t c memo united_states tax_court oakcross vineyards ltd dennis d groth tax_matters_partner petitioner v commissioner of internal revenue respondent docket no filed date richard j sideman for petitioner kathryn k vetter for respondent memorandum findings_of_fact and opinion wells judge the instant case is a proceeding pursuant to sections for a readjustment of partnership items of oakcross vineyards ltd vineyards a partnership for the taxable_year ending date in a notice of final_partnership_administrative_adjustment respondent increased vineyards’ income for that year by dollar_figure and increased the partnership’s self-employment_income by the same amount unless otherwise noted all section references are to the internal_revenue_code code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure the issue to be decided is whether respondent's determination that vineyards must report its income from the sale of grapes and other_property on the accrual_method rather than the cash_receipts_and_disbursements_method in order to clearly reflect its income was an abuse of respondent’s discretion findings_of_fact some of the facts have been stipulated for trial pursuant to rule the parties’ stipulations of fact are incorporated herein by reference and are found as facts in the instant case at the time the petition in the instant case was filed vineyards maintained its principal_place_of_business in oakville california general background vineyards vineyards was organized on date as a california limited_partnership to acquire and operate a vineyard in california's napa valley mr groth and his wife judith sometimes referred to herein together as the groths are the general partners of vineyards and own an 85-percent interest in the partnership trusts for the benefit of each of the groths' three children are limited partners of vineyards and own the remainder of vineyards each trust holding a 5-percent interest vineyards is engaged in the business of growing wine grapes and is a farmer for purposes of the code vineyards jointly operates two vineyards the oakcross vineyard a 121-acre parcel acquired during for dollar_figure and the hillview vineyard acquired during for dollar_figure vineyards made downpayments of dollar_figure and dollar_figure respectively for each parcel and financed the remainder of their purchase prices with mortgage debt vineyards borrowed dollar_figure from the production credit association pca for the purchase of the hillview vineyard since it started business vineyards has used the cash_receipts_and_disbursements_method of accounting vineyards' operations were initially financed by cash contributions from the groths mortgage debt and annual operating loans vineyards obtained operating or crop loans from the pca during each of the years through the loans were repaid each year during vineyards obtained a dollar_figure line of credit from napa national bank during vineyards employed inter alia a vineyard manager and two assistants prior to and during vineyards maintained an office in a building on the hillview vineyard winery during having learned that operating a winery offered greater potential for profit than operating a vineyard the groths decided to enter the winery business accordingly during that year they established pursuant to california law groth vineyards and winery winery an s_corporation winery is engaged in the business of making and marketing wines such as cabernet sauvignon chardonnay and sauvignon blanc which are named for the varietal or type of grape from which each is made since it started business winery has used the accrual_method of accounting initially the groths owned all of the outstanding shares of winery's stock in the groths employed a professional winemaker nils venge as general manager of winery during mr venge was responsible for all production operations of winery and for supervision of vineyards' vineyard manager mr venge's employment contract provided for options to acquire up to percent of winery's stock which he exercised as they became available during each of the following years mr venge held the following percentage of winery's stock year percentage dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure in general a winemaker decides when to pick grapes and must be satisfied with the viticultural practices of the vineyard supplying grapes during relevant periods mr groth was president and secretary of winery and mrs groth was vice president and chief financial officer of winery the groths had overall responsibility for all winery operations mr groth represents to customers that he controls the production process from the growing of the grape until the cork is put in the bottle during the groths had taken over full-time management of winery prior to that time mr groth had been successively a partner of the accounting firm of arthur young and company the chief financial officer of atari inc and president of atari's international division winery was initially financed by the groths' personal resources by the end of their investment in winery's stock was dollar_figure and their loans to winery totaled dollar_figure since it was established in winery sought to build a physical plant in which to make store and bottle its wines during winery undertook to construct a winery plant investing dollar_figure but the project was deferred when financing could not be obtained during winery contracted with another winery to crush and ferment its grapes pursuant to a custom crush contract during winery constructed an open pad in the oakcross vineyard for crushing and fermenting grapes investing dollar_figure winery also relied on the facilities of other wineries during that year for the custom crushing of grapes and the bottling aging and storing of its wines during winery began selling some of its vintage sauvignon blanc once winery had demonstrated that its wines were salable during date bank of america granted winery a dollar_figure line of credit and an equipment loan of dollar_figure as a condition of granting the line of credit bank of america required that vineyards and the groths subordinate all of the debts owed them by winery totaling dollar_figure to winery's obligations to the bank and no payments on those debts be made by winery without the bank's consent vineyards accordingly executed a subordination agreement to induce bank of america to extend credit to winery the bank also required cross-collateralization by vineyards and personal guarantees by the groths of the loan during date bank of america increased winery's line of credit to dollar_figure and continued to require winery's debts to vineyards to be subordinate to winery's obligations to the bank vineyards subsequently executed subordination agreements dated date and date during winery was not achieving the sales goals expected by bank of america and the bank declined to raise winery's line of credit to dollar_figure as a consequence winery was put in a difficult financial position winery sold some of its and vintages in bulk which fetched a lower price than could have been obtained had the wine been bottled but which saved costs as well as unused barrels during date bank of america offered to renew winery's line of credit in the amount of dollar_figure subject_to continued subordination of vineyards' claims against winery to those of the bank and other restrictions on payments by winery to vineyards further described below the terms imposed in connection with the renewal of the line of credit continued until winery ceased dealing with bank of america which occurred during during date winery negotiated a dollar_figure line of credit from napa national bank which also agreed to provide a construction loan of dollar_figure to build winery's plant and an equipment loan of dollar_figure the bank required the same subordination of winery's debts to vineyards to winery's obligations to the bank the same cross-collateralization by vineyards and the same payment schedule as bank of america had required during winery's plant which had the capacity to produce big_number cases of wine was completed and occupied also during winery began using the term estate bottled to describe its wines meaning inter alia that winery controlled the viticultural practices of the vineyards in which the grapes from which the wines had been made were grown the following table summarizes winery's wine sales through year sales dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number activities of vineyards and winery dealings between vineyards and unrelated buyers from through vineyards sold grapes to unrelated buyers and the sales were made at market_value during vineyards sold all of its grapes to unrelated buyers during certain of the years from through long-term agreements with certain buyers for vineyards' grapes that had been made by the previous owners of its vineyards were continued and new agreements were made certain written agreements for the sale of grapes whether long term or otherwise were on the purchaser's letterhead while others were on winery's letterhead the agreements on winery's letterhead generally called for payment of one half of the amount due days after delivery and the balance on january of the year following the year of delivery the contracts written on purchasers' letterheads provided similar payment terms vineyards sent invoices to buyers on winery letterhead mr venge executed some of vineyards' grape purchase agreements on behalf of mr groth vineyards charged and collected interest on the unpaid balances due from unrelated purchasers those buyers generally paid vineyards for grapes within months of harvest which generally occurred during september or october of each year accordingly they generally made their final payments for grapes purchased during either the year of purchase or the first quarter of the following calendar_year during and unrelated buyers paid for their grape purchases before the end of those years vineyards made sales to unrelated buyers in the following amounts from through year amount dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number the following table summarizes the relative amounts of the purchase_price of grapes received by vineyards from unrelated buyers during the year_of_sale and the subsequent year year_of_sale percentage received-- percentage received-- year_of_sale subsequent year dollar_figure a portion of the amount due vineyards was not paid until after by letter dated date mr groth informed one of vineyards' customers for grapes from the hillview vineyard of mr groth's long-term plan to start a winery the letter further stated that mr groth would need grapes produced by the hillview vineyard for that winery and that for he wished to sell to the customer only half of the amount of sauvignon blanc grapes specified in the agreement that had been made between the customer and the previous owner of the hillview vineyard and thereafter to take all of those grapes for his own winery during vineyards entered into a contract with renaissance wine company for the purchase of grapes that would continue from year to year until canceled if canceled the parties were obligated to buy and sell the same amount of grapes at the same price as had been bought and sold during the preceding year the contract called for the purchase of tons of grapes at dollar_figure per ton consequently the buyer was obligated to buy annually tons of grapes for at least years in a cover letter with respect to the contract dated date mr groth stated that dollar_figure per ton is a price that is below our normal selling_price and is designed to help you renaissance wine company achieve your average sell price of dollar_figure case dealings between winery and unrelated growers from through winery purchased grapes from unrelated growers pursuant to agreements that would continue until canceled the agreements which were prepared on winery letterhead provided that winery would pay one half of the purchase_price days after delivery of the grapes and the balance by december of the year of delivery for grapes purchased from one grower during winery paid one half of the purchase_price during and the balance during for grapes purchased from other growers during and for all grapes purchased during and winery paid for its purchases by yearend pursuant to the terms of its agreements during relevant periods winery could not have purchased all of the grapes that it needed from unrelated growers without additional capital bank of america did not suggest that the unrelated vineyards from which winery purchased grapes execute subordination agreements similar to those executed by vineyards winery did not purchase grapes from unrelated vineyards from through and purchased grapes only from vineyards during those years a date letter to mr venge from one of the unrelated growers supplying winery confirms an agreement to sell winery tons of chardonnay grapes and review the pricing structure used in the past and possibly reduce and align the price per ton to the napa valley average the letter states that we are always willing to work closely with you should disparities arise in price for this reason we will be taking a look at the price per ton of chardonnay it would be more of an incentive for us to do this if we know that groth would buy at least tons of chardonnay for an additional three years beginning in dealings between vineyards and winery grape sales during vineyards began selling grapes to winery and continued selling grapes to winery each year thereafter through in general the amount of grapes that winery purchased increased each year and during winery purchased approximately percent of vineyards' grapes prior to winery was not able to use all of the grapes produced by vineyards after vineyards did not sell grapes to unrelated buyers the percentage of vineyards' total grape sales represented by its sales to winery during each year from through was as follows year percentage sold to winery - - vineyards sold grapes to winery at market_value winery made no payments to vineyards during or for grape purchases because funds were not available vineyards sold grapes to winery during because mr groth believed that winery would eventually become successful during date winery made its first payment to vineyards for sauvignon blanc grapes used in wine being sold at that time that payment and subsequent payments to vineyards were made with funds provided by winery's line of credit from bank of america and the bank consented to the date payment in deciding whether to approve the payment the bank considered whether the wines made from the grapes purchased from vineyards had been released for sale and vineyards would be paid months after a wine's release at that time winery customarily released its sauvignon blanc after year its chardonnay after years and its cabernet sauvignon after years winery also produced relatively small quantities of a reserve cabernet sauvignon that was released year after the estate cabernet was released a subsequent vintage was not released until the prior one had been sold by addenda to subordination agreements dated date and date that were executed by it vineyards consented to receive payments from winery only for those grapes that had been made into wine that had been released for sale by winery for a minimum of months vineyards acknowledged however that payments were allowed only to the extent they did not jeopardize winery's ability to meet its obligations to bank of america the terms on which winery paid vineyards for grape purchases were further modified in connection with the renewal of winery's line of credit during date as a condition of renewing the line bank of america required that payments to vineyards for grapes be made quarterly no earlier than days after each quarter's end and ratably as the wine made from vineyard's grapes was sold in a letter dated date to bank of america discussing the bank's proposal with respect to the timing of winery's payments to vineyards for grapes mr groth wrote that judy and i have provided generous delayed payment terms to the winery that are still adequate as noted above the foregoing payment arrangement between winery and vineyards continued for the remainder of the period that bank of america provided a line of credit to winery as well as subsequently when winery obtained a line of credit from napa national bank during date during vineyards and winery executed a grape payment calculation that provided inter alia that vineyards would sell grapes to winery in quantities as needed by winery with winery having first choice of grapes and mr venge having authority to select among the grapes available and to coordinate sales with unrelated buyers and payment for the grapes would occur ratably as the wine made from the grapes was sold by winery with payments occurring periodically during the year but with full payment for actual sales during a year being made no later than the quarter following the year's end the following table summarizes the amount of winery's grape purchases from and payments to vineyards for grapes from through year amount of purchase amount of payment dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number the amounts owed to vineyards by winery for grapes at the end of each calendar_year from through are as follows year account receivable dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number vineyard's dollar_figure account receivable from winery as of date comprised amounts due for the purchase of the following vintages and varietals of grapes vintage cabernet sauvignon chardonnay sauvignon blanc merlot dollar_figure big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number dollar_figure big_number dollar_figure big_number big_number by the end of winery had paid only dollar_figure with respect to its grape purchases which totaled dollar_figure and had paid nothing for its purchases interest payments by winery to vineyards vineyards charged winery interest on the unpaid receivables from winery but winery paid none of that interest during or beginning in winery paid vineyards some of the interest that had been accruing on vineyard's receivables from winery pursuant to addenda to the subordination agreements executed by vineyards that were dated date and date vineyards was permitted to collect interest from winery on the receivables due from winery at the rate of percent vineyards acknowledged however that payments of interest were allowed only to the extent they did not jeopardize winery's ability to meet its obligations to the bank of america interest payments continued until when bank of america required winery to cease accruing interest on vineyard's receivables without the bank's consent as a condition of renewing winery's line of credit furthermore all accrued and unpaid interest owed to vineyards was eliminated from winery's books at the end of and was never paid to vineyards no interest accrued on vineyards' receivables for the remainder of the time that winery dealt with bank of america the grape payment calculation executed by winery and vineyards during however provided that vineyards would be paid interest at the rate of percent on its receivables from winery for grape purchases during date winery obtained a line of credit from napa national bank which allowed interest on the receivables to be accrued and paid quarterly the following table summarizes the accrual and payment of interest to vineyards on its receivables from winery for grape purchases from through year interest accrued interest_paid dollar_figure big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number balance dollar_figure big_number big_number big_number rent payments by winery to vineyards the land at the oakcross vineyard that was used for the crush pad was rented by winery from vineyards for dollar_figure per year prior to and during winery's offices were located in a building at the hillview vineyard which was rented from vineyards for dollar_figure per month as a condition for the renewal of winery's line of credit bank of america required that payment of rent by winery to vineyards be suspended during and after winery ceased dealing with bank of america during rent payments resumed opinion the issue to be decided is whether respondent's determination pursuant to sec_446 that vineyards must use the accrual and not the cash_method to account for its income from the sale of grapes and other_property in order to clearly reflect its income constitutes an abuse of respondent’s discretion vineyards was a farmer for purposes of the code and used pursuant to sec_1_61-4 and sec_1_471-6 income_tax regs the cash_receipts_and_disbursements_method of accounting to compute its income respondent contends that use of the cash_method materially distorted vineyard's income because of the large and increasing account receivable from winery which did not pay for its grape purchases until wine made from the grapes was released for sale or sold between and years afterwards respondent points out that vineyards did not give the same terms to unrelated buyers of its grapes and argues that the deferred payment arrangement served no business_purpose of vineyards petitioner contends that vineyards was permitted to use the cash_method that the method was generally accepted in the vineyard industry that it was consistently applied by vineyards and that it clearly reflected vineyards' income petitioner argues that it is not required to show a business_purpose for the deferred payment arrangement with winery but that such a purpose exists namely the establishment of a long-term relationship between vineyards and winery petitioner urges that the relationship of vineyards to winery is irrelevant to the question whether vineyards may use the cash_method_of_accounting generally sec_446 provides that if a taxpayer's method_of_accounting does not clearly reflect income then the computation of taxable_income shall be made pursuant to a method that in the opinion of the commissioner does clearly reflect income sec_446 vests the commissioner with broad power to determine whether the accounting methods used by a taxpayer clearly reflect income 439_us_522 and to require revision of a method that does not clearly reflect income 650_f2d_1046 9th cir affg 71_tc_1083 586_f2d_747 9th cir affg 64_tc_1091 430_f2d_679 9th cir affg tcmemo_1969_39 an action taken by the commissioner under sec_446 will be set_aside by the courts only if there is a clear abuse_of_discretion cole v commissioner supra pincite see also stephens marine inc v commissioner supra pincite accordingly a determination pursuant to sec_446 is entitled to more than the usual presumption of correctness 104_tc_367 and cases cited therein and the taxpayer bears a heavy burden_of_proof in overcoming a determination that an accounting_method does not clearly reflect income thor power tool co v commissioner supra pincite moreover even if a taxpayer including a farmer is otherwise entitled to use the cash_method_of_accounting sec_446 may be used to prevent abuses of the method van raden v commissioner t c pincite and mere compliance with a generally permitted method does not foreclose the commissioner's exercise of discretion pursuant to sec_446 102_tc_87 affd 71_f3d_209 6th cir a taxpayer may challenge the commissioner's determination on the grounds that its accounting_method clearly reflects income 60_tc_794 and if the taxpayer's method_of_accounting does clearly reflect income the commissioner may not require a change to another method that more clearly reflects income ansley- sheppard-burgess co v commissioner supra pincite historically farmers have been allowed to use the cash_method which enables them to employ a simplified accounting procedure 384_us_102 89_tc_98 although it is generally acknowledged that distortions of income may result from use of the cash_method frysinger v commissioner 645_f2d_523 5th cir affg tcmemo_1980_89 ansley-sheppard- burgess co v commissioner supra pincite 90_tc_1090 affd 901_f2d_810 9th cir kennedy v commissioner supra pincite 73_tc_980 such distortions do not prevent the cash_method from clearly reflecting income so long as the method is consistently applied and no attempt is made to unreasonably prepay expenses or defer receipt of income ansley-sheppard- burgess co v commissioner supra pincite kennedy v commissioner supra pincite magnon v commissioner supra pincite6 van raden v commissioner t c pincite moreover farmers are allowed great flexibility in timing the receipt of income from harvested crops and may sell them in one year pursuant to a contract calling for payment in a later year 69_tc_511 a taxpayer including a farmer using the cash_method_of_accounting is ordinarily entitled to report income in the year it is actually or constructively3 received sec_1_61-4 sec_1 a income_tax regs but may not do so where application of the general_rule results in a material distortion_of_income see respondent does not contend that vineyards was in constructive receipt of any of the amounts due it from winery van raden v commissioner t c pincite3 where a taxpayer's method_of_accounting results in a material distortion_of_income the commissioner is empowered by sec_446 to require use of a different accounting_method so that income is clearly reflected commissioner v van raden f 2d pincite- 533_f2d_768 2d cir affg 63_tc_556 79_tc_7 affd 725_f2d_1173 8th cir 68_tc_115 and cases cited therein see also 580_f2d_422 the question of whether a taxpayer's method_of_accounting materially distorts or clearly reflects income is one of fact and is to be resolved on a case-by-case basis cole v commissioner supra pincite ansley-sheppard-burgess co v commissioner supra pincite 85_tc_397 the cases that involve the question of whether a material distortion has occurred with respect to the receipt of income take into account the same considerations and factors that are examined in cases involving the question of whether a material distortion has occurred with respect to the claim of a deduction compare ansley-sheppard-burgess co v commissioner supra pincite applied communications inc v commissioner tcmemo_1989_469 c a hunt engg co v commissioner tcmemo_1956_ with van raden v commissioner t c pincite6 62_tc_469 affd 536_f2d_874 9th cir accordingly we consider cases dealing with material distortions of income arising in connection with the claim of deductions in van raden v commissioner t c pincite6 we set forth the following approach to considering the question whether a distortion_of_income was material because the method_of_accounting and the nature of the trade_or_business are so interdependent we conclude that the distortion_of_income must not be examined in a vacuum but in light of the business practice or business activities which give rise to the transaction which the commissioner has determined must be accorded a different accounting treatment for example material distortions of income may occur if the sales force of a business is more successful in december than in january yet such a distortion would not require adjustment to clearly reflect income because the distortion resulted from the business activity itself a material distortion_of_income generally does not occur where a deferral of income arises in the regular course of business and not from a manipulation of the cash_method 522_f2d_1055 9th cir remanding tcmemo_1971_83 courts have also considered whether a business_purpose exists for a transaction in deciding whether a taxpayer's method_of_accounting for the transaction materially distorts income frysinger v commissioner supra pincite packard v commissioner supra pincite van raden v commissioner t c pincite6 a business_purpose exists where the taxpayer establishes a reasonable expectation of receiving some business benefit from the aspect of the transaction challenged by the commissioner packard v commissioner supra pincite furthermore a material distortion_of_income is likely to be found where the amount of an item differs substantially from what might normally be expected in an arm's-length_transaction structured without special regard to tax consequences 65_tc_625 moreover we have recognized that the interval of time between the reporting of the payment of expenses and the receipt of associated income can be so great that the use of the cash_method_of_accounting by a taxpayer results in an impermissible distortion_of_income silberman v commissioner tcmemo_1983_782 affd without published opinions sub nom appeal of david whin inc appeal of giordano appeal of malanka stamato v commissioner 770_f2d_1068 3d cir where related parties deal with each other on the same terms as with unrelated parties a method_of_accounting will not be considered to materially distort income simply because the parties to a transaction are related gold-pak meat co v commissioner supra pincite nonetheless it is also well established that transactions between related parties are closely scrutinized 918_f2d_90 9th cir 91_tc_371 we note that an accounting_method can produce a material distortion_of_income even where a taxpayer does not have a tax_avoidance motive in employing it anderson v commissioner tcmemo_1975_302 affd 568_f2d_386 5th cir 82_tc_239 affd without published opinion 786_f2d_1174 9th cir velvet horn inc v commissioner tcmemo_1981_227 we accordingly shall consider whether use of the cash_method_of_accounting to report vineyards' income from the sales of grapes and other_property materially distorted its income we note at the outset that the groths were the general partners of vineyards and held an 85-percent interest in the partnership with trusts for the benefit of each of their children holding the remaining 15-percent interest at relevant times the groths also owned at least percent of the stock of winery with mr venge holding at most percent as stated above the fact that the groths controlled both vineyards and winery requires that we carefully scrutinize the transactions between them we note at the outset that vineyards and winery did not deal with one another on the same terms as they dealt with unrelated parties although vineyards sold grapes to unrelated parties and to winery at market_value unrelated parties generally paid vineyards for grapes within months of harvest the written sales agreements pursuant to which vineyards sold grapes to unrelated parties that were written on winery's letterhead generally provided that the buyer would pay percent of the pursuant to the employment contract between the groths and mr venge mr venge acquired percent of the stock of winery between and amount due days after delivery and percent during january of the following calendar_year other sales agreements that were written on unrelated purchasers' letterheads provided for payment of the sale price at similar times usually determined with reference to the time grapes were delivered certain of those agreements provided for payment of a portion of the price at the latest during the calendar_year following delivery generally unrelated buyers made their final payment for grapes purchased during either the year of purchase or the first quarter of the following calendar_year vineyards collected interest from unrelated buyers on overdue amounts similarly winery's agreements for the purchase of grapes from unrelated growers provide that percent of the purchase_price was to be paid days after delivery and the remainder by december of the year of delivery we consider the foregoing payment arrangements to be the result of arm's-length bargaining between unrelated buyers and sellers in contrast vineyards allowed winery more liberal payment terms during and winery purchased grapes from vineyards but did not pay for them because the cash to do so was not available vineyards also allowed or acquiesced in the control by winery's lenders of the payment of amounts due vineyards vineyards agreed to subordinate its claims against winery to those of bank of america and later to napa national bank but unrelated sellers of grapes to winery did not winery could not make payments to vineyards without the consent of its lenders winery's first payment to vineyards during date was made with the consent of bank of america with funds provided by a line of credit that the bank had extended to winery the test used by the bank to decide whether payment was to be allowed was whether the wine made from vineyard's grapes was released for sale the date payment accordingly was made for grapes used in wine that had been released for sale approximately months prior to the time of that payment vineyards subsequently consented in addenda to subsequent subordination agreements to receive payment for grapes that had been made into wine that had been released for sale by winery for a minimum of months as a condition of renewing winery's line of credit during late bank of america insisted that winery pay vineyards for grapes quarterly but only as the wine made from the grapes was sold the grape payment calculation entered into by vineyards and winery during provided similar payment terms that payment arrangement remained in place through the remainder of winery's relationship with bank of america and continued when winery replaced its line of credit from that bank with one obtained from napa national bank during date the foregoing payment practices resulted in an account receivable from winery to vineyards in the amount of dollar_figure as of date over percent of which was attributable to winery's and grape purchases generally winery's payments to vineyards for grape purchases were deferred between and years after delivery vineyards permitted winery to defer payment of the interest accruing on vineyards' receivables from winery vineyards further allowed or acquiesced in the control by winery's lenders of payments to it of interest and rent during each year from until winery began paying to vineyards some of the interest accrued on vineyards' receivables from winery using funds from winery's line of credit vineyards also made agreements with bank of america concerning the amount of interest it was entitled to collect from winery with respect to the receivables bank of america however as a condition of renewing winery's line of credit during late required that payments of interest to vineyards cease no further accruals occur without its consent and all accrued and unpaid interest owed by winery to vineyards totaling dollar_figure be eliminated from winery's books the interest eliminated was never paid to vineyards despite a provision in the grape payment calculation that called for the payment to vineyards of while petitioner maintains that the interest accrued was eliminated at the insistence of bank of america we note that the letter from bank of america to winery outlining the terms on which winery's line of credit would be renewed states that as borrower winery has proposed all existing accrued and unpaid interest owed by borrower to guarantors including vineyards is to be reversed and eliminated from borrower's books by there is accordingly some question concerning whether the accrued interest was eliminated at the instance of the bank of america interest pincite percent on the unpaid balance of grape purchases by winery no interest was accrued for by winery with respect to the amounts due vineyards winery's rent payments to vineyards also ceased during this was done at the instance of bank of america once winery obtained a line of credit from napa national bank however interest and rent payments resumed the foregoing facts demonstrate that vineyards and winery dealt with each other on terms that were significantly different from those on which they dealt with unrelated parties moreover the record indicates to us that the terms on which they dealt were intended to benefit winery and imposed burdens on vineyards vineyards executed agreements subordinating its claims against winery to those of winery's lenders to induce those lenders to grant credit to winery the terms on which winery purchased grapes from vineyards were also intended to favor winery for instance in a date letter to bank of america mr groth wrote that judy and i have provided generous delayed payment terms to the winery that are still adequate without the generous payment terms granted by vineyards winery could not have purchased the grapes it required without the infusion of additional capital winery did not make payments to vineyards for grape purchases during and because funds were not available winery began to pay vineyards after winery obtained a line of credit during but payments were subject_to the control of winery's lenders these arrangements apparently allowed winery to use available_resources to develop itself mr groth admitted at trial that perhaps vineyards would have been paid for its grapes sooner had it sold to unrelated parties petitioner contends that vineyards had a legitimate business_purpose for extending such generous payment terms to winery at trial mr groth a general_partner of vineyards testified that he sought to establish a long-term relationship with winery because such a relationship would provide vineyards with a continuing market for its grapes and the best prices for grapes tended to be paid on long-term_contracts mr groth also testified that a vineyard would do well if it established a long- term relationship with a successful winery the record indicates that grape growers offered favorable terms to large-quantity purchasers given the prospect of developing a long-term relationship with those buyers accordingly we would not consider it unusual if vineyards offered some accommodation to winery to foster such a relationship the record however indicates that when unrelated parties dealt with each other the inducement typically offered for a long-term relationship was a lower price per ton of grapes purchased rather than substantial deferral of payment of the purchase_price accordingly even if vineyards had desired in petitioner's sur-reply brief petitioner points to a continued to accommodate winery in order to foster a long-term relationship petitioner has not established that the deferral of payments for grapes was a practice adopted by parties dealing at arm's length furthermore the accommodations vineyards gave winery went even further including subordinating vineyards' claims against winery to those of its lenders and allowing winery's lenders to control the payment of amounts due for grape purchases interest and rent to vineyards moreover we note that other factors influenced the development of the relationship between vineyards and winery the record indicates that as early as mr groth intended that vineyards' grapes would supply winery's needs and that vineyards' relationships with other purchasers were to be continued market_segment_specialization_program study of the wine industry prepared by the internal_revenue_service that was released in date market segment specialization program--the wine industry tpds 83919y reprinted in tax analysts daily tax highlights and documents pincite9 date petitioner relies on certain statements in the study to support the contention that the payment arrangements between vineyards and winery were widespread in the wine industry although petitioner relies on the study to show facts concerning the practices of the wine industry the study is not otherwise in the record nor does petitioner attempt to establish that it is admissible in evidence and respondent has not had an opportunity to object to its admission petitioner claims that the study has probative value however the study which was released in does not necessarily reflect the practices of the wine industry in the year in issue moreover the study also states in a portion not relied on by petitioner that deferred payment practices which the study indicates occur only between related parties distort the income of vineyards using the cash_method id pincite accordingly we shall disregard the study cited by petitioner subordinated to its relationship with winery also winery's control of vineyards' viticultural practices entitled it to use the term estate bottled to describe its wines consequently the evidence supports an inference that a long-term relationship between vineyards and winery could have been established even without vineyards' generous payment terms because the dealings between vineyards and winery are at variance with the practices of unrelated parties with similar objectives dealing at arm's length we are not prepared to accept that they occurred in the ordinary course of vineyards' business or were actuated by the business purposes claimed for them petitioner has pointed to no nontax benefit received by vineyards from winery commensurate with the substantial concessions and accommodations made by vineyards for winery's benefit moreover petitioner has not shown that vineyards could not have sold as it did in all of its grapes to third parties at market_value on terms that did not entail the same period of deferral as its sales to winery to the contrary it appears to us that vineyards was able to sell to unrelated buyers all of the grapes that winery did not require without such a deferral of payment of the purchase_price accordingly we conclude that petitioner has not established that there was a legitimate business_purpose mr groth testified that he had significant experience selling vineyards' grapes to unrelated parties for vineyards' generous payment terms to winery and that no material distortion of vineyards' income occurred we further conclude that petitioner has failed to establish that respondent’s determination that use of the cash_method to report vineyards' income from sales of grapes and other_property did not clearly reflect vineyards' income and that use of the accrual_method was required in order to clearly reflect its income was an abuse of respondent’s discretion to reflect the foregoing decision will be entered for respondent


internal_revenue_service number release date index number ----------------------------- ----------------------------------------------- -------------------------------------- ---------------------------------------------- ----------------------------------------------- -------------------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-127774-06 date date ---------------- ---------------------- ----------------------------------------------- legend x ------------------------ ---------------- country date dear ----- ------- submitted on behalf of x requesting that the service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect to be treated as a partnership under sec_301_7701-3 x represents that x is a foreign_entity eligible to elect to be treated as a partnership however x inadvertently failed to timely file a form_8832 entity classification election electing to treat x as a partnership effective date entity for federal_income_tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if the foreign eligible_entity has more the information submitted states that x was formed under the laws of country this responds to a letter dated date and subsequent correspondence sec_301_7701-3 provides guidance on the classification of a foreign sec_301_9100-1 through provide the standards the sec_301_9100-1 provides that the commissioner may grant a reasonable sec_301_7701-3 provides that an entity classification election must be filed plr-127774-06 than one owner it may elect to be treated as a partnership pursuant to the rules in sec_301_7701-3 on form_8832 and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date on which the form is filed extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect to be treated as a partnership effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose federal tax consequences of the facts described above under any other provision of the code provides that it may not be used or cited as precedent except as specifically set forth above no opinion is expressed concerning the based solely on the information submitted and the representations made we this ruling is directed only to the taxpayer requesting it sec_6110 plr-127774-06 being sent to x’s authorized representative pursuant to a power_of_attorney on file with this office a copy of this letter is sincerely heather c maloy associate chief_counsel passthroughs and special industries copy of this letter copy for sec_6110 purposes enclosures cc


internal_revenue_service number release date index no cc psi - plr-111273-00 date x a b c d e f g d1 d2 year year dear this responds to a letter dated date submitted by x’s authorized representative on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on d1 of year the shareholders of x are a b c d e f and g a as x's president represents that x relied on its professional advisors to prepare the necessary documents for purposes of obtaining x’s s_corporation status however the form_2553 election by a small_business_corporation for x was not filed as a result of a breakdown in communication as to who would prepare and file it a represents that the shareholder’s of x had intended x to be an inactive corporation for its first short tax_year year and that the s election would be effective on d2 of year sec_1362 of the code provides that if-- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation effective for x's tax_year beginning d2 of year accordingly provided that x makes an election to be an s_corporation by filing a form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x's year taxable_year a copy of this letter should be attached to the form_2553 except as specifically ruled upon above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provisions of the code including whether x was or is a small_business_corporation under sec_1361 of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative office of the associate chief_counsel passthroughs and special industries sincerely yours thomas hines acting branch chief branch enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index numbers --------------------------------- -------------------------------------- ------------------------------------------ --------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------ telephone number -------------------- refer reply to cc psi b03 plr-150978-13 date date legend x y a ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- ---------------------- ------------------------------------------------------------------------------------------------------------------------- -------------------------- country ------- date ------------------ date ------------------------ date --------------------- year ------ dear ------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations that x be granted an extension of time to file an election to be classified as a disregarded_entity under sec_301_7701-3 facts plr-150978-13 x was formed on date under the laws of country on date several individuals including a a u s tax resident acquired of y which wholly owned x by default classification x was an association for federal tax purposes x failed to file timely form_8832 entity classification election to be classified as a disregarded_entity for federal tax purposes effective date law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 under sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that unless an entity elects otherwise a foreign eligible_entity is an association if all members have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided in sec_301_7701-3 or to change its classification by filing a form_8832 with the service_center designated on the form_8832 sec_301_7701-3 provides that an election made under sec_301 c i will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 cannot be more than days prior to the date on which the election is filed and cannot be more than months after the date on which the election is filed sec_301_7701-3 provides that if an eligible_entity classified as an association elects to be classified as a disregarded_entity the following is deemed to occur the association distributes all of its assets and liabilities to its single owner in liquidation of the association sec_301_9100-1 provides that the commissioner may 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 code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections plr-150978-13 sec_301_9100-3 provides extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have not been satisfied for any effective date prior to date as a result x is not granted an extension of time to make an election to be treated as a disregarded_entity for federal tax purposes for an effective date prior to date however based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied for an effective date of date as a result x is granted an extension of time of the earlier of days from the date of this letter or the expiration of the period of limitations for year to make an election to be treated as a disregarded_entity for federal tax purposes effective date x must make the election by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form this ruling is contingent on x and the owners of x filing all required federal_income_tax and informational returns including amended returns consistent with the requested relief granted in this letter a copy of this letter should be attached to any such return to the extent appropriate these returns or amended returns must include form_8858 return of u s persons with respect to foreign disregarded entities such that these forms reflect the consequences of the relief granted in this letter copies of this letter should be attached to any such returns or amended returns except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition sec_301_9100-1 provides that the granting of an extension of time for making an election is not a determination that the taxpayer is otherwise eligible to make the election 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 plr-150978-13 pursuant to a power_of_attorney on file with this office we are sending a copy of this letter to x’s authorized representative the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely associate chief_counsel passthroughs special industries by ___________________________________ james a quinn senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number -------------------------------------- ------------------------------------------ ------------------------- ----------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ---------------- telephone number -------------------- refer reply to cc psi plr-139533-15 date june x ------------------------------------------- ----------------------- ------------------------ date -------------- ------ date ------------------------ date ---------------- date ---------------- date -------------------- state a ------------------------ ------------------------------------------ y ------------------------------- ---------------------- dear ----- --------- this letter responds to a letter dated date and subsequent correspondence requesting relief under sec_1362 of the internal_revenue_code to make a new s_corporation_election prior to the expiration of time provided in sec_1362 the information submitted states that x was formed in state on date and that it elected to be treated as an s_corporation effective date on date a an individual who had been the sole shareholder of x sold of the shares of x to y a c_corporation thereby causing a termination of x’s s_corporation_election on date a repurchased x x requests permission to reelect to be an s_corporation effective date date is prior to the expiration of the five-year waiting_period imposed by sec_1362 sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect to be an s_corporation sec_1362 provides that an election under sec_1362 shall be plr-139533-15 terminated whenever at any time on or after the 1st day of the 1st taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that any termination under sec_1362 is effective on and after the date of cessation sec_1362 provides that if a small_business_corporation has made an election under sec_1362 and if such election has been terminated under sec_1362 the corporation and any successor_corporation shall not be eligible to make an election under sec_1362 for any taxable_year before its fifth taxable_year which begins after the first taxable_year for which the termination is effective unless the secretary consents to the election sec_1_1362-5 of the income_tax regulations provides that absent the commissioner’s consent an s_corporation whose election has terminated or a successor_corporation may not make a new election for five taxable years as described in sec_1362 the commissioner however may permit the corporation to make a new election before the 5-year period expires the corporation has the burden of establishing that under the relevant facts and circumstances the commissioner should consent to a new election the fact that more than percent of the stock in the corporation is owned by persons who did not own any stock in the corporation on the date of the termination tends to establish that consent should be granted in the absence of such fact consent will ordinarily be denied unless it can be shown that the event causing the termination was not reasonably within the control of the corporation or shareholders having a substantial interest in the corporation and was not a part of a plan on the part of the corporation or of such shareholders to terminate the election in the present case based on all of the facts submitted and representations made all of the stock in x is currently held by a who owned all of the stock in x on the date of the termination thus not more than percent of the stock in x is owned by persons who did not own stock in x on the date of the termination further the event causing the termination the acquisition by a c_corporation y of the stock of x was reasonably within the control of x and its shareholders accordingly x is denied permission to reelect to be an s_corporation prior to the expiration of the 5-year period prescribed by sec_1362 of the code except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed regarding whether x is otherwise eligible to be an s_corporation this ruling is directed only to the taxpayer that requested it sec_6110 of provides that it may not be used or cited as precedent plr-139533-15 pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely bradford r poston senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


t c summary opinion united_states tax_court jonathan l hall petitioner v commissioner of internal revenue respondent docket no 11674-06s filed date jonathan l hall pro_se jay a roberts for respondent panuthos chief special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code as amended this case is before the court on petitioner’s request for review of the internal_revenue_service irs appeals_office appeals determination to sustain the filing of a federal_tax_lien with respect to petitioner’s through income_tax liabilities after a concession the issue before the court is whether respondent abused his discretion in sustaining the lien filing with respect to petitioner’s income_tax liabilities for taxable_year sec_2001 through background petitioner resided in virginia when he filed the petition the parties filed a stipulation of facts and a supplemental stipulation of facts with attached exhibits we find those facts and incorporate the stipulations by this reference petitioner worked as a laborer during and the years in issue petitioner received forms 1099-misc miscellaneous income for each of the years in issue he reported his earnings and claimed various expenses for each year on schedule c profit or loss from business and he reported a respondent conceded that the federal_tax_lien for would be withdrawn because the lien was filed reflecting a zero balance owed for after the filing the internal_revenue_service irs assessed a collection fee interest and an addition_to_tax for failure_to_pay_tax reported on a return at trial respondent’s counsel agreed that the irs would abate the remaining balance and withdraw the lien for self-employment_tax liability for each year petitioner had no federal_income_tax withheld from the payments he received and he made no estimated_tax payments he filed balance due returns for the years in issue and did not remit payment with those returns in petitioner entered into an installment_agreement and made payments toward his outstanding tax_liabilities but he defaulted on the installment_agreement in when he stopped making payments respondent filed the notice_of_federal_tax_lien on date and mailed a notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 dated date to petitioner petitioner timely submitted form request for a collection_due_process_hearing and received a date for a telephone hearing the day before the scheduled hearing petitioner called the appeals officer and asked to postpone the hearing for days the officer refused the delay but allowed petitioner additional time to submit information he wanted considered petitioner submitted nothing beyond his initial hearing request and the officer issued a notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination sustaining the lien filing petitioner timely petitioned for judicial review of the notice_of_determination in response to motions from respondent the court granted a continuance and remanded the case so that appeals could provide petitioner a face-to-face collection hearing appeals assigned a different settlement officer so to conduct the hearing on remand before the hearing the so informed petitioner that appeals could not consider collection alternatives without proof of his current compliance with federal_income_tax obligations including tax_return filing and estimated_tax payments and completed collection information form s with supporting documentation on date the so and his supervisor met with petitioner for several hours petitioner sought withdrawal of the notice of lien on account of hardship and the adverse effect on his credit and he requested currently noncollectible cnc status as a collection alternative the so refused to consider collection alternatives during the meeting because petitioner had not provided proof of compliance or the requested collection information before or at the meeting during the collection hearing petitioner asserted that he had been improperly classified as an independent_contractor by the people for whom he provided services during the years in the settlement officer so stated that petitioner was not entitled to challenge the underlying tax_liabilities in the collection hearing because he had had a prior opportunity to so challenge ie when he received a notice_of_intent_to_levy dated date before the date notice_of_federal_tax_lien filing however the date levy notice which is the subject of another case docket no 26741-06s involves petitioner’s tax_liabilities for tax_year only not any of the years at issue in this case through in any event the so afforded petitioner the opportunity to challenge the underlying tax_liabilities at the hearing issue petitioner claimed that the alleged employer paid him a lower employee hourly rate and not a higher independent_contractor rate petitioner attempted to challenge the underlying tax_liabilities solely on the basis that respondent should determine his proper classification the so observed that the outstanding liabilities resulted from petitioner’s filing his returns as an independent_contractor and discussed petitioner’s submitting amended federal_income_tax returns for any years petitioner considered himself an employee as well as petitioner’s submitting form ss-8 determination of worker status for purposes of federal employment_taxes and income_tax_withholding petitioner did not provide any documentation to support a challenge to the existence or amounts of the underlying tax_liabilities for the years at issue petitioner also argued that the liens should be removed to allow him to obtain credit so he could purchase a computer the so and his supervisor explained that one purpose of the tax_liens is to prevent a taxpayer from acquiring additional debt that could compete for funds needed to pay tax_liabilities the so allowed petitioner additional time to submit proof of current compliance with his federal_income_tax obligations and to provide the collection information required to evaluate collection alternatives using the information petitioner submitted after the hearing which indicated that petitioner did not have assets available for collection and did not have positive monthly disposable income the so determined that the only collection alternative available was to place petitioner’s account in cnc status petitioner did not submit any amended returns or a form ss-8 to the so on date the so issued a supplemental notice_of_determination concerning collection actions under sec_6320 and or supplemental notice_of_determination determining that petitioner’s account would be placed in cnc status and that the liens would remain in place at trial petitioner sought judicial determination of his classification employee vs independent_contractor and removal of the federal tax_liens respondent conceded the employment question agreeing to accept whichever status petitioner preferred respondent’s counsel indicated that recalculating petitioner’s taxes as an employee would result in more taxes due than the amounts reflected in petitioner’s original returns filed as an independent_contractor although petitioner would be liable for only one-half of the self-employment taxes if he filed as an employee he would lose the deductions for one-half of the self- employment_taxes and the expenses he originally listed on schedules c profit or loss from business would be reported on schedules a itemized_deductions where they would be subject_to the 2-percent floor imposed by sec_67 on miscellaneous_itemized_deductions here unreimbursed employee business_expenses and would displace or compete with his standard_deduction petitioner refused to stipulate his employment status the court instructed petitioner that without an express agreement by both parties the issue would be decided on the continued discussion in reviewing the commissioner’s decision to sustain collection actions where the validity of the underlying tax_liability is properly at issue the court reviews the commissioner’s determination of the underlying tax_liability de novo 114_tc_604 114_tc_176 the court reviews any other administrative determination regarding proposed collection actions for abuse_of_discretion sego v commissioner supra pincite goza v commissioner supra pincite an abuse_of_discretion occurs when the exercise of discretion is without sound basis in fact or law 125_tc_301 affd 469_f3d_27 1st cir if the court finds that a taxpayer is liable for deficiencies and additions to tax then the commissioner’s administrative determination sustaining the collection action will be reviewed for abuse_of_discretion see 118_tc_22 godwin v commissioner tcmemo_2003_289 affd 132_fedappx_785 11th cir sec_6320 provides that appeals’ conduct of collection hearings that challenge federal_tax_lien filings shall generally be consistent with the procedures set forth in sec_6330 sec_3 continued basis of his returns as filed no oral or written_agreement as to petitioner’s employment status was made part of the record d and e at the hearing the appeals officer is required to verify that the requirements of any applicable law or administrative procedure have been met sec_6330 see also sec_6330 the appeals officer is also required to address whether the proposed collection action balances the need for efficient tax collection with the legitimate concern that any collection action be no more intrusive than necessary sec_6330 the taxpayer may raise any relevant issue relating to the unpaid tax or the proposed levy sec_6330 the taxpayer is also entitled to challenge the existence or amount of the underlying tax_liability if he did not receive any statutory_notice_of_deficiency for such tax_liability or did not otherwise have an opportunity to dispute such tax_liability sec_6330 petitioner did not receive a notice_of_deficiency or otherwise have an opportunity to dispute the underlying tax_liabilities before the collection hearings concerning the liens filed for the years at issue therefore he may challenge the respondent was not obliged to issue a notice_of_deficiency to petitioner because the assessments were entered under sec_6201 based on the amounts petitioner reported due on his tax returns along with statutory interest and additions to tax moreover sec_6211 excludes from the definition of a deficiency the tax that taxpayers report due on their returns 122_tc_1 as mentioned supra note the date levy notice did not address the years at issue in this case and thus did not provide an opportunity to dispute the underlying tax_liabilities for continued existence or amounts of his underlying tax_liabilities for tax years through see 122_tc_1 although petitioner repeatedly questioned whether he was properly classified as an independent_contractor rather than an employee he did not challenge the reporting of his income as self-employment_income by filing a form ss-8 or any amended returns with the so or by submission of evidence at trial thus while petitioner was entitled to challenge the underlying tax_liabilities he made no such challenge during the administrative collection proceeding or at trial the so did not make any determination as to petitioner’s underlying tax_liabilities accordingly the underlying tax_liabilities remain as petitioner reported with respect to collection alternatives we review the so’s determination for abuse_of_discretion petitioner relied upon sec_6323 c and d to argue that the liens should be withdrawn sec_6323 allows for withdrawal of liens that were filed prematurely the so verified that the taxes were properly assessed that the irs sent notice_and_demand for payment to petitioner and that petitioner defaulted on the installment_agreement the liens were not filed prematurely continued through according to the internal_revenue_manual pt continued petitioner did not submit any evidence showing that withdrawal of the liens would facilitate collection see sec_6323 or would be in the best interest of petitioner and the united_states see sec_6323 petitioner argued that removing the liens would enhance his ability to earn income which would increase his future income subject_to tax increase the amount of tax he would owe and pay in future years and enable him to make payments on his outstanding liabilities he provided no support for these contentions petitioner introduced evidence that his application_for credit to purchase a new computer was denied and asserted that the computer would be helpful in his business however petitioner did not show how the computer would lead to increased income or how its lack would keep petitioner from earning a living petitioner’s assertion that removal of the liens would facilitate collection and would be in the united states’ best interest is only conjectural continued date the filing of a federal_tax_lien is a requirement of placing petitioner’s account in currently noncollectible cnc status which status petitioner had requested from the automated collection function contrary to petitioner’s contentions irs records do not reflect that his account was ever placed in cnc status it appears that petitioner’s request for cnc status may have triggered the lien filing but his challenge to the lien filing prevented the secretary from applying cnc status until his collection appeal was finally resolved this case resolves his appeal and as mentioned the date supplemental notice_of_determination reflects the so’s determination that petitioner was eligible for cnc status petitioner failed to prove that the liens should be withdrawn pursuant to sec_6323 the so verified that the legal and administrative requirements had been met and considered whether the proposed collection actions properly balanced collection efficiency and intrusiveness on the basis of the record we conclude that respondent satisfied the requirements of sec_6330 and did not abuse his discretion in sustaining the notice_of_federal_tax_lien for tax_year sec_2001 through as discussed supra note respondent has agreed to remove the lien for and to abate the remaining balance due for that year only respondent’s determination as to the liens for through is sustained to reflect the foregoing an appropriate order and decision will be entered


internal_revenue_service number release date index number ----------------------- ------------------------------- -------------- ---------------------------------- ------------------- ------------------------------- -------------- ---------------------------------- --------------------------------------------------- -------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-129049-06 date december legend husband wife child a child b child c trust a ---- trust b ----- trust c ----- date year s t u v w ------------------------------------------------- -------------------------------------------- ----------------------- ------------------------------- ------------------------- - - - - - ------------------------------------------------------------------------------------------ - --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- - ------------------------- - - ------- ----------- - ------------- - ------------- - - ------------- ------------- - x - dear ------------------------------------ ----------- this letter is in response to a letter dated date from your authorized representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations and sec_2642 of the internal_revenue_code to make plr-129049-06 allocations of husband’s and wife’s respective generation-skipping_transfer gst exemptions the facts and representations submitted are summarized as follows on date in year husband and wife taxpayers established three substantially identical irrevocable trusts one for the benefit of each of their three children trust a for the benefit of child a_trust b for the benefit of child b and trust c for the benefit of child c each trust is a generation-skipping_transfer gst_trust as defined in sec_2632 on date husband transferred assets valued at dollar_figures to trust a assets valued at dollar_figuret to trust b and assets valued at dollar_figureu to trust c on the same day wife transferred assets valued at dollar_figures to trust a assets valued at dollar_figurev to trust b and assets valued at dollar_figurew to trust c in addition during year taxpayers also each made transfers of dollar_figurex directly to six separate grandchildren taxpayers timely filed separate united_states gift and generation-skipping_transfer_tax returns form sec_709 gift_tax returns to report their transfers to trust a_trust b and trust c they did not consent to split the gifts pursuant to sec_2513 although the law firm that assisted taxpayers advised them of the necessity to allocate their respective gst exemptions to the transfers the certified_public_accountant who prepared the returns and on whose expertise taxpayers relied inadvertently failed to allocate taxpayers’ available gst tax exemptions to the transfers it is represented that no additions have been made to trust a_trust b or trust c since year and no distributions have been made to skip persons from any of the trusts sec_2601 imposes a tax on every generation-skipping_transfer a generation- skipping transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip by the applicable_rate sec_2641 defines applicable_rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer sec_2602 provides that the amount of the tax is the taxable_amount multiplied under sec_2642 the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer is generally defined as the excess of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of gst_exemption under sec_2631 allocated to the trust or to property transferred in a direct_skip and the denominator is the value of the property transferred to the trust or involved in the direct_skip sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 which may be allocated by such individual or his executor to any sec_2632 provides that any allocation by an individual of his or her gst plr-129049-06 property with respect to which such individual is the transferor exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual's estate determined with regard to extensions regardless of whether such a return is required to be filed provides that an allocation of gst_exemption to property transferred during the transferor’s lifetime other than a direct_skip is made on form_709 sec_26_2632-1 of the generation-skipping_transfer_tax regulations sec_2642 provides in relevant part that if the allocation of the gst sec_2642 provides generally that the secretary shall by regulation exemption to any transfers of property is made on a timely filed gift_tax_return for such transfer the value of such property for purposes of determining the inclusion_ratio shall be its value as finally determined for purposes of chapter and such allocation shall be effective on and after the date of such transfer prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of enactment of sec_2642 which was enacted into law on date sec_2642 provides that in determining whether to grant relief the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief the time for making the allocation shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers is to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 under the provisions of sec_301_9100-3 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 subtitles e g h and i requests for relief under sec_301_9100-3 will be granted when the taxpayer under sec_301_9100-1 a regulatory election includes an election whose due sec_301_9100-3 provides that a taxpayer is deemed to have acted sec_301_9100-3 provides that in general requests for extensions of time plr-129049-06 for regulatory elections that do not meet the requirements of sec_301_9100-2 must be made under the rules of sec_301_9100-3 date is prescribed by a notice published in the internal_revenue_bulletin in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an election described in sec_2642 under the provisions of sec_301_9100-3 provides the evidence to establish 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 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 have been satisfied therefore husband and wife are each granted an extension of time of days from the date of this letter to make allocations of their respective gst exemptions for their transfers to trust a_trust b and trust c in year separate individual supplemental form 709s should be filed for husband and wife for year each form_709 should include a notice of allocation properly allocating the taxpayers’ gst_exemption to the transfers to trust a_trust b and trust c the allocations will be effective as of the respective dates of the transfers to the trusts and the inclusion_ratio of each trust will be determined based on the value of the transfers to each trust as determined for federal gift_tax purposes and the amount of exemption allocated to each trust a copy of this letter should be attached to each individual supplemental form_709 and filed with the internal_revenue_service center cincinnati ohio copies are included for this purpose concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter the ruling contained in this letter is based upon information and representations submitted by taxpayers 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_ruling it is subject_to verification on examination except as expressly provided herein no opinion is expressed or implied plr-129049-06 pursuant to the power_of_attorney on file with this office this letter is being sent this ruling is directed only to the taxpayers requesting it sec_6110 to taxpayers' representative provides that it may not be used or cited as precedent sincerely william p o'shea associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purpose sec_2 copies of this letter


department of the treasury internal_revenue_service washington d c contact person identification_number telephone number employer_identification_number tax_exempt_and_government_entities_division number release date date date uil legend company dear this is in response to your letter dated date in which you requested certain rulings with respect to sec_4945 and sec_117 of the internal_revenue_code code background you have been recognized as an organization exempt under sec_501 of the code and are classified as a private_foundation within the meaning of sec_509 you operate a scholarship program for the children of the company’s current full-time u s employees you have operated your scholarship program for several decades and have received prior approval of your grant making program multiple times over the years as you have made material changes to your scholarship program you are currently seeking to make material changes to the applicant pool and award amounts provided under the scholarship program you are making six material changes a expand the group of eligible applicants to include children of active full-time permanent employees of company and or its subsidiaries in its controlled_group worldwide b amend the definition of eligible employees to those in job grade or below or comparable compensation bands c expand the list of higher education institutions which recipients may attend to include recognized and accredited post-secondary educational institutions as described under sec_170 both within the u s and outside the u s d add a further division in your applicant pool such that four pools exist along the axes of two and four year institutions and u s and non-u s applicants from which you will choose no more than percent of each pool e decrease the maximum annual number of awards from for four-year institutions and for two-year institutions to a total of awards and reduce the annual award amount from dollar_figure a year to dollar_figure a year f these are the only changes that will be made to your program your program will continue to limit the overall number of recipients to percent or whichever is smaller no component of the u s or non-u s program will be used to recruit or retain employees of company and once granted the awards may not be rescinded if the recipient’s parent ceases to be employed with company recipients will continue to be selected by an independent committee where no committee members are directors officers or employees of company the recipients must show the proper records indicating that they are attending a recognized institution the recipients continue to be determined on the basis of overall academic achievement leadership and civic involvement finally recipients remain free to choose their own course of study without influence from you or company with regard to educational institutions outside the u s attended by award recipients your process will include verifying that any non-u s institution which recipients may attend is nationally recognized or is recognized by the country’s ministry of education and is described in sec_170 and performing a reasonable search of publicly available information specifically the relevant ofac lists and un security council's lists to determine that the institution is not involved in activities relating to terrorism terrorist financing or any other form of terrorist support rulings requested the grant-making procedures as amended and described meet the requirements of sec_4945 and that scholarships granted in accordance with such procedures will not constitute taxable_expenditures within the meaning of sec_4945 grants awarded under these procedures are eligible for the exclusion from income provided by sec_117 to the extent such grants are actually used for qualified_tuition_and_related_expenses within the meaning of sec_117 law sec_117 of the code provides that gross_income does not include any amount received as a qualified_scholarship by an individual who is a candidate_for_a_degree at an educational_organization described in sec_170 a ii sec_117 of the code defines qualified_scholarship to mean any amount received by an individual as a scholarship or fellowship_grant to the extent the individual establishes that in accordance with the conditions of the grant such amount was used for qualified_tuition_and_related_expenses it also defines qualified_tuition_and_related_expenses as tuition and fees required for the enrollment or attendance of a student at an educational_organization described in sec_170 and fees books supplies and equipment required for courses of instruction at such an educational_organization sec_4945 of the code defines a taxable_expenditure as any amount_paid or incurred by a private_foundation as a grant to an individual for travel study or other similar purposes by such individual unless such grant satisfies the requirements of subsection g sec_4945 of the code provides that sec_4945 shall not apply to an individual grant awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the secretary if it is demonstrated that the grant constitutes a scholarship or fellowship_grant which would be subject_to the provisions of sec_117 and is to be used for study at an educational_organization described in sec_170 sec_53_4945-4 of the income_tax regulations regulations provides that a grant for study is not a taxable_expenditure only if the grant is awarded on an objective and nondiscriminatory basis the grant is made pursuant to a procedure approved in advance by the commissioner and it is demonstrated to the satisfaction of the commissioner that the grant constitutes a scholarship which is excluded from gross_income under sec_117 and is to be utilized for study at an educational_institution described in sec_170 sec_53_4945-4 of the regulations states that the group from which grantees are chosen must be sufficiently broad so that the giving of grants to members of such group would be considered to fulfill a purpose described in sec_170 thus ordinarily the group must be sufficiently large to constitute a charitable_class sec_53_4945-4 of the regulations provides that the approval procedures do not contemplate specific approval of particular grant programs but instead one-time approval of a system of standards procedures and follow-up designed to result in grants which meet the requirements of sec_4945 thus such approval shall apply to a subsequent grant program as long as the procedures under which it is conducted do not differ materially from those described in the request to the commissioner revproc_76_47 1976_2_cb_670 sets forth guidelines for determining whether a grant made by a private_foundation under an employer-related program to a child of an employee is a scholarship that meets the provisions of sec_117 of the code as that section read before the enactment of the tax_reform_act_of_1986 if a private foundation's program satisfies the conditions set forth in sections dollar_figure through dollar_figure of revproc_76_47 and meets the percentage_test described in sec_4 the service will assume that a grant meets the provisions of sec_117 as that section read before the enactment of the tax_reform_act_of_1986 analysis as a general_rule distributions to individuals for the purpose of study travel or other similar purposes from a private_foundation are taxable_expenditures sec_4945 if such distributions qualify as a scholarship under sec_117 however and are distributed pursuant to an objective and nondiscriminatory plan that is preapproved by the commissioner such grants will not be taxed under sec_4945 sec_4945 here based on the representations that the program’s procedures in awarding grants will continue to comply with sections dollar_figure through dollar_figure of revproc_76_47 and the information submitted an award under the proposed program would qualify as a scholarship under sec_117 to the extent that it is used for qualified_tuition_and_related_expenses as defined in sec_117 the scholarship program and all subsequent amendments submitted to the internal_revenue_service has been previously approved by the commissioner you intend to keep all of the previously approved scholarship program procedures including an external selection committee that is unrelated to company the basis by which applicants will be judged and the record keeping requirements for recipients you have represented that the above changes are the only changes requiring the approval of the commissioner see sec_53_4945-4 the first two changes listed provide for an increase to the applicant pool from u s employees to worldwide employees this change furthers the plan’s charitable purpose by increasing the number of applicants sec_53_4945-4 while you are expanding the list of eligible institutions to include institutions outside of the u s you have committed to ensuring that each institution is described in sec_170 sec_53_4945-4 additionally the number of recipients remains sufficiently large to not create private benefit concerns and sufficiently small to not create a form of compensation revproc_76_47 supra finally the remaining changes are not part of the criteria for approval by the commissioner under sec_4945 and therefore do not prevent your plan from obtaining such approval rulings the grant-making procedures as amended and described meet the requirements of sec_4945 and scholarships granted in accordance with such procedures will not constitute taxable expenditures’ within the meaning of sec_4945 grants awarded under these procedures are eligible for the exciusion from income provided by sec_117 to the extent such grants are actually used for qualified_tuition_and_related_expenses within the meaning of sec_117 this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolve questions concerning your federal_income_tax status this ruling should be kept in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative sincerely ronald shoemaker manager exempt_organizations technical group enclosure notice