at all times served as petitioner’s president and only officer minutes from petitioner’s annual meetings of directors and shareholders reflect that for each of the years in issue ludlow was elected president vice president secretary and treasurer ludlow was also petitioner’s sole director during and ludlow performed the following services for petitioner ordered and purchased supplies on behalf of petitioner entered into verbal and or written agreements on behalf of petitioner oversaw the finances of petitioner collected moneys owed petitioner managed petitioner maintained customer satisfaction performed all bookkeeping services for petitioner with assistance from his spouse sharon ludlow from time to time and performed all q4e- pickup and delivery services for clients on behalf of petitioner no other person provided any services to petitioner during the period in issue petitioner received client referrals from pyle transport services inc pyle transport of west chester pennsylvania ludlow performed services on behalf of petitioner pursuant to an independent_contractor service agreement between petitioner and pyle transport dated date and identifying ludlow as the driver for petitioner during and petitioner maintained a business commercial checking account ludlow shared signature_authority on petitioner’s account with his spouse petitioner did not make regular payments at fixed times to ludlow for his services rather ludlow or his wife obtained funds from petitioner’s bank account to pay ludlow as his needs arose petitioner neither classified any payment as a dividend nor distributed any dividends to shareholders from through petitioner’s tax reporting petitioner timely filed forms 1120s u s income_tax return for an s_corporation and related schedules for through on these returns petitioner did not report treating ludlow or any other individual as an employee of petitioner petitioner filed a form_1120s for each of the years and petitioner reported ordinary_income from its trade_or_business of dollar_figure dollar_figure and dollar_figure for - and respectively petitioner claimed no deduction either for compensation of officers or for salaries and wages in or for petitioner’s return reflects a deduction of dollar_figure for compensation of officers schedules k- shareholder’s share of income credits deductions etc attached to the returns show dollar_figure for dollar_figure for and dollar_figure for as the pro_rata share of and asa property distribution other than a dividend to ludlow petitioner’s forms 1120s were signed by ludlow as president and by joseph m grey grey as preparer during the period from to petitioner did not issue any forms w-2 wage and tax statement to ludlow petitioner also did not issue any forms 1099-misc miscellaneous income to ludlow in or in petitioner issued a form 1099-misc to ludlow for dollar_figure non-employee compensation and dollar_figure rents for_the_use_of ludlow’s residence as a business office for petitioner since petitioner’s incorporation in petitioner has not reported paying ludlow a salary or wages for work he performed on behalf of petitioner petitioner did not file a form_941 employer’s quarterly federal tax_return for any quarter in or ora form_940 employer’s annual federal unemployment futa_tax return for or the ludlows’ tax reporting for each of the years and ludlow and his spouse filed a joint form_1040 u s individual_income_tax_return on these returns the ludlows reported as ordinary_income from rental real_estate royalties partnerships s_corporations trusts etc dollar_figure dollar_figure and dollar_figure for and respectively for and attached schedules e supplemental income and loss characterize the foregoing amounts as nonpassive_income from schedules k-1 for dollar_figure is shown on schedule e as nonpassive_income from schedules k-1 dollar_figure is shown on schedule e and on form_4831 rental income as rent and dollar_figure is shown on schedule c profit or loss from business as gross_receipts although a deemed stipulation states that dollar_figure was reported on the schedule e as nonpassive_income from schedules k-1 a subsequent stipulation and documentary_evidence reveal the allocation above the notice_of_determination prior to the audit underlying the instant case covering and respondent neither audited petitioner for employment_tax purposes nor challenged petitioner’s treatment of ludlow as other than an employee thereafter on date respondent sent to petitioner the notice_of_determination at issue in this proceeding the notice was based on a - determination that ludlow was to be legally classified as an employee for purposes of federal employment_taxes and that petitioner was not entitled to relief from such classification pursuant to sec_530 enclosed with the notice was a schedule setting forth petitioner’s liabilities for fica and futa taxes it is stipulated that if the court decides that ludlow is to be classified as an employee for federal employment_tax purposes for all periods in and the amounts of taxes due and owing are as set forth in the notice_of_determination conversely if the court decides that ludlow should not be classified as an employee for any of the periods in issue the parties agree that petitioner owes no employment_taxes ultimate findings_of_fact ludlow as president of petitioner performed more than minor services and received remuneration therefor petitioner did not have a reasonable basis for failing to treat ludlow as an employee during the years in issue opinion it statutory and regulatory provisions a subtitle c of the internal_revenue_code subtitle c of the internal_revenue_code governs payment of employment_taxes in particular sec_3111 and sec_3301 impose taxes on employers under fica pertaining to social_security and futa pertaining to unemployment respectively based on wages paid to employees the term wages as used in these statutes generally encompasses all remuneration for employment sec_3121 sec_3306 employee is defined for purposes of fica_taxes in sec_3121 and with modifications not germane here sec_3306 1i1 makes this definition applicable for purposes of futa taxes as well sec_3121 provides sec_3121 employee --for purposes of this chapter the term employee means--- any officer of a corporation or any individual who under the usual common_law rules applicable in determining the employer-employee relationship has the status of an employee or any individual other than an individual who is an employee under paragraph or who performs services for remuneration for any person-- a as an agent-driver or commission-- driver b as a full-time insurance salesman c as a home worker or d as a traveling or city salesman xk kk ke under specified conditions or any individual who performs services that are included under an agreement entered into pursuant to sec_218 of the social_security act --- - regulations promulgated under sec_3121 clarify the scope of the inclusion in paragraph for corporate officers as follows generally an officer of a corporation is an employee of the corporation however an officer of a corporation who as such does not perform any services or performs only minor services and who neither receives nor is entitled to receive directly or indirectly any remuneration is considered not to be an employee of the corporation sec_31 d - b employment_tax regs identical language is also included in regulations promulgated under sec_3306 sec_31 -l e employment_tax regs b sec_530 of the revenue act of sec_530 operates in enumerated circumstances to afford relief from employment_tax liability notwithstanding the actual relationship between the taxpayer and the individual performing services the statute provides in part sec_530 controversies involving whether individuals are employees for purposes of the employment_taxes a termination of certain employment_tax liability -- in general --if-- a for purposes of employment_taxes the taxpayer did not treat an individual as an employee for any period and b in the case of periods after date all federal tax returns including information returns required to be filed by the taxpayer with respect to such individual for such period are filed on a basis consistent with the taxpayer’s treatment of such individual as not being an employee -- - then for purposes of applying such taxes for such period with respect to the taxpayer the individual shall be deemed not to be an employee unless the taxpayer had no reasonable basis for not treating such individual as an employee statutory standards providing one method of satisfying the requirements of paragraph -- for purposes of paragraph a taxpayer shall in any case be treated as having a reasonable basis for not treating an individual as an employee for a period if the taxpayer’s treatment of such individual for such period was in reasonable reliance on any of the following a judicial precedent published rulings technical_advice with respect to the taxpayer or a letter_ruling to the taxpayer b a past internal_revenue_service audit of the taxpayer in which there was no assessment attributable to the treatment for employment_tax purposes of the individuals holding positions substantially_similar to the position held by this individual or c long-standing recognized practice of a significant segment of the industry in which such individual was engaged in specified circumstances sec_530 places the burden_of_proof on the commissioner with respect to certain issues under sec_530 but this provision does not affect our analysis here sec_530 applies only to periods after date so has no bearing on petitioner’s liabilities for small_business job protection act of publaw_104_188 sec b 110_stat_1767 for subsequent periods a taxpayer desiring to take advantage of sec_530 first must establish a prima facie case that it was reasonable not to treat an individual as an employee and must have fully cooperated with the secretary because as explained in detail below petitioner did not establish a prima facie case that its treatment of ludlow was reasonable the burden_of_proof remains on petitioner with respect to and as well il classification of ludlow for employment_tax purposes a status under fica and futa provisions in contending that ludlow should not be classified as an employee under the fica and futa provisions of the internal_revenue_code petitioner focuses on ludlow’s status as an s_corporation shareholder and alleged lack of status as a common_law_employee we briefly address these contentions seriatim contentions regarding s_corporation shareholders petitioner cites sec_1366 sec_1372 and sec_6037 and 70_f3d_548 9th cir presumably in support of an argument that s_corporation shareholders should not be deemed employees sec_1366 and sec_6037 generally require that income items of s_corporations be passed through to shareholders on a pro_rata basis and reported by such shareholders in a manner consistent with treatment on the corporate return these rules however pertain to calculation of income_tax_liability under subtitle a and have no bearing on computation of federal employment_taxes 117_tc_141 affd sub nom 54_fedappx_100 3d cir furthermore an employer cannot by the expedient of characterizing moneys paid in remuneration for services as distributions of net_income rather than as wages avoid fica and futa liabilities id pincite thus as in veterinary surgical consultants p c v commissioner supra pincite and 119_tc_121 we reject any suggestion that petitioner’s passing through of its net_income to ludlow precludes the finding of an employer-employee relationship between petitioner and ludlow we likewise reject as not germane to the question before us petitioner’s reliance on sec_1372 addressing fringe_benefits under subtitle a and the reference to that statute in durando v united_states supra pincite see veterinary surgical consultants p c v commissioner supra pincite contentions regarding common_law employment petitioner contends that employee as used throughout sec_3121 must be construed in a manner consistent with its use in sec_3121 such that the usual common_law rules for determining existence of an employer-employee relationship are to be taken into account in support of this position petitioner quotes the following passage from tex carbonate co v phinney 307_f2d_289 5th cir the statutory definition of employees as including officers of a corporation will not be so construed as to mean that an officer is an employee per se only such officers as work for it in fact are to be so included and in determining whether an officer is an employee within the meaning of the statutes the usual employer-employee tests are to be applied petitioner further emphasizes that common_law focuses on whether the alleged employer held the right to control the details of the work performed by the individual and argues that petitioner had neither the authority nor the ability to exert control_over ludlow there exist however at least two fatal defects in petitioner’s arguments in this regard first from the standpoint of statutory construction the premise underlying petitioner’s position finds no support either in the structure of the text or in the tex carbonate co v phinney supra decision sec_3121 is written in the disjunctive with each of the four paragraphs expressly separated from the next by or accordingly each paragraph affords a separate and independent basis for deeming one engaged to perform services an employee individuals described in paragraphs and of sec_3121 are therefore frequently referred to as statutory employees subject_to fica and futa regardless of their status under common_law see joseph m grey pub accountant p c v commissioner supra pincite moreover tex carbonate co v phinney supra is not authority to the contrary significant regulatory and statutory developments have occurred since the years in issue in that case -- given that sec_31_3121_d_-1 and sec_31 -l e employment_tax regs were promulgated after those years and that the futa definition of employee then in effect appears to have contemplated a corporate officer who could be an independent_contractor under common_law see eg sec i r c the court of appeals’ statements concerning common_law rules may no longer be relevant joseph m grey pub accountant p c v commissioner supra pincite n the opinion in tex carbonate co v phinney supra pincite recognized that regardless of the test purportedly being applied such officers as work for a corporation in fact are included as employees the court also addressed the impact of an alleged absence of control in that case as follows even though an absence of control is shown and this as we have noted has not been done the force of the factor is diminished to near de_minimis by the fact that the service provider himself was a member of the board_of directors a vice president and the executive of the company in charge of its sales and the development of its markets id pincite hence critical components of the analysis in tex carbonate co v phinney supra are consistent with the current regulatory approach to officers and contrary to petitioner’s position second from a factual standpoint even if the common_law control factor were pertinent to our evaluation petitioner has failed to establish a lack of control_over ludlow in the performance of his services as in joseph m grey pub -- - accountant p c v commissioner supra pincite to accept petitioner’s contentions in this regard would be the equivalent of disregarding the corporate form in which ludlow chose to conduct his business caselaw does not permit a taxpayer to use his or her dual role as a shareholder of and service provider to a corporation as grounds for ignoring the legal ramifications of the business construct so selected 319_us_436 joseph m grey pub accountant p c v commissioner supra pincite application of sec_3121 d on the basis of the foregoing analysis application of sec_3121 is not precluded or limited here by considerations pertaining to ludlow’s status as an s_corporation shareholder or under the common_law sec_3121 and sec_31_3121_d_-1 and sec_31 -l1 e employment_tax regs specify that corporate officers are to be classified as employees if they perform more than minor services and receive or are entitled to receive remuneration the overwhelming weight of the evidence here shows that ludlow’s activities vis-a-vis petitioner met these criteria accordingly considerations with respect to burden_of_proof do not affect our analysis on this point ludlow at all relevant times served as petitioner’s president and worked in all aspects of petitioner’s delivery -- - operations ludlow also obtained remuneration from petitioner’s bank account as his needs arose furthermore although sec_3121 may be inapplicable to the extent that an officer performs services in some other capacity i as an independent_contractor petitioner has offered no convincing evidence that ludlow worked for or was engaged by petitioner in a capacity other than as an officer see joseph m grey pub accountant p c v commissioner t c pincite revrul_82_83 1982_1_cb_151 the only item referenced in the record that could suggest an independent_contractor relationship is the form 1099-misc reporting nonemployee compensation_for this document is uncorroborated by other evidence such as a service agreement and is entitled to little weight see joseph m grey pub accountant p c v commissioner supra pincite hence we conclude that ludlow was an employee of petitioner for employment_tax purposes in accordance with sec_3121 b availability of sec_530 relief sec_530 affords relief from employment_tax liability notwithstanding an adverse classification where the following three requirements are satisfied the taxpayer has not treated the individual or any individual holding a substantially_similar position as an employee for any period the taxpayer has consistently treated the individual as not being an employee - on all tax returns for periods after date and the taxpayer has a reasonable basis for not treating the individual as an employee sec_530 with respect to the case at bar respondent has conceded that petitioner meets the first of the above requirements as regards the second respondent contends that petitioner did not meet this reporting requirement for and but because of the form misc respondent does not argue that a similar failure exists for the third regquirement is in dispute for each through and since lack of a reasonable basis for not treating ludlow as an employee will render sec_530 relief unavailable for all years without regard to the other criteria we begin with this element concerning the existence of a reasonable basis for purposes of sec_530 sec_530 sets forth three statutory safe havens reliance upon any of the circumstances enumerated in subparagraph a b or c of sec_530 is deemed sufficient to establish the requisite reasonable basis subparagraph a lists judicial precedent published rulings technical_advice with respect to the taxpayer ora letter_ruling to the taxpayer the amended petition alleges the petitioner relies on judicial precedent as its reasonable basis for not treating john f ludlow its sole shareholder and president as an employee during any part of and said judicial precedent is 307_f2d_289 5th cir cert_denied 371_us_940 on brief petitioner reiterates reliance on tex carbonate co v phinney 307_f2d_289 5th cir and cites as well to 527_fsupp_515 b d wis in support of the premise that petitioner reasonably looked to common_law control concepts in classifying ludlow for the reasons previously discussed tex carbonate co v phinney supra does not afford a reasonable basis for disregard of the explicit rules of sec_3121 and sec_31_3121_d_-1 and sec_31 -l e employment_tax regs equally unavailing in this regard is automated typesetting inc v united_states supra the district_court in that case simply evaluated the employment relationship of the involved individuals both through a common_law analysis and through application of the provisions relating to corporate officers id pincite in deciding that the individuals qualified as employees under either rubric the court did not repudiate the statutory treatment of corporate executives id pincite see also joseph m grey pub accountant p c v commissioner supra pincite n moreover even if we were to assume arguendo that the cited cases could offer a reasonable basis for treating an officer as a nonemployee petitioner has failed to establish reliance on the claimed precedent as a factual matter to fall within the safe - - harbors of sec_530 the taxpayer must have relied on the alleged authority during the periods in issue at the time the employment decisions were being made the statute does not countenance ex post facto justification see 181_f3d_272 2d cir reversing and remanding because it was unclear from the record whether the taxpayer in fact relied on any specific industry practice in reaching its decision to treat its workers as non-employee tenants let alone whether such reliance was reasonable 205_fsupp2d_376 m d pa the taxpayer must show that it relied upon those grounds alleged as a reasonable basis and that the reliance was reasonable w va pers servs inc v united_states aftr 2d pincite8 ustc par big_number at big_number s d w va the plain meaning of sec_530 is that only evidence known to and relied upon by the taxpayer is relevant facts that are learned after the incorrect treatment of the employees are not facts that a taxpayer relied upon in making its original decision regarding how to treat its employees until a few months before trial petitioner did not purport to rely on sec_530 or the bases described therein and expressly disclaimed any dependence on the statute petitioner’s present claim of reliance is not credible the following - - colloguy transpired at trial between ludlow and counsel for respondent q counsel for respondent are you familiar with the case texas carbonate versus phinney a ludlow no q have you ever discussed that case with anyone a no petitioner proposed to call grey the accountant who advised petitioner and prepared petitioner’s tax returns grey was not allowed to testify in this case because he had not been listed as a witness in petitioner’s trial memorandum in violation of this court’s standing pre-trial order see rule b his testimony in any event would not have made a difference see veterinary surgical consultants p c v commissioner tcmemo_2003_48 where grey testified that he was unaware of the tex carbonate co v phinney supra case until posttrial briefing during the fall of in 119_tc_121 petitioner failed to establish that it relied on judicial precedent or for that matter on any of the other sources specified in sec_530 a accordingly we conclude that subparagraph a does not aid petitioner here the same result obtains with respect to subparagraphs b and c the parties have stipulated that respondent did not audit petitioner for employment_tax purposes prior to the --- - examination underlying the present case petitioner therefore cannot show reliance on a past audit under sec_530 b likewise petitioner has adduced no evidence of conventions in the hauling industry to establish longstanding industry practice under sec_530 c the safe havens of sec_530 are therefore inapplicable on the record before us in seeking to establish a reasonable basis for ludlow’s treatment apart from the safe havens petitioner quotes from the following definition of employment status in sec_530 the term ‘employment status’ means the status of an individual under the usual common_law rules applicable in determining the employer-employee relationship as an employee or as an independent_contractor or other individual who is not an employee petitioner apparently believes that the purported lack of common_law control makes its treatment of ludlow reasonable within the meaning of sec_530 and that the above definition supports this view again however petitioner’s approach is contrary to controlling statutes and to the facts of this case as a matter of construction sec_530 defines employment status for purposes of certain provisions of sec_530 not germane here it does not purport to override or interpret the definition of employee in sec_3121 and related regulations hence sec_530 does not render it rational for petitioner to - have ignored the statutory mandate regarding corporate officers and to have taken a position that was not otherwise supported by authority petitioner also does not claim in actuality to have relied on sec_530 in deciding not to treat ludlow as an employee in or we conclude and have found as a fact that petitioner did not have a reasonable basis for failing to characterize ludlow as an employee consequently relief from employment_tax liability is not available to petitioner under sec_530 lastly in connection with sec_530 petitioner raises a due process argument this issue has never been properly pled by petitioner rather petitioner mentioned due process in its motion for leave to file an amended petition did not allege a due process violation in the amended petition itself and argued the matter only on brief generally issues not properly raised prior to briefing will not be considered when to do so would prevent the opposing party from presenting evidence that might have been offered if the issue had been timely raised dibleo v commissioner 96_tc_858 affd 959_f2d_16 2d cir 71_tc_874 here however even if we were to treat the due process issue as appropriately before us petitioner’s position 1s without merit - - sec_530 provides that the internal_revenue_service shall before or at the commencement of any audit inquiry relating to the employment status of one or more individuals who perform services for the taxpayer provide the taxpayer with a written notice of the provisions of this section small_business job protection act of sec a 110_stat_1766 on brief petitioner alleges that it learned of the existence of sec_530 only through the date notice_of_determination which postdated by a substantial margin the commencement on date of the underlying employment_tax audit petitioner then states the inaction of respondent in not providing petitioner with the required sect e notice constitutes a serious constitutional violation of petitioner’s right to due process and petitioner moves this court to allow it to recover its legal fees since the conduct of respondent is so egregious against the petitioner to the extent that petitioner’s due process contentions take the form of a claim for litigation or administrative costs and fees under sec_7430 such claim is premature rule a as pertinent here specifies that the appropriate time to seek recovery_of legal costs follows service of a written opinion see 104_tc_320 87_tc_533 furthermore even if petitioner’s allegations might be read as a plea encompassing other remedies petitioner has failed to show that its situation satisfies the prerequisites for relief -- - under the due process clause as this court has noted even ina criminal context defendants are generally required to establish actual prejudice in order to obtain due process relief 79_tc_185 involving a claimed denial of due process on account of delay in issuance of the subject deficiency_notice the record in the instant case is devoid of evidence of such prejudice although petitioner was made aware of sec_530 at least prior to filing its petition with the court petitioner failed therein to raise the statute nonetheless petitioner was subsequently granted leave to file an amended petition specifically to place at issue its right to relief under sec_530 the matter of substantive relief under sec_530 not as previously noted of a due process violation based on sec_530 notice procedures therefore was properly before the court at trial and petitioner was afforded an opportunity to be heard accordingly no actual prejudice was sustained the above analysis is consistent with our recent jurisprudence on the notice provision contained in section a of the internal_revenue_service restructuring and reform act of publaw_105_206 112_stat_767 in 114_tc_489 affd 275_f3d_912 10th cir we considered this requirement that the commissioner include on each notice_of_deficiency the last date for filing a - - petition with the tax_court we held that where the commissioner failed to place such date on the notice but the taxpayers nonetheless received the notice and filed a petition in a timely manner the notice was valid id pincite in so holding we noted the absence of any delay prejudicial to the taxpayers’ ability to petition the court id pincite thus failure to comply with certain procedural notice requirements does not rise to the level of a denial of due process where as here the taxpayer’s opportunity to present its position is not prejudiced c conclusion we hold that ludlow is an employee of petitioner pursuant to sec_3121 and that petitioner is not entitled to relief under sec_530 accordingly petitioner is liable for fica and futa taxes for the periods in issue as set forth in respondent’s notice_of_determination and relevant stipulations to reflect the foregoing decision will be entered for respondent and in accordance with stipulations as to amounts


internal_revenue_service number release date index number ---------------------------- -------------------- -------------------------------------------------- ------------------ ----------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ---------------------------- telephone number --------------------- refer reply to cc tege eb qp1 plr-138789-04 date date -------------------------------------------------- --------------------------------------------------------- ------------------------------------------ ----------------------------------------- --------------------------------- ------------------------------------------ ---------------------------------------------------------------------------------------------------- -------- legend x b c d state e f g date ------------------- date ------------------- date ------------------------ date ---------------------- date ------------------ date ---------------------- year a ------- act ---------------------------------------------------------------------------------------------------- -------------------------------- dear ------------------ this is in response to your request dated date as supplemented on date in which you request a letter_ruling on whether x is an instrumentality of state e under internal_revenue_code code sec_3121 such that services provided by employees of x are exempt from taxation as employment for purposes of the old-age survivors and disability insurance oasdi portion of federal_insurance_contributions_act fica_taxes plr-138789-04 facts on date the sole elementary_school in d was ordered closed by the superintendent of b in order to consolidate operations and save money in order to preserve the local elementary_school x was incorporated on date as a non-profit state e corporation on date x was granted a charter to operate an open-enrollment charter school pursuant to the state e education code x’s articles of incorporation articles adopted on date provide that x is organized for the promotion and maintenance of current public school facilities in d and to foster public education for the local school children prior to its charter the local school was a member of b the local school district and the traditional means of providing public education in state e x’s articles provide that x shall not carry on any activities not permitted to be carried on by a corporation exempt from federal_income_tax under code sec_501 the articles provide that no part of the net_earnings of x will inure to the benefit of any private persons and provide that upon its dissolution remaining assets shall be distributed for one or more tax-exempt or public purposes x’s bylaws as revised on date provide that the management business and affairs of x and all corporate powers shall be exercised by or under authority of the nine member board_of directors vacancies on the board are filled by members of the board_of directors at the annual meeting members may include parents guardians teachers as well as local residents and landowners of the d area the directors hold office until removed or their successors are elected or installed the state e commissioner of education retains the right to appoint a board_of managers to exercise the duties of the board_of trustees if the school fails to satisfy certain requirements an annual report of x’s financial activity is required all funds are required to be handled pursuant to the act of state e x received a favorable letter of determination dated date from the internal_revenue_service recognizing it as a federally tax-exempt code sec_501 organization on date x was granted a charter to operate an open-enrollment charter school by c offering state supported free public education to students in grades kindergarten through grade eight in the area of d the charter recites that x is a state e public school the charter requires x to obtain an annual audit of the financial and programmatic operations of x by a certified_public_accountant holding a permit from the state e board_of public accountancy which shall be filed with f the charter may not be revised without the approval of the state e commissioner of education x is subject_to the authority of the state e commissioner of education and is subject_to investigations by f to determine compliance with the terms of the charter with regard to accountability for student performance the school is subject_to specific rules of the state e education code and is required to provide an annual written evaluation of x’s plr-138789-04 compliance with these requirements with the state e commissioner of education x is required to fully comply with the financial_accounting principles published by f for the management and operation of charter schools x was granted the charter pursuant to the provisions of the state e education code relating to charter schools the recited purposes of charter schools in general include improve student learning increase the choice of learning opportunities within the public school system establish a new form of accountability for public schools and encourage different and innovative learning methods the specific rules governing open-enrollment charter schools provide that an organization_exempt_from_taxation under code sec_501 may be granted a charter by c to operate an open-enrollment charter school to provide instruction to students at one or more elementary or secondary grade levels as provided by the charter a charter school is subject_to many of the same requirements imposed on other state e public educational institutions and with permission may participate in any state program available to school districts the traditional means of providing public education in state e an open-enrollment charter school is subject_to the same operational requirements that apply to a school district an open-enrollment charter school is immune from liability to the same extent as a school district participation in the state e retirement_system is available on the same basis to employees of open enrollment charter schools as to employees of school districts an open-enrollment charter school does not have the authority to impose taxes however open-enrollment charter schools receive state funding and are entitled to available grants on the same basis as school districts the charter of a school may be modified placed on probation revoked or denied renewal by g for material violation of the terms of the charter failure to satisfy generally accepted accounting standards of fiscal management or failure to comply with an applicable law or rule x’s financial statements and independent auditor’s report from the year ended date indicate that for that year x received of its funding from state e from the federal government and from local support x leases its facilities from b for a nominal annual fee which is currently dollar_figure per year the facility used by x is the same one used when elementary education was provided by b b is responsible for major repairs to the building routine maintenance is provided by x the original charter of x expired in year a the charter has been renewed with f for an additional ten years plr-138789-04 law code sec_3101 imposes a tax on employees for oasdi ie the social_security_tax on the income of every individual received by such individual with respect to employment code sec_3111 imposes the social_security_tax on employers calculated as a percentage of wages with respect to employment subject_to certain exceptions not applicable in this case code sec_3121 provides that the definition of employment includes service in the employ of a state or any political_subdivision thereof or of any instrumentality of the foregoing by an individual who is not a member of a retirement_system of such state whether x is an instrumentality within the meaning of code sec_3121 is determined using the factors found in revrul_57_128 1957_1_cb_311 revrul_57_128 provides that the following factors are taken into consideration in determining the status of an organization as an instrumentality of one or more states or political subdivisions whether it is used for a governmental purpose and performs a government function whether performance of its function is on behalf of one or more states or political subdivisions whether there are any private interests involved or whether the states or political subdivisions involved have the powers and interests of an owner whether control and supervision of the organization is vested in public authority or authorities if express or implied statutory or other authority is necessary for the creation and or use of such an instrumentality whether such authority exists and the degree of financial autonomy and the source of its operating_expenses analysis an analysis of the facts of this case using the factors identified in revrul_57_128 follows governmental purpose and function state e has promulgated rules and standards applicable to open-enrollment charter schools as an alternative to standard or traditional public education in state e provided by school districts x is used for a governmental purpose and performs a governmental function as the provision of public education is a governmental purpose and function the state e statute governing open-enrollment charter schools makes them subject_to many of the same requirements to which public schools in state e school districts are subject x is subject_to the direct authority of the state e commissioner of education plr-138789-04 x’s charter is granted by c and is renewed by c an agency of state e the original charter expired in year a and the charter has been renewed for an additional ten years function performed on behalf of a state state e statute recites the intention that open-enrollment charter schools increase the choice of learning opportunities and encourage different and innovative learning methods within the public school system as such x provides an alternative form of public education through the open-enrollment charter school and encourages different and innovative learning methods x performs an educational function on behalf of state e x is performing functions previously performed by b x took over these educational functions when the elementary_school in d was ordered closed by the superintendent of b in order to consolidate operations and save money private interest versus government ownership x’s articles of incorporation provide that no part of the net_earnings of x will inure to the benefit of any private person the annual financial report indicates that over of its annual operating_expenses come from federal and state sources pursuant to the laws of state e state e retains an ownership_interest in property purchased by x with state e funds state e law further provides that in the event that x’s charter becomes forfeited or is not extended the commissioner of education of state e shall take possession of all of x’s property public control and supervision the control of x is in the board_of directors subject_to the state e commissioner of education x is subject_to many of the same requirements imposed on other state e institutions and may participate in other state programs available to school districts and has the same operational requirements that apply to school districts although the day- to-day management of x is by the board_of directors x is subject_to numerous statutory requirements x may not revise its charter without the approval of the state e commissioner of education x is subject_to investigations by f to determine charter compliance in accordance with state e rules x is required to furnish a copy of its annual audit to f x is also subject_to the state e education code rules governing student performance accountability and accreditation statutory authority state e statute authorizes g to grant a charter for an open-enrollment charter school to a code sec_501 organization x was chartered pursuant to the authority in the state e education code as an open-enrollment charter school financial autonomy source of operating funds plr-138789-04 x’s financial statements and independent auditor’s report from the year ended date indicates that for that period x received of its funding from state e from the federal government and from local support virtually the entire operating budget of x comes from state e or the federal government while the charter school does not have the authority to impose taxes it receives state funding and is entitled to grants on the same basis as state e school districts conclusion based upon the above analysis we conclude that x satisfies the criteria of revrul_57_128 and is an instrumentality of state e the services performed by x employees who are qualified participants in a retirement_system within the meaning of code sec_3121 are excluded from employment for purposes of code sec_3101 and sec_3111 no opinion is expressed on whether the employees of x participate in a retirement_system within the meaning of code sec_3121 the above analysis is based on the assumption that x’s employees are not covered by a sec_218 agreement the ruling contained in this letter is based upon information and representations submitted by the taxpayer’s representative 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 a ruling it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it code sec_6110 provides that this ruling may not be used or cited as precedent sincerely _________________________ lynne camillo branch chief employment_tax branch cc tege eoeg et2 tax exempt government entities


internal_revenue_service number release date index no cc psi - plr-116942-00 date x a d1 year dear this responds to your letter dated date submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on d1 of year the sole shareholder of x is a a x's president represents that x relied on its accountant to prepare the necessary documents for purposes of obtaining x’s s_corporation status however the form_2553 election by a small_business_corporation for x was not timely filed with the service_center a represents that it was a’s intent to have x elect to be an s_corporation effective d1 of year x filed its tax_return using form_1120s u s income_tax return for an s_corporation sec_1362 provides that if-- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation effective for x's tax_year beginning d1 of year accordingly provided that x makes an election to be an s_corporation by filing a form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x's year taxable_year a copy of this letter should be attached to the form_2553 except as specifically ruled upon above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provisions of the code including whether x was or is a small_business_corporation under sec_1361 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to x sincerely yours jeanne m sullivan assistant to the chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes