james c cooper and lorelei m cooper petitioners v commissioner of internal revenue respondent docket no filed date in p-h an inventor transferred several patents to t a corporation ps own of the outstanding_stock of t p-w’s sister and ps’ friend own the remaining stock p-h controlled t through its officers directors and shareholders ps reported royalty income that p-h received from t in exchange for the transfer of the patents as capital_gain under sec_1235 for and in p-h paid the engineering expenses of a related corporation ps deducted these expenses as professional fees on a schedule c profit or loss from business attached to their federal_income_tax return between and ps advanced dollar_figure cooper v commissioner to x a corporation under the terms of a working_capital promissory note p-h owned of the outstanding_stock of x during the years at issue x contracted with an indian com- pany to develop a new product and it used ps’ loans in part to fund the development of the new product in the indian company abandoned its development of the new product ps claimed that x was insolvent and claimed a bad_debt deduction under sec_166 of dollar_figure for r determined that the royalty payments p-h received from t did not qualify for capital_gain treatment the engineering expenses were the ordinary and necessary expenses of a related corporation and ps were not entitled to deduct those expenses ps were not entitled to a bad_debt deduction for and ps were liable for an accuracy- related penalty under sec_6662 for each of the years at issue held p-h did not transfer all substantial rights in the subject patents to t within the meaning of sec_1235 because p-h controlled t during the years at issue see 525_f2d_1046 ct_cl ps are therefore not entitled to capital_gain treatment under sec_1235 for the royalties p-h received from t in exchange for the subject patents held further ps are entitled to deduct the engineering expenses for under 48_tc_679 p-h’s pri- mary motive in paying the expenses was to protect or promote his business as an inventor and the expenditures constituted ordinary and necessary expenses in the furtherance or pro- motion of p-h’s business held further ps are not entitled to a bad_debt deduction under sec_166 because ps have failed to prove that the promissory note became worthless in held further ps are liable for an accuracy-related pen- alty under sec_6662 for each of the years at issue lawrence t ullmann for petitioners nhi t luu and christian a speck for respondent marvel judge respondent determined deficiencies in petitioners’ federal_income_tax of dollar_figure dollar_figure and for and respectively and dollar_figure accuracy-related_penalties under of dollar_figure dollar_figure and dollar_figure for and respectively after concessions the issues for decision are sec_6662 unless otherwise indicated all section references are to the internal_revenue_code code in effect for the years at issue and all rule ref- erences are to the tax_court rules_of_practice and procedure some mone- tary amounts have been rounded to the nearest dollar the parties stipulated or conceded that petitioners are entitled to de- continued united_states tax_court reports whether royalties petitioner james cooper received during and qualified for capital_gain treat- ment pursuant to sec_1235 whether petitioners may deduct professional fees paid during that were attrib- utable to expenses charged by holmes development for work performed with respect to u s patent big_number pat- ent whether petitioners’ advance of dollar_figure to pixel instruments corp pixel is deductible as a nonbusi- ness bad_debt for pursuant to sec_166 and whether petitioners are liable for sec_6662 accuracy- related penalties for the years at issue findings_of_fact some of the facts have been stipulated and are so found the stipulations of facts are incorporated herein by this ref- erence petitioners resided in nevada when they petitioned this court i patent royalties mr cooper is an engineer and inventor he has an under- graduate degree in electrical engineering from oklahoma state university and is the named inventor on more than patents in the united_states his patents are primarily for products and components used in the transmission of audio and video signals petitioner lorelei cooper has an under- graduate degree in communications from kent state univer- sity she is not the named inventor on any patents in mr cooper consulted daniel leckrone an attorney specializing in patent law and patent licensing regarding mr cooper’s portfolio of intellectual_property these con- duct on schedule c profit or loss from business travel_expenses of dollar_figure dollar_figure and dollar_figure for and respectively and professional fees of dollar_figure dollar_figure and dollar_figure for and respectively the patent was titled apparatus and method for reducing quan- tizing distortion the parties stipulated that on date the outstanding bal- ance on the promissory note was dollar_figure however petitioners claimed a nonbusiness_bad_debt deduction for the outstanding balance on the prom- issory note of dollar_figure for mr cooper is also a patent agent entitled to represent third parties be- fore the u s patent and trademark office cooper v commissioner sultations led to an agreement commercialization agree- ment among mr leckrone mr cooper and pixel wherein mr cooper and pixel assigned their portfolio of audio and video patents to vidpro a licensing company formed by mr leckrone a number of disputes arose between mr cooper and mr leckrone under the commercialization agreement in mr cooper sent mr leckrone notice that he was termi- nating the commercialization agreement mr cooper con- tended that under the terms of the commercialization agree- ment the patent rights held by vidpro automatically reverted to him as a result of the termination notice mr leckrone disagreed ultimately this dispute led to litigation between mr cooper and mr leckrone vidpro and an attorney on vidpro’s board_of directors cooper-leckrone litigation subsequently petitioners believing that all rights in vidpro’s audio and video patents reverted to mr cooper incorporated technology licensing corp a california cor- poration tlc with lois walters and janet coulter ms walters is petitioner lorelei cooper’s sister and ms coulter is a longtime friend of ms cooper and ms walters ms coulter and ms walters resided in ohio from through the commercialization of a patent generally includes finding companies to manufacture products using the patent as well as finding and suing pat- ent infringers for damages at the time the commercialization agreement was signed vidpro was known as videotech the cooper-leckrone litigation ended in when a final arbitration award was entered determining among other things that the commer- cialization agreement was properly terminated as of date and all rights title and interest that vidpro claimed in the patents were re- turned to mr cooper or his assignee petitioners moved their principal_residence from california to nevada in date petitioners ms walters and ms coulter then formed a second technology licensing corp with the nevada secretary of state tlc nevada petitioners as cotrustees of the cooper trust u d t decem- ber cooper trust contributed dollar_figure to tlc nevada in exchange for shares in tlc nevada and ms walters and ms coulter each con- tributed dollar_figure to tlc nevada in exchange for shares in tlc nevada ms walters ms cooper and ms coulter were the president and chief financial officer vice president and secretary of tlc respectively on date tlc merged into tlc-nevada with tlc-nevada as the surviving corporation we refer to tlc nevada as tlc unless other- wise indicated united_states tax_court reports and both worked full time with companies other than tlc during the years at issue neither ms coulter nor ms walters had any experience in patent licensing or patent commercialization before their involvement with tlc petitioners incorporated tlc to engage in patent licensing and patent commercialization they wanted tlc to have the aura of a fully operating licensing corporation but also wanted people mr cooper could trust-such as their close friend ms coulter and their relative ms walters-to be the shareholders officers and directors of tlc petitioners engaged attorney r gordon baker jr to pro- vide advice on forming tlc among other things mr baker advised petitioners on the requirements of sec_1235 and qualifying the royalty payments mr cooper would receive from tlc as capital_gain under that section mr baker advised petitioners that they could not control tlc directly or indirectly and their stock ownership in tlc had to be less than of the total outstanding_stock consistent with mr baker’s advice the outstanding_stock of tlc at formation was as follows petitioners as cotrustees of the cooper trust owned shares lois walters owned shares and janet coulter owned shares ms walters and ms coulter each made an ini- tial contribution of dollar_figure to tlc in exchange for their shares while petitioners as cotrustees of the cooper trust contributed dollar_figure for the trust’s shares ms walters ms cooper and ms coulter were the president and chief finan- cial officer vice president and secretary of tlc respec- tively mr cooper was the general manager of tlc ms walters has a b a degree in finance from cleveland state univer- sity during the years at issue she was an employee of the national mul- tiple sclerosis society in independence ohio ms coulter has a b s de- gree in animal science from ohio state university and an m s in agricul- tural economics from the university of wyoming she owns her own con- struction company multi-maintenance inc in ohio and was an employee of multi-maintenance during the years at issue tlc did not have an office or other formal business location beginning in or and continuing through the years at issue ms coulter performed most of ms walters’ duties at tlc at that time ms walters was working more than hours per week for the national multiple sclerosis society and spending substantial time caring for her ill father cooper v commissioner on date mr cooper and pixel entered into agreements collectively tlc agreements with tlc purport- edly transferring all of mr cooper’s and pixel’s rights in the patents subject patents giving rise to the royalties at issue in this case to tlc under each tlc agreement the licensor ie mr cooper or pixel receive sec_40 of all gross_proceeds received by tlc for any sublicense and of all damages received in litigation or settlement of litigation the licensor then receive sec_90 of all remaining net_proceeds as defined in the tlc agreements by tlc had begun experiencing financial difficulty it could not effectively license its patents because the patents were the subject of the cooper-leckrone litigation and poten- tial licensees were wary of tlc’s authority to license the pat- ents furthermore tlc needed legal representation to pursue patent infringement cases in an effort to solve tlc’s financial difficulties mr cooper contacted anthony brown who was in the business of helping inventors protect and enforce their patents mr brown owned ip innovation llc ip innovation subse- quently tlc mr cooper and pixel entered into an agree- ment ip innovation assignment agreement with ip innova- tion assigning an undivided_interest in patent big_number patent to ip innovation then ip innovation mr cooper pixel and tlc engaged the patent law firm of niro scavone haller niro niro firm to represent their interests with respect to the patent mr cooper agreed to provide technical assistance to the niro firm as necessary to assist the firm in interpreting the patents technology and devices that would be the subject of the licensing and infringement matters the firm was pursuing mr cooper was not compensated for providing technical assistance to the niro firm on date tlc and its shareholders adopted a stock restriction agreement providing in relevant part that on date tlc pixel mr cooper and ip innovation exe- cuted an agreement exclusive license agreement expanding ip innova- tion’s license beyond the patent by providing an exclusive perpetual and irrevocable license to several additional patents tlc pixel mr coo- per and ip innovation amended the exclusive license agreement on octo- ber and on date the exclusive license agreement was terminated united_states tax_court reports tlc’s shares could not be sold assigned or transferred except according to the terms of the stock restriction agree- ment under the agreement petitioners were permitted to transfer shares of tlc stock to their issue or any trust for the benefit of their issue no other tlc shareholder ie ms coulter or ms walters was permitted to transfer shares of tlc stock to her issue or any party other than a share- holder mr baker drafted the stock restriction agreement in his role as petitioners’ estate_planning attorney despite owning a majority of tlc’s outstanding_stock and being on the board_of directors neither ms coulter nor ms walters negotiated the terms of the stock restriction agreement in anthony brown formed new medium llc new medium and av technologies llc av technologies to pursue patent commercialization tlc pixel and mr cooper subsequently entered into licensing agreements for certain patents with both new medium and av technologies collec- tively new medium and av technologies agreements in or about acacia technologies group acacia purchased ip innovation and ip innovation became a subsidiary of acacia on date the parties to the new medium and av technologies agreements and the ip innovation assignment agreement clarified by agreement letter agreement that all material decisions ie licensing litigation and prosecution with respect to the new medium and av technologies agree- ments and the ip innovation assignment agreement were to be made according to a majority vote of mr cooper acacia and anthony brown under the letter agreement tlc did not have a vote with respect to the material decisions under either the ip innovation assignment agree- neither ms coulter nor ms walters consulted an attorney before signing the stock restriction agreement and neither could recall the cir- cumstances of her signing the agreement they did not receive any consid- eration for giving up their right to transfer their shares in tlc mr baker testified that the restrictions on ms walters’ and ms coulter’s ability to transfer shares in tlc were inadvertent and done in error we find mr baker’s testimony unconvincing in the light of our finding that mr cooper indirectly controlled tlc see infra p mr cooper had ample motiva- tion to ensure that the stock of tlc was not transferred to parties he could not control under the letter agreement acacia was defined as ip innovation new medium and av technologies cooper v commissioner ment or the new medium and av technologies agree- ments among the patents transferred by mr cooper to tlc under the terms of the tlc agreements were three patents known as the lowe patents the lowe patents included the patent on date tlc transferred the lowe patents back to mr cooper he did not pay any money or transfer any other consideration to tlc for the return of the lowe patents the agreement transferring the lowe patents from tlc to mr cooper simply states that the parties com- pleted the transfer because tlc had not licensed the lowe patents and tlc and mr cooper desired to return the lowe patents to mr cooper on date mr cooper transferred the lowe patents to watonga technology inc watonga the share- holders of watonga were as follows the cooper trust petitioners’ son petitioners’ daughter ms coulter and ms walters combined ms coulter was the president of watonga under the agreement transfer- ring the lowe patents to watonga mr cooper received of all net revenue as defined in the agreement and the letter agreement provides that all material decisions with respect to the ip innovation assignment agreement and the new medium and av technologies agreements will be made by a majority of cooper the acacia companies and anthony brown including without limitation all licensing litigation and prosecution decisions petitioners contend that the above-referenced provision in the letter agreement mistakenly uses the term cooper instead of cooper parties cooper parties was de- fined in the letter agreement to include tlc while cooper was defined as j carl cooper petitioner james c cooper generally where the terms of a contract are unambiguous we presume that the contracting parties intended what they stated and will interpret the contract as written see eg peco foods inc v commissioner tcmemo_2012_18 aff ’d 522_fedappx_840 11th cir see also canfora v coast hotels casinos inc p 3d nev holding that when a contract is clear on its face it will be enforced as writ- ten as a result we presume the parties intended what they stated in the letter agreement and infer that mr cooper and not tlc was entitled to vote on material decisions regarding the ip innovation assignment agree- ment and the new medium and av technologies agreements although she was watonga’s president ms coulter testified that she did not know whether watonga licensed any patents during united_states tax_court reports watonga retained of all net revenue watonga received dollar_figure in gross_receipts from the license of the patent in the amount of the royalties paid each year to mr cooper was determined under the tlc agreements by accountants hired by tlc neither ms walters nor ms coulter who were the majority shareholders as well as officers and direc- tors reviewed and verified the amount of royalties paid to mr cooper each year similarly neither ms walters nor ms coulter negotiated the terms of tlc’s agreements to license the subject patents to other companies instead ms walters and ms coulter relied on tlc’s attorneys and the technical expertise of mr cooper with regard to tlc’s licensing activities during the years at issue ms walters and ms coulter’s duties as directors and officers consisted largely of signing checks and transferring funds as directed by tlc’s accountants and signing agreements as directed by tlc’s attorneys the only compensation ms walters and ms coulter received from tlc was director’s fees paid during some years and long-term care insurance policies purchased by tlc in tlc had no employees and paid no com- pensation to any party we infer from the record and find that substantially_all of tlc’s decisions regarding licensing patent infringement and patent transfers were made either by mr cooper or at his the remaining of net revenue was payable to virgil lowe or his nominee mr lowe was the original owner of the lowe patents he sold the lowe patents to mr cooper in for dollar_figure and of all net revenue received from any third party in connection with the license of the patents watonga purportedly paid tlc dollar_figure in with respect to the patent it is unclear from the record whether such a payment was made and if so pursuant to what agreement the payment was made mr cooper testified at trial that he could not recall the details of the payment and was not sure whether watonga had a licensing agreement with tlc he further testified that the document notating the payment could be in error or that the payment could be the result of a prior agreement that was not in the record in the light of mr cooper’s testimony and our re- view of the record we do not find credible the contention that watonga paid tlc anything of value with respect to the patent in ms coulter testified that her review of the royalties paid annually to mr cooper consisted solely of reviewing the statement provided by the ac- countants regarding the amount of royalties to be paid and agreeing with it cooper v commissioner direction we further find that mr cooper controlled tlc in all material respects ms coulter and ms walters acted in their capacities as directors and officers of tlc at the direc- tion of mr cooper they did not make independent decisions in accordance with their fiduciary duties to tlc or act in their best interests as shareholders ii professional fees during late and mr cooper engaged mike holmes of holmes development to complete reverse engineering and related_services with respect to the patent reverse engineering services included disassembling televisions and dvd recorders to determine how the products were designed and manufactured and whether any of the products were infringing on mr cooper’s patents services the engineering reverse the invoices for the reverse engineering services were addressed to mr cooper individually and not to tlc or watonga yet tlc and watonga were the principal owners of the patent during the period when mr holmes com- pleted the reverse engineering services mr cooper owned the patent for only a few days in he paid holmes development dollar_figure in for the reverse engineering services iii pixel instruments bad_debt petitioners incorporated pixel in for the purpose of designing and manufacturing audio and video signal proc- essing products specifically pixel designed products to measure and correct errors in the synchronization of sound and video images mr cooper was the president of pixel at all relevant times ms cooper held various positions with pixel from to including the position of vice presi- dent in date pixel executed a working_capital promissory note promissory note wherein it promised to pay to the cooper trust all sums advanced to pixel by the cooper mr cooper transferred the patent to tlc in tlc returned the patent to mr cooper on date and mr cooper trans- ferred the patent to watonga on date see supra pp united_states tax_court reports trust up to dollar_figure million on date pixel and the cooper trust amended the promissory note to increase the maximum loan amount to dollar_figure million until some point in petitioners wholly owned pixel in petitioners transferred of their shares in pixel to mirko vojnovic and christopher smith mr smith was a longtime consultant to pixel he and mr vojnovic owned and of pixel’s shares respectively during the years at issue they paid nothing or a de_minimis amount for their shares however in conjunction with the cooper trust’s transfer of shares to mr smith and mr vojnovic pixel transferred certain its rights to royalties from the patents pixel previously licensed to tlc-to mr cooper intellectual properties-including when televisions changed from standard definition to high definition in the mid-to-late 2000s many of pixel’s products became obsolete in an effort to better compete in the marketplace pixel began developing a product known as liptracker to correct lip synchronization errors in high defi- nition televisions between and petitioners as co- trustees of the cooper trust advanced funds to pixel under the terms of the promissory note these funds were used in part to fund the liptracker program pixel contracted with an indian company to complete the software development necessary for liptracker pixel’s goal was to have a working and salable liptracker product for presentation at the national association of broadcasters convention in date unfortunately the indian company could not fulfill its promise to develop the liptracker soft- ware and pixel was unable to proceed with the development on its own pixel met with representatives from the indian company in date who confirmed the company was aban- doning its development of the liptracker software in pixel faced financial difficulty it had no new prod- ucts in development-aside from the stalled liptracker product-and few older products that were still marketable its gross_receipts were in excess of dollar_figure in both and but decreased significantly in and mr vojnovic sold all of his pixel shares to mr smith in date for dollar_figure cooper v commissioner however pixel continued business operations through at least it was the assignee of many patents in and thereafter and had an active licensing agreement with tlc pixel’s gross_receipts were dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for and respectively pixel had total yearend assets each year from through in excess of dollar_figure including more than dollar_figure in both and mr cooper continued to advance funds to pixel under the terms of the promissory note throughout on date the outstanding balance on the promissory note was dollar_figure mr cooper concluded at that time that pixel could not pay the outstanding balance on the pixel note and petitioners treated the balance as a nonbusiness_bad_debt on petitioners’ federal_income_tax return petitioners did not initiate any type of litigation to recover the amounts they lent pixel under the terms of the promissory note and it is unclear from the record what demands if any they made for payment of the outstanding balance iv petitioners’ tax reporting and notice_of_deficiency petitioners jointly filed form sec_1040 u s individual_income_tax_return for each of the years at issue they reported the royalty payments mr cooper received from tlc as capital_gain on schedules d capital_gains_and_losses attached to their form sec_1040 the amounts of royalty pay- ments petitioners reported for and were dollar_figure dollar_figure and dollar_figure respectively peti- tioners also reported income and expenses from mr cooper’s patent licensing business on schedules c attached to their pixel was the assignee or assignor on a number of filings with the u s patent and trademark office from through mr cooper testi- fied that these assignments were confirming assignments that had oc- curred many years before and did not transfer anything new of value to pixel according to mr cooper these confirmatory assignments were nec- essary to show proper chain of title the gross_receipts of dollar_figure in and consisted of a single annual trademark royalty that will continue for the foreseeable future mr cooper testified that he consulted attorney mitch mitchell who had previously represented mr cooper in the cooper-leckrone litigation regarding pursuing litigation against pixel for the balance due on the promissory note mr cooper claimed that he subsequently determined that litigation against pixel would be futile united_states tax_court reports form_1040 for each of the years at issue among the deduc- tions claimed for was dollar_figure for professional fees paid to holmes development during finally for petitioners claimed a bad_debt deduction of dollar_figure on a schedule d attached to their form_1040 this deduction was for the purportedly uncollectible loan to pixel under the terms of the promissory note on date respondent issued the notice_of_deficiency to petitioners respondent determined that the royalties mr cooper received from tlc did not qualify for capital_gain treatment under sec_1235 because mr cooper controlled tlc petitioners could not deduct certain expenses for the years at issue and petitioners were not entitled to a bad_debt deduction under sec_166 for the promissory note because petitioners had not shown that the promissory note became worthless in i burden_of_proof opinion ordinarily the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving that the determinations are erroneous rule a 290_us_111 the burden_of_proof shifts to the commissioner however if the taxpayer produces credible_evidence to support the deduction or position the taxpayer complied with any substantiation requirements and the taxpayer cooperated with the secretary with regard to all reasonable requests for information sec_7491 see also 116_tc_438 petitioners do not assert nor have they proven that they are entitled to a shift in the burden_of_proof under sec_7491 accordingly petitioners bear the burden_of_proof with respect to respondent’s deficiency determinations the term secretary means the secretary_of_the_treasury or his dele- gate sec_7701 cooper v commissioner ii sec_1235 gain a whether a holder’s control_over an unrelated corporate transferee defeats capital_gain treatment under sec- tion sec_1235 provides that a transfer other than by gift inheritance or devise of all_substantial_rights_to_a_patent by any holder shall be treated as the sale_or_exchange of a capital_asset held for more than year regardless of whether the payments in consideration of such transfer are contingent on the productivity use or disposition of the property transferred thus in order for the transfer of a patent to qualify as a sale_or_exchange the owner must transfer all substantial rights to the property see sec_1235 see also 90_tc_1263 aff ’d 877_f2d_1075 1st cir for purposes of sec_1235 the term all substantial rights means all rights which are of value at the time the rights are transferred sec_1_1235-2 income_tax regs the retention of the right to terminate the transfer at will is the retention of a substantial right under sec_1235 sec_27 the term holder includes any individual whose efforts created such property sec_1235 generally an assignment is a transfer of all_substantial_rights_to_a_patent see 877_f2d_1075 1st cir aff ’g 90_tc_1263 while a license is a transfer of less than all sub- stantial rights in a patent see 68_tc_609 aff ’d 628_f2d_1196 9th cir we have previously stated that transactions between shareholders and their closely held corporations should be closely scrutinized in determining whether there has been a transfer of all substantial rights in a patent see 41_tc_50 sec_1_1235-1 income_tax regs provides that if a transfer is not one described in sec_1_1235-1 income_tax regs transfer of all sub- stantial rights to a patent by a holder to a person other than a related per- son then sec_1235 does not apply to determine whether such transfer is the sale_or_exchange of a capital_asset in other words a transfer by a per- son other than a holder or a transfer by a holder to a related_person is not governed by sec_1235 sec_1_1235-1 income_tax regs instead the tax consequences of such transactions are determined under other provi- sions of the code id petitioners do not contend that mr cooper is enti- tled to capital_gain treatment under any provisions of the code eg sec_1221 or sec_1231 other than sec_1235 in determining whether a transfer of all_substantial_rights_to_a_patent continued united_states tax_court reports b income_tax regs finally under sec_1235 transfers between related_persons as defined in sec_267 are not eligible for capital_gain treatment and for purposes of sec_1235 a corporation and an individual owning or more of the stock of such corporation directly or indirectly are related_persons sec_267 c respondent does not dispute that the transfer of the patents to tlc under the tlc agreements was other than by gift inheritance or devise mr cooper qualified as a holder of the subject patents and petitioners owned less than of tlc for purposes of sec_1235 however respondent contends that mr cooper effectively retained a right to terminate the transfers under the tlc agreements see sec_1_1235-2 income_tax regs because he indirectly controlled tlc through its directors officers and shareholders therefore respondent contends that mr cooper did not transfer all substantial rights in the subject patents and is not entitled to capital_gain treatment peti- tioners contend that mr cooper did not control tlc and that the directors officers and shareholders of tlc acted independently of mr cooper in their corporate decision- making neither the code nor applicable regulations specifically address whether sec_1235 applies to transfers to a cor- poration that is not related to the holder but is indirectly controlled by the holder whether a holder’s control_over a corporate transferee that is unrelated within the meaning of sec_1235 defeats capital_gain treatment appears to be an issue of first impression for this court however the court of claim sec_32 in charlson v united_states f 2d has occurred the language of the transfer agreement is not controlling sec_1_1235-2 income_tax regs instead the entire agreement and the form of the transaction must be examined to see if all substantial rights were transferred see juda v commissioner f 2d pincite the federal courts improvement act of pub_l_no 96_stat_25 merged the united_states court of claims into the newly created court_of_appeals_for_the_federal_circuit and in effect reconstituted the trial division of the court of claims into a newly created united_states claims_court a so-called article i court subsequently the united_states claims_court was renamed the united_states court of federal claims federal courts administration act of pub_l_no sec_902 sec_106 stat pincite cooper v commissioner ct_cl considered this issue and con- cluded that such control could prohibit the transfer of substantially_all rights in a patent and therefore preclude capital_gain treatment under sec_1235 the court of claims in charlson examined the legislative_history of sec_1235 and stated that it is clear that retention of control by a holder over an unrelated corporation can defeat capital_gains treatment if the retention prevents the transfer of ‘all substantial rights ’ id the court sup- ported its conclusion by reasoning that the holder’s control_over the unrelated corporation places him in essentially the same position as if all substantial rights had not been trans- ferred id the court found further support for its reasoning in the legislative_history of sec_1235 noting that a court should closely examine all of the facts and circumstances of transactions under sec_1235 and not rely solely on the terms of the transfer agreement to determine whether the owner transferred substantially_all rights in the patent to the transferee see id citing s rept no pincite u s c c a n we agree that retention of control places the holder in essentially the same position as if the patent had not been transferred thereby precluding the application of sec_1235 see id we further agree that congress intended for a transferor’s acts to speak louder than his words in estab- lishing whether a sale of a patent has occurred id accord- ingly we hold that retention of control by a holder over an unrelated corporation can defeat capital_gain treatment under sec_1235 because the retention prevents the transfer of all substantial rights in the patent b whether mr cooper retained control_over tlc and therefore did not transfer all substantial rights in the subject patents to tlc petitioners rely on the facts regarding control in 302_fsupp_945 e d wis and charlson to support their contention that the directors offi- in 525_f2d_1046 ct_cl the court of claims found that on the facts of that case the taxpayer did not control the transferee corporation and thus the taxpayer was not precluded from claiming capital_gain treatment under sec_1235 see infra pp united_states tax_court reports cers and shareholders of tlc acted independently of mr cooper in their corporate decisionmaking and that they are entitled to capital_gain treatment under sec_1235 we dis- agree because the facts regarding control in lee and charlson are distinguishable from the facts regarding control in this case here the facts support our finding that mr cooper indirectly controlled tlc we explain below in lee the taxpayer transferred patents to lee custom engineering inc lee engineering a closely held corpora- tion the three shareholders of lee engineering were unre- lated but were all friends the taxpayer owned of the outstanding_stock of lee engineering the government argued that the taxpayer had not transferred all substantial rights in his patents because he controlled lee engineering- the exclusive licensee of the patents therefore the govern- ment argued that the taxpayer did not effectively transfer his patents under sec_1235 the district_court rejected the government’s contentions stating among other things that there was no evidence presented which suggested the taxpayer was able to force the other stockholders or directors to do his bidding lee f_supp pincite in charlson the taxpayer transferred an exclusive license to germane corp germane to use manufacture and sell items incorporating his patents in exchange for of the royalties that germane received from licensing the patents to others germane was formed for the specific purpose of pur- chasing and licensing the taxpayer’s patents and the share- holders and directors of germane were all trusted business associates friends and employees of the taxpayer the taxpayer treated the royalties he received from ger- mane as capital_gain under sec_1235 the government argued that the taxpayer had not transferred all substantial the court in lee interpreted the government’s argument to be that no transfer had occurred under sec_1235 because the purported transfer was between parties within the same economic group 302_fsupp_945 e d wis the court rejected the government’s argument because it reasoned that under sec_1235 congress considered transfers within the same economic group to be transfers to a corporation in which or more of the outstanding_stock was owned by the trans- feror congress did not at any point in the legislative_history of this section indicate an intent to prohibit as a matter of course transfers to a closed corporation id cooper v commissioner rights in the patents to germane because he controlled ger- mane in effect the government argued that the taxpayer had a tacit understanding with germane that he would have final veto over any license agreement that germane made with respect to his patents the court found that although the relationships among the taxpayer germane and the shareholders made more prob- able the existence of prohibited retained control the evidence did not establish that the taxpayer was able to exercise such control_over germane charlson f 2d pincite instead the court found that germane exercised its rights in the pat- ents according to its own discretion even though it frequently sought received and followed the taxpayer’s advice id pincite the court noted among other things that the shareholders in germane all had skills valuable to a small patent licensing company id pincite these skills included legal engineering design and business expertise id further the court found that although the taxpayer was present in many of germane’s licensing negotiations this was mutually bene- ficial to both parties since it would potentially lead to higher royalties moreover there was no evidence that the tax- payer-and not germane-decided the terms of the licensing agreements finally although the taxpayer participated as a joint plaintiff with germane in patent infringement actions there was no evidence that the taxpayer controlled or directed the details of the litigation id pincite in short the court rejected the government’s position that the taxpayer controlled the operation of germane as a result the court held that the taxpayer had transferred all substantial rights in his patents to germane-entitling him to capital_gain treatment under sec_1235 id pincite by contrast tlc did not exercise its rights in the subject patents according to its own discretion both lee and charlson are distinguishable because the taxpayers in those cases did not control the transferee corporations here mr cooper-troubled by his deteriorated business relationship with mr leckrone-formed tlc with individuals he could trust and ultimately control ms coulter and ms walters- the shareholders and directors of tlc along with ms cooper -did not have the patent engineering or other such skills to make them particularly valuable to a small patent united_states tax_court reports licensing company instead they were individuals whom mr cooper could trust to follow his direction on patent licensing issues indeed ms coulter testified that the technical nego- tiations regarding licensing and patent infringement were over her head and she deferred to mr cooper on such issues she further testified that she signed licensing and infringe- ment agreements when directed to do so by tlc’s attorneys and signed checks and transferred funds when directed to do so by tlc’s accountants as officers and directors of tlc ms coulter and ms wal- ters took numerous actions that are inconsistent with acting independently and in the best interest of the corporation among other things ms coulter and ms walters approved tlc’s transfer of potentially valuable patents to mr cooper for no consideration at least in one instance mr cooper almost immediately licensed one of these patents to another related corporation for which that corporation received a roy- alty of dollar_figure in as shareholders ms coulter and ms walters signed a stock restriction agreement placing restrictions on their ability to transfer shares of stock in tlc to anyone other than petitioners without receiving any consideration in exchange the stock restriction agreement did not place similar restrictions on petitioners indeed it is unclear what material decisions if any the officers and directors of tlc made independent of mr cooper mr cooper-and not the officers or directors of tlc-provided technical assistance to the niro firm in inter- preting the subject patents and relevant technology and in formulating patent enforcement strategies mr cooper con- ducted all technical matters for tlc-which in substance was all or a large part of tlc’s activities furthermore in his role as general manager of tlc and under the terms of the letter agreement mr cooper made all material decisions for tlc with respect to the ip innovation assignment agree- ment and the new medium and av technologies agree- ments ms coulter testified that she often followed the advice of tlc’s attor- neys but she did not know who at tlc was directing tlc’s attorneys we infer from the record and find that tlc’s attorneys drafted licensing agreements and patent infringement agreements largely at the direction of mr cooper cooper v commissioner we do not find credible any testimony by petitioners that tlc was an independent corporation that mr cooper did not control we conclude that petitioners have failed to meet their burden of establishing that they transferred all substantial rights in the subject patents to tlc pursuant to sec_1235 see rule a accordingly we sustain respondent’s determination that petitioners’ royalty income for and did not qualify for capital_gain treatment under sec_1235 iii professional fees generally a taxpayer is entitled to deduct ordinary and necessary expenses paid_or_incurred in carrying_on_a_trade_or_business see sec_162 am stores co v commissioner 114_tc_458 an expense is ordinary if it is customary or usual within the particular trade business or industry or if it relates to a transaction of common or fre- quent occurrence in the type of business involved 308_us_488 an expense is necessary if it is appropriate and helpful for the development of the business see 320_us_467 to be deductible ordinary and necessary expenses must be directly connected with or pertaining to the tax- payer’s trade_or_business sec_1_162-1 income_tax regs deductions are a matter of legislative grace and a taxpayer must prove that he is entitled to the deductions he claims 503_us_79 generally a taxpayer who pays another taxpayer’s busi- ness expenses may not treat those payments as ordinary and necessary expenses_incurred in the payor’s trade_or_business see deputy v du pont u s pincite 42_tc_800 an exception exists for cases in which the taxpayer paid another tax- payer’s ordinary and necessary business_expenses in order to protect or promote the taxpayer’s own business see eg scruggs-vandervoort-barney inc v commissioner 7_tc_36 additionally sec_212 generally allows a taxpayer to deduct the ordi- nary and necessary expenses paid_or_incurred during the taxable_year for the production_or_collection_of_income such expenses must be reasonable in amount and bear a proximate relationship to the production or collec- tion of taxable_income sec_1_212-1 income_tax regs united_states tax_court reports in 48_tc_679 we articulated a two-part test for determining whether a taxpayer’s payments are eligible for this exception the taxpayer’s primary motive for paying the expenses was to protect or promote the taxpayer’s business and the expenditures constituted ordinary and necessary expenses in the furtherance or promotion of the taxpayer’s business under the lohrke test we must first ascertain the pur- pose or motive which cause d the taxpayer to pay the obliga- tions of the other person id to meet this prong mr cooper’s purpose in paying the holmes development expenses must have been for the benefit of his business as an inventor we must then judge whether it is an ordinary_and_necessary_expense of the taxpayer’s trade_or_business that is is it an appropriate expenditure for the fur- therance or promotion of that trade_or_business if so the expense is deductible by the individual paying it id petitioners claimed a deduction of dollar_figure in for professional fees paid to mr holmes for reverse engineering services respondent disallowed this deduction its entirety respondent contends that these expenses are prop- erly chargeable to watonga or tlc and are not mr cooper’s ordinary and necessary business_expenses petitioners con- tend that these expenses are the ordinary and necessary expenses of mr cooper’s business as an inventor alter- natively petitioners contend that even if we find that the expenses are properly chargeable to watonga or tlc peti- tioners are still entitled to deduct the expenses in mr holmes’ reverse engineering services included the dis- assembling of televisions and dvd recorders to determine how the products were designed and manufactured and whether any of the products infringed on mr cooper’s pat- ents the invoices for the reverse engineering expenses indicated that the services were completed with respect to the patent however mr cooper testified that most of these expenses were unrelated to the patent for example according to mr cooper the reverse engineering services included the reverse engineering of plasma tele- visions that use random dithering and not coherent dithering-the subject of the patent regardless peti- tioners stipulated that the reverse engineering expenses were cooper v commissioner for services performed with respect to the patent peti- tioners are bound by their stipulation see eg 108_tc_320 aff ’d without published opinion 208_f3d_205 3d cir see also rule e because tlc and watonga as applicable owned the patent during the period in which mr holmes completed his services see supra pp we conclude that the reverse engineering expenses were the ordinary and necessary business_expenses of tlc and watonga neverthe- less because petitioners paid the reverse engineering expenses for tlc and watonga they still may be entitled to deduct the expenses under lohrke v commissioner t c pincite respondent does not dispute that mr cooper was in the trade_or_business of patent commercialization and being an inventor during the years at issue mr cooper testified that he had a long-term working relationship with mr holmes the holmes development invoices while referencing that the services were completed with respect to the patent also list mr cooper as the obligor and account_holder thus it appears holmes development understood its client relation- ship to be with mr cooper individually and not with watonga or tlc we find credible mr cooper’s testimony that holmes development’s business relationship was with him personally that holmes development trusted mr cooper to pay for the services completed and that non- payment of the holmes development expenses would have adversely affected mr cooper’s business reputation see eg the parties filed a stipulation of settled issues on date stat- ing that t he legal and professional services expenses not allowed by re- spondent for taxable_year in the amount of dollar_figure are attrib- utable to expenses charged by holmes development for works performed by holmes development during the period from date through date with respect to u s patent big_number the holmes development invoices further support our conclusion that mr cooper controlled tlc and his portfolio of patents see supra p although mr cooper purportedly transferred all substantial rights in the patent to tlc and watonga holmes development understood its rela- tionship to be with mr cooper individually we do not believe that holmes development would have considered its business relationship to be with mr cooper if tlc and watonga as applicable owned all substantial rights in the patent and tlc and watonga functioned as independent corporations united_states tax_court reports jenkins v commissioner tcmemo_1983_667 further- more holmes development’s work on the patent owned by watonga had the potential to directly benefit mr cooper’s trade_or_business as an inventor because mr cooper stood to receive of watonga’s net revenue accordingly we con- clude that mr cooper’s payment of the reverse engineering expenses was for the benefit of his trade_or_business as an inventor and his ongoing relationship with holmes develop- ment therefore petitioners have satisfied the first part of lohrke’s two-part test see lohrke v commissioner t c pincite mr cooper further testified that the services performed by holmes development were necessary in his trade_or_business to keep him apprised of current developments and current engineering practices for audio and video technology he fur- ther testified that the services performed by holmes develop- ment helped him ascertain whether certain products infringed on any patents that he had developed and commer- cialized we conclude that the reverse engineering expenses were proximately related to mr cooper’s business as an inventor and their payment by him was ordinary and nec- essary see id pincite accordingly we conclude that peti- tioners have satisfied the second part of the lohrke test see id and they are entitled to deduct the reverse engineering expenses iv bad_debt sec_166 authorizes a taxpayer to deduct any debt that becomes worthless within the taxable_year sec_166 distinguishes between business and nonbusiness bad_debts nonbusiness bad_debts are treated as losses resulting from the sale_or_exchange of a short-term capital_asset sec_166 sec_1211 sec_1212 a nonbusiness_debt is a debt other than a a debt created or acquired as the case may be in connection with a trade_or_business of the taxpayer or b a debt the loss from the worthlessness of which is incurred in the taxpayer’s trade_or_business sec_166 to qualify for a deduction for a worthless_debt a taxpayer a business_bad_debt is deductible as an ordinary_loss to the extent of the taxpayer’s adjusted_basis in the debt sec_166 petitioners do not contend that the loan to pixel is deductible as a business_bad_debt cooper v commissioner must show that he and his alleged debtor intended to create a debtor-creditor relationship that a genuine debt in fact existed and that the debt became worthless within the tax_year 54_tc_239 see also sec_1_166-1 income_tax regs the year a debt becomes worthless is fixed by identifiable events that form the basis of reasonable grounds for abandoning any hope of recovery 109_tc_400 the question of whether a debt became worthless during a taxable_year is determined on the basis of all the facts and circumstances see eg 93_tc_758 aff ’d 946_f2d_395 5th cir specifically a taxpayer must prove that the debt had value at the beginning of the taxable_year and that it became worthless during that year 106_tc_184 aff ’d in part rev’d in part on other grounds 318_f3d_924 9th cir the taxpayer must show sufficient objective facts from which worthless- ness could be concluded mere belief of worthlessness is not sufficient 105_tc_126 furthermore legal action is not required to show worthlessness if surrounding circumstances indicate that a debt is worthless and uncollectible and that any legal action in all likelihood would be futile because the debtor would not be able to satisfy a favorable judgment sec_1_166-2 income_tax regs a debt is not worthless for purposes of a sec_166 deduc- tion merely because it might be difficult or uncomfortable to collect see 40_fedclaims_737 a creditor’s determination that there is no hope of recovery_of a debt due and owing must be made in the exercise of sound business judgment and must be based upon information that is as complete as is reasonably obtainable regarding the debtor’s financial condition or ability to satisfy the debt see andrew v commissioner t c pincite an analysis regarding the deductibility of a bad_debt must examine whether the debt was truly worthless and if so when it became worthless the conclusions depend on the particular facts and circumstances of the case and there is no bright-line_test or formula for determining worthlessness within a given taxable_year lucas v am code co 280_us_143 united_states tax_court reports to be worthless a debt must not only be lacking current value and be uncollectible at the time the taxpayer takes the deduction but it must also be lacking potential value due to the likelihood that it will remain uncollectible in the future 53_tc_491 aff ’d 467_f2d_47 9th cir see also 50_tc_813 mere belief that a debt is bad is insufficient to support a deduction for worthlessness the fact that a business is on the decline that it has failed to turn a profit or that its debt obligation may be difficult to collect does not necessarily justify treating the debt obligation as worthless 106_tc_312 aff ’d without pub- lished opinion 121_f3d_723 11th cir this is espe- cially true where the debtor continues to be a going concern with the potential to earn a future profit see 535_f3d_1221 10th cir citing 620_f2d_1176 6th cir aff ’g 68_tc_213 aff ’g tcmemo_2006_174 abc beverage corp v commissioner tcmemo_2006_195 petitioners contend that the promissory note became worthless in following the indian company’s abandon- ment of the liptracker program this action according to petitioners gave rise to the conclusion that there was no hope of recovering the outstanding amounts under the promissory note we disagree pixel had total yearend assets each year from through in excess of dollar_figure including more than dollar_figure in assets in and it appears to us that pixel remained a going concern well past the outcome of pixel’s arrangement with the indian company and the failure of the liptracker program do not support petitioners’ claim that there was no longer any prospect of recovery_of their loans to pixel more importantly the proper inquiry in this case is not whether petitioners acted reasonably in their recovery efforts but whether sufficient objective facts show that the debt became worthless during the year in question here the facts do not support such a determination pixel experienced a decline in its business in but its gross_receipts increased in petitioners as cotrustees of the cooper trust continued to advance funds to pixel under cooper v commissioner the terms of the promissory note throughout indeed petitioners advanced dollar_figure to pixel under the terms of the promissory note between july and date we do not find it credible that petitioners would have advanced nearly dollar_figure to pixel after date if they believed the promissory note had been rendered worthless in date by the difficulties with the liptracker program the evidence shows that pixel had substantial assets at the end of the tax_year and that its gross_receipts increased in moreover at the very least pixel was entitled to an indefi- nitely continuing annual royalty of dollar_figure and owned rights in several other patents mr cooper claimed that he consulted with mr mitchell and they determined that filing a lawsuit against pixel would be futile mr cooper then concluded that the promis- sory note was worthless but petitioners failed to introduce evidence proving what information mr mitchell analyzed to determine that litigation against pixel would be futile and failed to introduce evidence proving the basis on which mr mitchell made his purported conclusion petitioners have failed to satisfy their burden of proving that no prospect of recovery existed in and failed to prove that the promis- sory note became worthless in see rule a accordingly we sustain respondent’s disallowance of peti- tioners’ bad_debt deduction for v accuracy-related_penalties a introduction sec_6662 authorizes the imposition of a penalty on the portion of an underpayment_of_tax that is attributable to among other things negligence or disregard of rules or regulations or any substantial_understatement_of_income_tax sec_6662 and b and only one accuracy- generally advances made to an insolvent_debtor are not debts for tax purposes but are characterized as capital contributions or gifts see 74_tc_476 69_tc_814 furthermore advances made by an investor to a closely held or controlled_corporation may properly be charac- terized not as a bona_fide loan but as a capital_contribution see 398_f2d_694 3d cir pixel’s liabilities to petitioners under the terms of the promissory note constituted substantially_all of pixel’s liabilities in united_states tax_court reports related penalty may be imposed with respect to any given portion of an underpayment even if that portion is attrib- utable to more than one of the reasons identified in sec_6662 sec_1_6662-2 income_tax regs the commissioner bears the initial burden of production with respect to the taxpayer’s liability for the sec_6662 penalty sec_7491 the commissioner must introduce sufficient evidence indicating that it is appropriate to impose the relevant penalty higbee v commissioner t c pincite once the commissioner meets his burden of production the taxpayer must come forward with persuasive evidence that the commissioner’s determination is incorrect or that the taxpayer had reasonable_cause or substantial_authority for the position id pincite b petitioners’ liability for the sec_6662 penaltie sec_1 substantial_understatement_of_income_tax a substantial_understatement_of_income_tax exists if the amount of the understatement exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 the term understatement means the excess of the amount of tax required to be shown on the return for the taxable_year over the amount of tax imposed that is shown on the return reduced by any rebate sec_6662 the amount of the understatement is reduced by that portion of the understatement that is attributable to the tax treatment of any item if there is or was substan- tial authority for such treatment or any item if the rel- evant facts affecting the item’s tax treatment are adequately disclosed in the return or in a statement attached to the return and there is a reasonable basis for the taxpayer’s treatment of the item sec_6662 respondent has introduced sufficient evidence to dem- onstrate that petitioners have substantially understated their income_tax_liability for each of the years at issue peti- tioners have not alleged nor have they proven that they had substantial_authority for all or any portion of the understate- ments or that they adequately disclosed their tax positions on their returns accordingly if the rule_155_computations confirm a substantial_understatement petitioners are liable cooper v commissioner for the sec_6662 underpayment penalty for a substan- tial understatement of income_tax negligence or disregard of rules or regulations the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws and the term disregard includes any careless reckless or intentional disregard sec_6662 sec_1_6662-3 and income_tax regs negligence is strongly indicated where a taxpayer fails to make a reason- able attempt to ascertain the correctness of a deduction credit or exclusion on a return that would seem to a reason- able and prudent person to be too good to be true under the circumstances sec_1_6662-3 income_tax regs dis- regard of rules or regulations is ‘careless’ if the taxpayer does not exercise reasonable diligence to determine the correctness of a return position and is ‘reckless’ if the tax- payer makes little or no effort to determine whether a rule_or_regulation exists under circumstances which demonstrate a substantial deviation from the standard of conduct that a reasonable person would observe sec_1_6662-3 income_tax regs see also 85_tc_934 respondent has met his burden to show that petitioners acted negligently or with careless disregard of rules and regulations with respect to the royalty payments mr cooper received from tlc and with respect to the bad_debt deduc- tion for the promissory note we have found that mr cooper did not transfer all substantial rights to tlc within the meaning of sec_1235 because mr cooper indirectly con- trolled tlc further we have found that the promissory note did not become worthless in and therefore peti- tioners were not entitled to claim a bad_debt deduction for the promissory note on their return petitioners reported the royalty payments from tlc as capital_gain without considering how mr cooper’s involvement with tlc affected their qualification for capital_gain treatment under sec_1235 similarly petitioners reported the promissory note as a bad_debt on their return without reasonably attempting to collect the debt and without identifying specific events that made recovery_of the debt futile in the future we conclude that petitioners did not make a reasonable attempt united_states tax_court reports to ascertain the correctness of their bad_debt deduction for or their right to treat the royalty payments received from tlc as capital_gain c petitioners’ reasonable_cause good_faith defense taxpayers may avoid liability for the sec_6662 penalty if they demonstrate that they had reasonable_cause for the underpayment and that they acted in good_faith with respect to the underpayment sec_6664 reasonable_cause and good_faith are determined on a case-by-case basis taking into account all pertinent facts and circumstances sec_1 b income_tax regs the most important factor is the extent of the taxpayer’s efforts to assess his or her proper tax_liability id reliance on professional advice may constitute reasonable_cause and good_faith but it must be established that the reliance was reasonable 89_tc_849 aff ’d on another issue 904_f2d_1011 5th cir aff ’d 501_us_868 we have pre- viously held that the taxpayer must satisfy a three-prong test to be found to have reasonably relied on professional advice to negate a sec_6662 accuracy-related_penalty the adviser was a competent professional who had suffi- cient experience to justify the reliance the taxpayer pro- vided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment 115_tc_43 aff ’d 299_f3d_221 3d cir petitioners contend that they acted with reasonable_cause and good_faith based on their reliance on professional advice and therefore no sec_6662 accuracy-related_penalty is applicable with regard to the royalty payments mr cooper received from tlc petitioners contend they sought the advice of mr baker a tax attorney and competent profes- sional with regard to their bad_debt deduction petitioners contend they sought and relied on the advice of mr baker and mr mitchell petitioners contend that they provided mr baker and mr mitchell with all necessary and accurate information and that they reasonably relied in good_faith on mr baker and mr mitchell’s advice see freytag v commis- sioner t c pincite mr baker testified with respect to the royalty payments and petitioners’ compliance with sec_1235 that he advised cooper v commissioner petitioners that mr cooper could not indirectly control tlc moreover mr baker did not provide advice to petitioners before they filed their form sec_1040 for the years at issue nor did he provide advice to petitioners regarding whether mr cooper controlled tlc following tlc’s incorporation peti- tioners did not follow mr baker’s advice to ensure that mr cooper did not indirectly control tlc consequently peti- tioners cannot claim reliance on the professional advice of mr baker to negate the sec_6662 penalty with respect to their erroneous capital_gain treatment of the royalty pay- ments mr cooper received during the years at issue with regard to the bad_debt deduction petitioners have failed to introduce evidence regarding what information they provided to mr baker and mr mitchell to enable them to determine whether the promissory note was worthless within the meaning of sec_166 in petitioners did not call mr mitchell to testify or otherwise introduce any evidence regarding mr mitchell’s advice similarly mr baker did not testify regarding any advice he may have given to petitioners that would indicate that it was his opinion that the promis- sory note became worthless in in short petitioners have failed to prove that they received or relied on the professional advice of mr baker and mr mitchell with respect to their erroneous sec_166 bad_debt deduction in because respondent has met his initial burden of produc- tion under sec_7491 with respect to the sec_6662 penalty for each of the years at issue and petitioners have failed to prove either that they are not liable for the pen- alties or that they had reasonable_cause and acted in good_faith we conclude that respondent properly determined that petitioners are liable for the penalties accordingly if the rule_155_computations show that the understatement_of_tax exceeds the greater of of the tax required to be shown on the return or dollar_figure see sec_6662 then peti- tioners are liable for the sec_6662 penalty for an underpayment_of_tax attributable to a substantial under- statement of income_tax for each of the years at issue alter- natively petitioners are liable for the sec_6662 penalty for negligence or disregard of rules and regulations with respect to the royalty payments and the sec_166 bad_debt deduction united_states tax_court reports we have considered the remaining arguments made by the parties and to the extent not discussed above conclude those arguments are irrelevant moot or without merit to reflect the parties’ concessions and the foregoing decision will be entered under rule f


internal_revenue_service date number info release date uilc cc psi 1-cor-120320-00 we are responding to your correspondence requesting relief in order to establish date as the effective date for your s_corporation_election the information submitted explains that the internal_revenue_service failed to receive your original election based on the instructions to form_2553 taxpayers are generally notified of acceptance or nonacceptance of their election within three months of date of filing_date mailed if the irs questions whether the election was filed acceptable proof of filing is a certified or registered mail receipt b form_2553 with an accepted stamp c form_2553 with stamped irs received date or e an irs letter stating the election has been accepted because you have not provided such proof of filing we are unable to respond to your request as submitted however this letter provides useful information relating to your request announcement copy enclosed provides guidance on seeking relief for late s_corporation elections and inadvertent invalid s_corporation elections generally to request relief for a late or invalid s_corporation_election you must request a private_letter_ruling from the national_office the procedures for requesting a private_letter_ruling are set out in revproc_2000_1 copy enclosed in addition revproc_2000_1 requires taxpayers to submit a user_fee along with their ruling_request the standard user_fee for a private_letter_ruling is dollar_figure however taxpayers with gross_income of less than dollar_figure million on their last-filed tax_return qualify for a reduced user_fee in the amount of dollar_figure if you are eligible to use the reduced fee provision you must include the statement described in b b of appendix a with your request please review appendix b for a sample format for requesting a private_letter_ruling if you decide to submit a formal request for a private_letter_ruling please include the proper user_fee if applying under the reduced fee provisions send a statement certifying gross_income and refer your request to our office by adding the following to the address attn cc p a p o box ben franklin station washington dc direct to cc psi room please keep this letter with your tax records and feel free to provide a copy of it to your authorized representative we hope that the above information proves helpful sincerely yours s dianna k miosi dianna k miosi chief branch associate chief_counsel passthroughs and special industries enclosures announcement revproc_2000_1


t c memo united_states tax_court reginald and ronda charlson petitioners v commissioner of internal revenue respondent great american stageline inc petitioner v commissioner of internal revenue respondent docket nos filed date reginald and ronda charlson pro sese in docket no reginald charlson an officer for petitioner in docket no linette b angelastro for respondent -- - memorandum findings_of_fact and opinion foley judge by notice dated date respondent determined the following deficiencies relating to petitioners’ federal income taxes reginald and ronda charlson docket no year deficiency dollar_figure big_number big_number great american stageline inc docket no year deficiency dollar_figure big_number 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 after concessions the issue for decision is whether any petitioner is entitled to an investment_tax_credit itc that was carried forward from findings_of_fact when their respective petitions were filed reginald and ronda charlson resided in westlake village california and great american stageline inc great american had its principal_place_of_business in newbury park california the charlsons owned two corporations great american a c_corporation formed in and c c investments inc c c - - an s_corporation formed in mr and mrs charlson each owned percent of each corporation great american operated intercity buses that were purchased by and leased from c c in c c purchased and placed_in_service seven intercity buses c c leased these buses to great american from date through date a term of months at the conclusion of the first lease c c and great american entered into a second lease for an additional months from date through date the leases were negotiated separately and did not contain options to renew and the payment amounts and lease terms were different c c purchased the buses for the sole purpose of leasing them to great american the buses were gualified investment_property which qualified for an itc pursuant to sec_38 the useful_life of each of the buses was years the charlsons’ subsequent tax returns claimed the itc carried over from and passed through c c ina prior audit respondent examined the charlsons’ but not c c’s federal_income_tax return without challenging the itc carryover opinion brligibility for investment_tax_credit sec_38 allows an itc for qualified_investments the amount of which is determined under sec_46 section q4e- e as in effect in limited the availability of the itc to noncorporate lessors including s_corporations noncorporate lessors were entitled to the itc only if either a the lessor manufactured or produced the leased property or b the property was leased for a term of less than percent of the useful_life of the property and the sec_162 deductions allowable to the lessor during the first months after transfer to the lessee exceeded percent of the rental income see sec_4e e the parties agree that c c did not manufacture or produce the buses to determine whether the lease_term exceeded percent of the useful_life of the property two or more successive leases entered into relating to the same or substantially_similar items of sec_38 property are aggregated see sec_1_46-4 income_tax regs whether the terms of two or more leases are aggregated depends on the facts and circumstances and our determination of the duration of the lease is based on the realistic contemplation of the parties when the property was placed_in_service 95_tc_82 concluding that if the substance of the transaction is that the lessee will continue leasing the property beyond the period stated in the lease then the specified lease_term is disregarded and the lease is considered to be of indefinite length affd 943_f2d_22 8th --- - cir see also 881_f2d_832 9th cir affg tcmemo_1987_375 although the leases were negotiated separately and the terms changed c c purchased the buses for the sole purpose of leasing them to great american at the time the buses were placed_in_service and the first lease was entered into the parties believed c c would lease the buses to great american beyond the period stated in the lease indeed the term of the two leases when aggregated wa sec_68 months more than half the year useful_life of the buses in addition petitioners failed to introduce any evidence relating to whether their allowable sec_162 deductions exceeded percent of the rental income received by c c during the first months of the lease in short the lease did not meet the requirements of sec_46 accordingly the charlsons are not entitled to the itc relating to the years in issue we also note that great american was not entitled to claim the itc sec_48 allows a lessor to elect to treat the lessee as the purchaser if the lessor files a statement of the election see sec_1_48-4 income_tax regs petitioners did not file such an election to the contrary c c claimed the credit in and passed it through to the charlsons estoppel relating to prior audit petitioners contend respondent is estopped from challenging the charlsons’ carryover of the credit because the charlsons’ federal_income_tax return for was audited and the itc carryover was not challenged respondent is not bound however to allow the same treatment in a subsequent year even where similar erroneously reported items were unchallenged in an audit of a prior year see 58_tc_397 affd 481_f2d_812 10th cir 55_tc_483 affd per order 4th cir date accordingly respondent was not estopped from disallowing the carryover of the itc claimed by the charlsons in and contentions we have not addressed are moot irrelevant or meritless to reflect the foregoing decisions will be entered under rule


internal_revenue_service number release date index number 2056a ---------------------------------------------- ------------------------------------------------------------ - ---------------------------- --------------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact -------------------- id no -------------- telephone number ---------------------- refer reply to cc psi plr-116876-13 date date in re --------------------------------------------------- --------------------- legend decedent spouse trust trustee date date date date date date dear ----------------- --------------------------- --------------------------- ------------------------------------------------------------ ---------------------------------- -------------------------- ------------------ ------------------- ---------------------------- ------------------------ ------------------- this letter responds to your letter dated date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to file form 706-qdt u s estate_tax_return for qualified domestic trusts to notify and certify to the internal_revenue_service service that spouse who is the beneficiary of trust has become a united_states citizen decedent died intestate on date survived by spouse at the time of decedent’s death spouse was not a united_states citizen on date spouse established a qualified_domestic_trust qdot trust under sec_2056a also on date spouse plr-116876-13 executed an irrevocable assignment to trust on date spouse as executrix of decedent’s estate timely filed decedent’s form_706 united_states estate and generation-skipping_transfer_tax return and elected on schedule m to treat trust as a qdot spouse and trustee a u s_corporation served as co-trustees of trust decedent’s estate received a closing document from the internal_revenue_service irs on date spouse became a u s citizen spouse died on date it is represented that spouse has continuously resided in the united_states from the date of decedent’s death and at all times thereafter and until the date of her death it is represented that no distributions other than trust income have been made from trust to spouse or any other person trustee of trust was not advised that spouse had become a u s citizen and accordingly no form 706-qdt was filed thus trustee did not make such notification and certification of spouse’s u s citizenship during the required time period on date approximately one year after the death of spouse trustee was advised that spouse had previously become a u s citizen upon discovery of this information trustee promptly submitted this private_letter_ruling request law and analysis sec_2001 of the internal_revenue_code imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2056 provides that for purposes of the tax imposed by sec_2001 the value of the taxable_estate is determined by deducting from the value of the gross_estate an amount equal to the value of any interest in property that passes or has passed_from_the_decedent to the surviving_spouse sec_2056 provides that except as provided in paragraph if the surviving_spouse is not a citizen_of_the_united_states no deduction shall be allowed under sec_2056 sec_2056 provides that paragraph shall not apply to any property passing to the surviving_spouse in a qdot there are three main requirements under sec_2056a that must be satisfied in order for a_trust to be a qdot the trust instrument must require that at least one trustee of the trust be an individual citizen_of_the_united_states or a domestic_corporation and provides that no distribution other than a distribution of income may be made from the trust unless a trustee who is an individual citizen_of_the_united_states or a domestic_corporation has the right to withhold from the distribution the tax imposed by sec_2056a on the distribution in addition the trust must meet the requirements of the regulations under sec_2056a finally the executor must make an election under this section on the federal estate_tax_return to qualify the property for the federal estate_tax_marital_deduction plr-116876-13 sec_2056a provides that an estate_tax is imposed on - a any distribution before the date of death of the surviving_spouse from a qualified_domestic_trust and b the value of the property remaining in a qualified_domestic_trust on the date of the death of the surviving_spouse sec_2056a provides in part that if the surviving_spouse of the decedent becomes a citizen_of_the_united_states and if such spouse was a resident_of_the_united_states at all times after the date of death of the decedent and before such spouse becomes a citizen_of_the_united_states then the tax imposed by sec_2056a shall not apply to any distributions before such spouse becomes a citizen and the tax imposed by sec_2056a shall not apply sec_20_2056a-10 and of the estate_tax regulations provides in part that a qdot is no longer subject_to the sec_2056a estate_tax if the surviving_spouse becomes a citizen_of_the_united_states and the spouse was a resident_of_the_united_states at all times after the death of the decedent and before becoming a united_states citizen and the u s trustee of the qdot notifies the irs and certifies in writing that the surviving_spouse has become a united_states citizen notice is to be made by filing a final form 706-qdt on or before april 15th of the calendar_year following the year in which the surviving_spouse becomes a united_states citizen unless an extension of time for filing is granted under sec_6081 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except in subtitles e g h and i sec_301_9100-3 sets forth the standards that the commissioner uses to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute these standards indicate that the commissioner should grant relief when the taxpayer provides evidence proving to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or to advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 are satisfied therefore trustee is granted an extension of time of days from the date of this letter to file with the irs the required notice and certification that spouse became a united_states citizen the required notice and plr-116876-13 certification should be made on a form 706-qdt the form 706-qdt should be filed with the internal_revenue_service center cincinnati oh a copy of this letter should be attached to the form 706-qdt this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely associate chief_counsel passthroughs special industries by ________________________ lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs special industries enclosure cc


t c memo united_states tax_court brenda reilly-casey petitioner v commissioner of internal revenue respondent docket no filed date richard ager uffelman for petitioner nhi t luu for respondent memorandum findings_of_fact and opinion kroupa judge this case is before the court in response to a determination notice under sec_6015 concerning petitioner’s tax liabilitie sec_1 all section references are to the internal_revenue_code as amended and in effect at all times relevant and all rule references are to the tax_court rules of continued for and years at issue we must decide whether petitioner is entitled to relief from joint_and_several_liability under sec_6015 we hold that petitioner is not findings_of_fact some of the facts have been deemed stipulated pursuant to rule f and are so found the stipulation of facts and the accompanying exhibits are incorporated by this reference petitioner resided in oregon when she filed the petition petitioner has been a successful realtor since the 1980s she often ranked in the top of her company’s annual sales rankings dann casey worked for the same company and petitioner and mr casey collectively couple were married in petitioner and mr casey each owned various single-family and multiunit residential properties before during and after the years at issue petitioner owned at least three properties during the years at issue including sw elmwood street in portland oregon elmwood property the couple resided at the elmwood property between and date the couple then resided at continued practice and procedure unless otherwise indicated se 141st place in portland oregon 141st place property from date until mr casey owned the 141st place property and paid the mortgage and all associated expenses petitioner consequently leased the elmwood property and collected dollar_figure in annual rent mr casey purchased four parcels of real_property and invested in a limited_liability_company during the years at issue mr casey also owned residential properties in arizona and nevada petitioner periodically used and enjoyed these properties and she was added to the title of the property in arizona petitioner periodically collected rents and facilitated maintenance on mr casey’s properties petitioner lent mr casey dollar_figure in and dollar_figure of which remains outstanding petitioner also lent to mr casey’s associate dollar_figure that partially funded another real_property purchase with mr casey a return preparer assisted petitioner and mr casey with jointly filing form sec_1040 u s individual_income_tax_return for the years at issue joint returns petitioner provided a completed questionnaire and documentation to the return preparer petitioner then followed up by telephone with the return preparer the return preparer electronically filed the joint returns petitioner knew that the joint returns had been electronically filed petitioner received hard copies of the joint returns soon after the return preparer filed them respondent issued to the couple a deficiency_notice for the years at issue respondent determined deficiencies of dollar_figure for and dollar_figure for collectively understatements and accuracy-related_penalties respondent determined that the couple had failed to report income overstated interest and claimed erroneous deductions from real_estate activities real_estate items respondent also determined that the couple had failed to report an oregon state_income_tax refund oregon refund received in and income from pension or annuities qualified dividends capital_gain distributions and social_security for the years at issue the couple did not file a petition with this court for redetermination of the determinations in the deficiency_notice petitioner later submitted to respondent form_8857 request for innocent spouse relief and form questionnaire for requesting spouse respondent denied petitioner’s request for relief petitioner timely filed a petition with this court regarding respondent’s denial of relief petitioner and mr casey dissolved their marriage in the uncontested divorce decree did not allocate any payments for outstanding taxes spousal support division of property or repayment of any outstanding loans petitioner requested relief in date respondent denied the request in date petitioner’s net_worth exceeds dollar_figure million and her monthly income exceeds her monthly expenses petitioner did not suffer from poor mental or physical health during the years at issue or when she requested relief from joint_and_several_liability petitioner filed federal_income_tax returns for and more than three years late petitioner has not filed a federal_income_tax return for opinion we must decide whether petitioner is entitled to relief from joint_and_several_liability for the joint tax obligations for the years at issue petitioner requests relief from tax_liabilities from the real_estate items and unreported income from the oregon refund petitioner contends she neither knew nor had constructive knowledge of the understatements because she failed to review the joint returns and was unaware of mr casey’s finances respondent argues that petitioner has not established that she meets the requirements for relief we agree with respondent i standard of review and burden_of_proof this court applies a de novo scope and standard of review to a taxpayer’s request for innocent spouse relief 132_tc_203 the spouse requesting relief generally bears the burden_of_proof see rule a 119_tc_306 aff’d 101_fedappx_34 6th cir young v commissioner tcmemo_2012_255 petitioner has not presented credible_evidence relevant to the disputed factual issues to shift the burden to respondent see sec_7491 ii relief from joint_and_several_liability we begin with the general principles of joint returns a married taxpayer may elect to file a joint federal_income_tax return with his or her spouse sec_6013 each spouse filing the return is jointly and severally liable for the entire tax_shown_on_the_return or otherwise determined to be due sec_6013 115_tc_183 aff’d 282_f3d_326 5th cir a taxpayer may seek relief from joint_and_several_liability that arises from a joint_return in certain situations and subject_to a variety of conditions see sec_6015 petitioner contends she qualifies for innocent spouse relief under subsection b and equitable relief under subsection f a relief under subsection b the parties dispute whether petitioner is entitled to relief from joint_and_several_liability for an understatement under subsection b the requesting the parties stipulated that petitioner is not eligible for relief under sec_6015 spouse must establish that he or she did not know and had no reason to know of the understatement when signing the return see sec_6015 sec_1_6015-2 income_tax regs a requesting spouse had reason to know of an understatement if a reasonably prudent taxpayer in his or her circumstances would have known that the tax_liability stated was erroneous or that further investigation was warranted 897_f2d_441 9th cir aff’g tcmemo_1987_522 we consider the nature and relative amount of the erroneous item the couple’s financial situation the requesting spouse’s educational background and business experience whether the requesting spouse participated in the activity that resulted in the erroneous item whether the requesting spouse inquired about the item and whether the erroneous item represented a departure from a recurring pattern reflected in prior years’ returns sec_1_6015-2 income_tax regs this is a factual question that we decide based on the entire record guth v commissioner f 2d pincite petitioner contends she had no reason to know of the understatements because she did not sign the joint returns we find this contention unbelievable a requesting spouse must satisfy five requirements under sec_6015 respondent concedes that joint returns were filed and petitioner timely sought relief see sec_6015 e the other two requirements are moot in light of our holding regarding the lack of knowledge requirement her testimony is insufficient to establish that she did not sign the joint returns even if she did not sign the joint returns the record demonstrates that petitioner spoke with the return preparer authorized the return preparer to file the joint returns knew the joint returns had been filed and received hard copies of the joint returns petitioner tacitly consented to the joint_return filings for the years at issue see reifler v commissioner tcmemo_2013_258 at and there is no indication that she sought to review the joint returns after each was filed or objected to either mr casey or the return preparer petitioner is charged with knowledge of the joint returns see barranco v commissioner tcmemo_2003_ petitioner also knew about the items and surrounding circumstances such that she should have understood the stated tax_liabilities were erroneous or at least inquired further petitioner is an experienced real_estate broker who owns multiple residential properties petitioner assisted in managing mr casey’s properties petitioner also knew that mr casey owned and sold residential properties even lending money to mr casey and his business partner petitioner was aware of the transactions underlying the real_estate items see eg 94_tc_126 aff’d 992_f2d_1132 11th cir petitioner had a duty_of inquiry and ignored facts that would have led a reasonably prudent taxpayer to inquire further see 114_tc_276 72_tc_1164 thomason v commissioner tcmemo_1994_418 further petitioner failed to show that she had no reason to know of improper deductions that would give rise to substantial understatements see 887_f2d_959 9th cir similarly petitioner failed to establish that she had no reason to know about the oregon refund income the oregon refund resulted from a joint state_income_tax return the couple filed petitioner did not establish that or even suggest why she was ignorant of the couple’s oregon tax_liability for or that she was unaware of the oregon refund petitioner has not established that she did not know or had no reason to know of the understatements petitioner is unable to satisfy this requirement thus we need not consider the other requirements for relief under subsection b see alt v commissioner t c pincite accordingly petitioner is not entitled to relief from joint_and_several_liability under subsection b for the years at issue petitioner neither requests nor argues for relief resulting from other items we deem that petitioner concedes relief with respect to other items b equitable relief under subsection f we now consider whether petitioner qualifies for relief under subsection f the commissioner may relieve a requesting spouse of joint liability if it is inequitable to hold that spouse liable for any deficiency or unpaid tax sec_6015 sec_1_6015-4 income_tax regs equitable relief under subsection f is available only when the spouse does not qualify for relief under subsections b and c 114_tc_324 a requesting spouse must satisfy seven threshold conditions before a request under subsection f will be considered see revproc_2013_34 sec_4 2013_43_irb_397 a requesting spouse that satisfies the threshold conditions must then demonstrate that equitable relief is appropriate under certain factors id secs dollar_figure and i r b pincite we may consider guidelines the commissioner prescribed in determining whether a requesting spouse is afforded equitable relief under subsec f see 136_tc_432 we note that the parties suggest we apply the proposed guidance in notice_2012_8 2012_4_irb_309 we have declined to do so because notice_2012_8 supra had not become final see eg hudgins v commissioner tcmemo_2012_260 at the commissioner has since promulgated final guidelines see revproc_2013_34 2013_43_irb_397 we will evaluate petitioner’s request for equitable relief under the guidance in revproc_2013_34 supra threshold conditions respondent concedes that petitioner satisfies six of the seven threshold conditions the seventh condition is that the income_tax must be attributable to an item of the nonrequesting spouse or an underpayment resulting from the nonrequesting spouse’s income unless an enumerated exception applies see id sec_4 respondent concedes that petitioner satisfies the seventh threshold condition with respect to at least a portion of each understatement thus petitioner meets the threshold requirements with respect to portions of the understatements and we consider petitioner’s request for equitable relief facts_and_circumstances_test we now consider the seven factors to determine whether equitable relief is appropriate respondent concedes that portions of each understatement should be allocated to mr casey see sec_1_6015-3 and iv income_tax regs we do not determine the appropriate amounts to allocate based on our holding a requesting spouse who satisfies three conditions is entitled to equitable relief under the commissioner’s streamlined procedure see revproc_2013_34 sec_4 i r b pincite the three conditions are the couple’s marital status potential economic hardship absent relief and whether the requesting spouse knew or had reason to know of the understatement petitioner did not meet the economic hardship or knowledge conditions the first factor is the couple’s marital status see revproc_2013_34 sec_4 a the couple’s marriage was dissolved by divorce decree in date this factor weighs in favor of granting equitable relief the second factor is whether petitioner would suffer economic hardship if relief is not granted see id sec_4 b i r b pincite economic hardship exists if satisfying the tax_liability in whole or part would cause the requesting spouse to be unable to pay reasonable basic living_expenses id petitioner’s monthly income covers her monthly expenses further petitioner has more than dollar_figure million in equity in her real_property interests satisfying the tax_liabilities would not cause petitioner to be unable to pay reasonable basic living_expenses accordingly this factor is neutral the third factor is whether petitioner knew or had reason to know of an understatement see id sec_4 c i a iii i r b pincite as previously discussed we find that petitioner did have reason to know of the understatements in addition petitioner does not contend she suffered physical or mental abuse and we find that mr casey did not restrict petitioner’s access to financial information see id sec_4 c i a this factor weighs against granting equitable relief the fourth factor is whether either spouse is obligated by divorce decree or other binding agreement to pay the outstanding federal_income_tax liability see id sec_4 d i r b pincite this factor is neutral as the divorce decree does not address the tax_liability the fifth factor is whether the requesting spouse significantly benefited from an understatement see id sec_4 e petitioner benefited financially by leasing the elmwood property while the couple resided at the 141st place property petitioner also used and enjoyed the nevada and arizona properties this factor weighs slightly against relief the sixth factor is whether the requesting spouse has made a good-faith effort to comply with the income_tax laws in later years see id sec_4 f petitioner filed returns for and three years late and has not filed a return for this factor weighs against relief the seventh and final factor is whether the requesting spouse was in poor mental or physical health see id sec_4 g i r b pincite petitioner was not in poor mental or physical health when the joint returns were filed or when she requested relief this factor is neutral in toto we find that petitioner has not established that equitable relief is appropriate the facts and circumstances indicate that petitioner had sufficient knowledge to detect the understatements and that she benefited from the understatements further she has not complied with the income_tax laws in the years following the understatements and she has not demonstrated that she would be unable to pay reasonable living_expenses we conclude that petitioner does not qualify for equitable relief for either understatement in reaching these holdings we have considered all of the parties’ arguments and to the extent not addressed we conclude that they are moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent