t c memo united_states tax_court john r and lois j mccarthy petitioners v commissioner of internal revenue respondent docket no filed date john r mccarthy pro_se jonathan sloat for respondent memorandum opinion nameroff special_trial_judge respondent determined deficiencies in petitioners’ and federal income taxes in the amounts of dollar_figure dollar_figure and dollar_figure respectively the issues for decision are whether petitioners properly reported certain types of income as schedule c income whether john r mccarthy petitioner conducted his writing activity with the objective of making a profit within the meaning - - of sec_183 ' and if so whether petitioners have substantiated the ordinary and necessary expenses claimed with respect to the writing activity some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time the petition was filed petitioners resided in simi valley california for all years in issue petitioners filed with their joint returns schedules c profit or loss from business for petitioner’s activities on the schedules c petitioner listed his principal business or profession as writing investing job shopping art engineering science consulting teaching photography and research all of the expenses listed on the schedules c were only with regard to petitioner’s writing activity and this is the only activity in which petitioner engaged with any regularity therefore we consider the schedules c as pertaining only to petitioner’s writing activity for convenience we combine the findings_of_fact and opinion for each issue unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure all amounts have been rounded to the nearest dollar for convenience character of income petitioners reported income on the schedule c of dollar_figure this amount is attributable to royalties petitioner received for consulting work he had performed prior to for an educational video petitioner had provided information on anthropology and agreed to accept as part of his compensation a percentage from the future sales of the video for petitioner reported schedule c income of dollar_figure consisting of video royalties of dollar_figure dollar_figure for performing unspecified research dollar_figure as a refund of legal expenses and dollar_figure of interest prior to the years at issue petitioner had assisted an individual with his invention a legal dispute arose between the parties petitioner retained counsel in and paid him an amount in excess of dollar_figure in the matter more or less disappeared and petitioner’s counsel refunded dollar_figure to petitioner petitioner included the dollar_figure in schedule c income because he had claimed a schedule c deduction for legal expenses in petitioners claimed a deduction of dollar_figure for legal and professional services on the schedule c it is not apparent whether this entire amount was paid to petitioner’s counsel concerning the invention matter respondent concedes that the dollar_figure is not includable in income in and the dollar_figure is not a deductible expense for irrespective of whether we determine that petitioner’s activity was not entered into for profit q4e- the interest item represents petitioner’ sec_50 percent of the interest earned on a savings account funded by the estate of petitioner’s mother the account is in the name of petitioner’s sister who wires amounts to petitioner on a monthly basis petitioner considers this as business income since he uses these funds for expenses for his writing activity in petitioner reported income of dollar_figure on his schedule c this amount consists of dollar_figure of video royalties interest of dollar_figure from his sister and dollar_figure for services he performed as a guest lecturer for an anthropology class none of this income was related to the writing activity respondent determined that the above described income is not properly reportable on a schedule c pertaining to the writing activity a taxpayer may not determine the nature of his income merely by using a particular form or by labeling it as he wishes but must report his income based on the economic realities of the situation 923_f2d_1328 8th cir affg tcmemo_1989_253 101_tc_537 citing 435_us_561 petitioner agrees that none of this income was derived from his writing activity petitioner testified that he knew he had to report all income received and the schedule c seemed like the - - proper place furthermore petitioner is of the opinion that since he spent some of the income on his writing activity it should be reported on schedule c the various income items are not properly reportable on schedule c pertaining to the writing activity indeed these income items were derived from separate activities or transactions apart from petitioner’s writing activity therefore income from other activities cannot be offset by expenses from petitioner’s writing activity the compensation received from the video production and the lecturing fee are properly reportable as other income on line of form_1040 the interest_income is properly reportable on schedule b interest and dividend income ’ for an activity to be considered a trade_or_business the taxpayer must be engaged in the activity with continuity and regularity see 480_us_23 the income derived from consulting and lecturing was not earned from activities in which petitioner engaged with continuity and regularity therefore this income would not be reported on separate schedules c for each activity after trial respondent moved to amend his pleadings to conform to the evidence and to seek an increased deficiency see sec_6214 rule petitioners had no objection and the motion was granted based upon respondent’s amendment to answer the deficiency for is unchanged the deficiency for is increased to dollar_figure and the deficiency for is decreased to dollar_figure this is based on the recharacterization of the income claimed on schedules c and a pension income adjustment for in petitioners’ favor there are also social_security_benefit adjustments which are computational writing activity after serving years in the military petitioner was employed by rocketdyne inc as a scientist and engineer for years as part of his employment petitioner wrote technical and scientific proposals petitioner retired from rocketdyne in following retirement petitioner continued employment as a scientist and engineer to rocketdyne and other defense contractors on an independent_contractor basis during and while employed by rocketdyne petitioner wrote articles for the public in his spare time petitioner submitted the articles to various periodicals and publishers but none of them were chosen for publication according to records provided by petitioner he has been submitting articles since petitioner desired to write novels but he did not have the time petitioner decided to pursue his writing activity including writing novels on a full time basis in during the years in issue petitioner continued to write and submit articles however none were chosen for publication many of the articles petitioner wrote contained contemporary political commentary petitioner also wrote articles about guns and travel in researching for the gun articles petitioner purchased guns and gun-related supplies such as bullets powder a chronograph device which measures the velocity of bullets when fired from a - gun a scope and mount for rifles and cleaning supplies petitioner has had an interest in guns since he was a child petitioner tested the performance of the guns and wrote articles on his findings petitioner submitted the articles to the national rifle association and various gun-related publications there was no interest in petitioner’s articles petitioner was interested in selling a novel because he thought it would pay a lot more than articles in late petitioner submitted two novels or portions thereof to literary agents petitioner did not have a contract with either agent one agent passed on the novel submitted to him and the other agent recommended that petitioner finish the novel and resubmit it with dollar_figure petitioner completed the novel and resubmitted it with dollar_figure which was against petitioner’s policy of paying out money to agents it was not selected for publishing in doing research for the articles and novels petitioner traveled to various places petitioner would research the area and take pictures petitioner’s wife often accompanied him on these trips petitioner occasionally took courses related to the topics he wanted to write about there is a lot of competition in the literary field petitioner believes he could have been published without pay but the national rifle association informed petitioner that they have their own technical staff to conduct gun testing helpful for the public organizations staff writer returns writer’s digest petitioner regularly analyzed literary agents and publishers agencies on schedules c filed with petitioners’ to his writing activity expense car and truck commissions and fees depreciation insurance legal and professional office rent- business prop repairs and maint supplies taxes and licenses travel publications total’ attended a writing conference early on he sought to receive compensation_for his articles but he did not find it to determine where he would send his material petitioner petitioner did not consult with any experts in the writing field about conducting a profitable writing activity did not take any courses on writing fictional material or writing petitioner did not belong to any literary petitioner studied on his own by analyzing petitioner wrote to various publishers seeking employment either freelance or as a he did not obtain any employment from the petitioners claimed the following expenses with respect and --- - ' our totals differ slightly from the totals on petitioners’ returns due to our rounding of the numbers we also note that there is a mathematical error in the return for tax_year up to the time of trial petitioner has not sold any of his articles or novels one article on the rocket industry was published in a history book in without pay petitioner reported no income from his writing activities respondent contends that petitioner is not entitled to claim any deductions because petitioner’s writing activity was not engaged in for profit sec_183 generally provides that if an activity engaged in by an individual is not entered into for profit no deduction attributable to the activity shall be allowed except as otherwise provided in sec_183 sec_183 c provides for purposes of this section the term ‘activity not engaged in for profit’ means any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 or under paragraph or of sec_212 profit for purposes of sec_183 means economic profit independent of tax savings see 91_tc_686 affd 893_f2d_656 4th cir 91_tc_371 although a reasonable expectation of profit is not required the facts and circumstances must indicate that the taxpayer entered into the activity or continued the activity with the - actual and honest objective of making a profit see 94_tc_41 78_tc_642 affd without opinion 702_f2d_1205 d c cir sec_1_183-2 income_tax regs in making this determination more weight is accorded to objective facts than to the taxpayer’s statement of intent see 72_tc_659 sec_1_183-2 income_tax regs the regulations under sec_183 provide nine nonexclusive factors to be used in determining whether a taxpayer is engaged in an activity with the objective to make a profit see sec_1_183-2 income_tax regs the factors are the manner in which the taxpayer carried on the activity the expertise of the taxpayer or his advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that the assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer’s history of income or loss with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayer and elements of personal pleasure or recreation see id no single factor is controlling rather the facts and circumstances of the case taken as a whole are determinative see 86_tc_360 sec_1_183-2 income_tax regs taking into account the above factors and considering the facts and circumstances relating to petitioner’s writing activity as discussed more fully below we are not persuaded that during the years in issue petitioner engaged in that activity with the objective to make a profit manner in which activity conducted the fact that a taxpayer carries on an activity ina businesslike manner and maintains complete and accurate books_and_records may indicate that the activity was engaged in for profit see sec_1_183-2 income_tax regs petitioner managed some aspects of this activity ina businesslike fashion he maintained records of his expenses and regularly researched and submitted articles and novels to the various periodicals and literary agents some of petitioner’s activities belied any profit objective for instance the income-producing potential of petitioner’s gun experiments seemed to be of little concern to petitioner petitioner was not an expert in gun testing yet he incurred gun-related expenses to conduct his tests without first researching whether there would be an interest in such findings from a lay person petitioner decided to conduct gun testing incurring expenses regardless of the amount of income he could objectively expect from a gun article petitioner stated at trial that selling articles did not pay well and he offered no indication as to how much he could receive from the sale of an article petitioner testified that the sale of a novel would pay well but no amount was offered nor has he had a contract with a literary agent since he started the activity petitioner did not explain how he expected to recoup the dollar_figure in losses petitioner argues that he did have a profit objective since he submitted articles only to periodicals that offered compensation however petitioner’s articles were not accepted for publication for a number of years at least since and it does not appear that petitioner attempted to develop a strategy to get published or made changes in order to succeed petitioner did submit his two novels to two literary agents prior to the years at issue petitioner did not enter into any contracts with the agents it is not clear from the record whether petitioner submitted any novels to agents during the years at issue expertise of petitioner and his advisers preparation for an activity by extensive study or consultation with experts may indicate a profit objective where the taxpayer conducts the activity in accordance with such study or advice see sec_1_183-2 income_tax regs petitioner did not seek expert advice on how to start or maintain a business as a fiction writer or as a writer of political commentary or about guns petitioner did not consult with anyone on the economics of conducting a writing activity while petitioner had writing skills they were in the technical field of engineering and science although his articles about guns were rather technical petitioner did not have a background on gun testing petitioner did not join any literary organizations to learn more about the industry petitioner did attend a writing conference early on but he did not find it helpful time and effort expended the fact that the taxpayer devotes much of his or her personal time and effort to carrying on an activity particularly if the activity does not have substantial personal or recreational aspects may indicate a profit objective see sec_1_183-2 b income_tax regs we do not question the amount of time petitioner expended in carrying on the writing activity suffice it to say that he devoted a great deal of time researching testing and writing about the topics that interested him expectation that assets may appreciate an expectation that assets used in the activity will appreciate in value may indicate a profit objective see sec_1_183-2 b income_tax regs petitioner contends that the guns he purchased will appreciate in value this was based on petitioner’s own estimation and he offered no evidence to support his contention that the value of the guns is sufficient to recoup the accumulated losses in any event it would seem that collecting guns is a different activity from writing about them past success in similar or dissimilar activities a taxpayer’s past success in similar or dissimilar activities is relevant in determining a profit objective see sec_1_183-2 income_tax regs petitioner contends that he was successful as a writer for rocketdyne and that he considers himself a professional writer because of his employment with rocketdyne when employed by rocketdyne petitioner wrote technical or scientific proposals for the company presumably petitioner was a skilled and talented technical writer this is quite different from writing articles and novels for the public furthermore petitioner did not have to market the writing that he performed for rocketdyne -- - the activity’s history of income and or loss an activity’s history of income or loss may reflect whether the taxpayer has a profit objective see sec_1_183-2 income_tax regs unless explained by customary business risks or unforeseen or fortuitous circumstances beyond the taxpayer’s control a record of continuous losses beyond the period customarily reguired to obtain profitability may indicate that the activity is not engaged in for profit see id petitioner has not earned any income from the writing activity and he has incurred substantial losses during the years in issue it is not clear from the record the amount of losses that were claimed in prior years during the years in issue petitioners deducted dollar_figure of losses attributable to the writing activity the magnitude of the activity’s losses in comparison with the lack of revenues is an indication that petitioner did not have a profit_motive with respect to the activity see smith v commissioner tcmemo_1997_503 burger v commissioner tcmemo_1985_523 furthermore many businesses do experience losses in their startup years but they typically have a goal to realize a profit including enough net_earnings to recoup the losses petitioner stated that he wrote and submitted articles on a part-time basis from to after which he focused on his writing activity full time however it is not clear from the record when petitioner started treating his activity as a schedule c business -- - amount of occasional profits the amount of occasional profits if substantial in relation to losses_incurred or the taxpayer’s investment may indicate a profit objective see sec_1_183-2 income_tax regs in this case petitioner has never earned a profit from his activity and the evidence suggests that any future net profits are unlikely taxpayer’s financial status substantial income from sources other than the activity particularly if the losses from the activity generate substantial tax benefits may indicate that the activity is not engaged in for profit especially if there are personal or recreational elements involved see sec_1_183-2 income_tax regs during the years in issue petitioners received social_security_benefits pension interest and dividend income petitioners were by no means wealthy however the losses from the activity greatly reduced their tax_liability elements of personal pleasure the existence of personal or recreational elements in an activity may indicate that the activity is not engaged in for profit on the other hand where an activity lacks any appeal other than profit a profit objective may be indicated see sec_1_183-2 b income_tax regs it is obvious that petitioner enjoyed writing and derived personal satisfaction in sharing his opinions and research petitioner acknowledged that he conducted tests on guns and wrote about guns because that is a personal_interest of his petitioner and his wife also traveled for his research which has elements of personal pleasure where the possibility of profit is small given all the other factors and the possibility for gratification is substantial it is clear that the latter possibility constitutes the primary motivation for the activity see smith v commissioner supra citing burger v commissioner supra because petitioner’s writing activity was not an activity engaged in for profit the activity cannot be considered a trade_or_business for purposes of sec_162 petitioners are not allowed deductions for the expenses claimed for all years in issue in view of the foregoing we need not consider the third issue of whether petitioners’ schedule c expenses are ordinary and necessary and whether they have been substantiated based on the foregoing decision will be entered under rule


internal_revenue_service number info 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 b01 genin-144135-04 date date this responds to your letter dated date in which it was requested that taxpayer ----------------------------- dear ------------- the internal_revenue_service recognize taxpayer’s election to be an s_corporation effective as of the tax_year after review of taxpayer’s request it has been determined that taxpayer’s election will be recognized for the tax_year please contact -------------- at -------------------- not a toll-free call s dianna k miosi we hope that this information is helpful to you if you have additional questions sincerely dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries


department of the treasury internal_revenue_service commerce street ms dal dallas tx tax_exempt_and_government_entities_division release number release date date legend org organization name uil xx date address address org address person to contact identification_number contact telephone number in reply refer to te_ge review staff ein certified mail - return receipt requested dear this is a final adverse determination as to your exempt status under sec_501 of the internal_revenue_code our adverse determination was made for the following reasons as aresult of a recent examination of your organization’s activities and form_990 for the period ended december 20xx and december 20xx it was determined that your organization does not maintain separate records of income from members and income from non-members as sales and hall rentals to a result the service considers all of your income from bar sales derive from non-members in addition your organization opens its bar to the public and conducts gaming activities with non-members these activities give the appearance that the organization is conducting business with the general_public like a for-profit business the organization fails to meet the requirements for exemption under c veterans organizations whether organized before or after the amendment of sec_501 must be operated for one or more of the eight purposes listed in regs c -1 c accordingly you cannot have purposes of a substantial nature that are not listed in this section and retain sec_501 status for taxable years after september 19xx sec_501 grants exemption to a post or organization of past or present members of the armed_forces_of_the_united_states or an auxiliary unit or society of or a_trust or foundation for any such post or organization - organized in the united_states or any of its possessions at least percent of the members of which are past or present members of the armed_forces_of_the_united_states and substantially_all of the other members of which are individuals who are cadets spouses widows or widowers of past or present members of the armed_forces_of_the_united_states or of cadets and no part of which inures to the benefit of any private_shareholder_or_individual based on the above we are revoking your organization's exemption from federal_income_tax under sec_501 of the internal_revenue_code effective january 20xx you are required to file form_1120 u s_corporation income_tax return these returns should be filed with the appropriate service_center for all years beginning after december 20xx you have executed the form 6018-a agreeing to the revocation of exemption under sec_501 c form_1120 must be filed by the day of the third month after the end of your annual_accounting_period a penalty of dollar_figure a day is charged when a return is filed late unless there is reasonable_cause for the delay however the maximum penalty charged cannot exceed dollar_figure or percent of your gross_receipts for the year whichever is less this penalty may also be charged if a return is not complete so please be sure your return is complete before you file it you have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by calling or writing to taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours vicki l hansen acting director eo examinations schedule no or exhibit year period ended form_88 a department of the treasury - internal_revenue_service explanation of items name of taxpayer org 20xx12 and 20xkx12 legend org organization name companies issues xx date motto motto co-1 co-2 under the circumstances described does the org meet the requirements for continued recognition of exemption under sec_501 of the internal_revenue_code facts the org was charted on september 19xx the organization is under the group of the org the org was recognized as tax-exempt under exemption number the internal_revenue_code of 19xx under sec_501 the activities include operating a bar that is open to the public selling motto holding membership meetings contributing funds to charitable organizations and conducting charitable activities the organization receives the majority of its income from rental of the hall bar sales and motto sales through its vending machine the organization also receives income from membership dues and motto motto was discontinued in november of 20xx the organization paid for advertisement in the co-1 as a place in co-2 listing on the website it listed the organization’s name address phone number and product and services offered the product and services listed are banquet rooms facility rental and party planning services and miscellaneous personal services on website the organization’s name address and phone number are listed on the website the organization’s name address phone number and business type is listed under banquet halls the organization has an on premise liquor license from the state of xyz exhibit the definition for an on premise liquor license states the motto vending machine is located inside the bar and anyone is allowed to purchase motto from it the organization does not maintain records to show the amounts of bar and motto sales from members and from non-members the organization does not maintain records for the hall rentals to members and non-members the treasurer stated in a signed statement exhibit that all activities are open to the public such as corn beef dinner for st patrick’s day the bar is open to the public and form 886-a crev department of the treasury - internal_revenue_service page -1- eon 886a name of taxpayer explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service org 20xx12 and 20xx12 the building is rented out to the public for parties and weddings the bar has been open to the public for about four years law sec_501 requires that an organization created under this subsection must be supported through member dues and restricted from conducting business with the general_public sec_501 recognizes as exempt from federal_income_tax a post or organization of past or present members of the armed_forces_of_the_united_states or an auxiliary unit or society of or a_trust or foundation for any such post organization a organized in the united_states or any of its possessions b at least percent of the members of which are past or present members of the armed_forces_of_the_united_states and substantially_all of the other members of which are individuals who are cadets or are spouses widows or widowers of past or present members of the armed_forces_of_the_united_states or of cadets and c no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual federal tax regulation sec_1_501_c_19_-1 states that in order to be described in sec_501 under paragraph a of this section an organization must be operated exclusively for one or more of the following purposes promote the social welfare of the community to assist disabled and needy war veterans and members of the united_states armed_forces and their dependents and the widows and orphans of deceased veterans to provide entertainment care and assistance to hospitalized veterans or members of the armed_forces_of_the_united_states to carry on programs to perpetuate the memory of deceased veterans and members of the armed_forces and to comfort their survivors to conduct programs for religious charitable scientific literacy or educational_purposes to sponsor or participate in activities of a patriotic nature to provide insurance benefits for their members or dependents of their members or both to provide social and recreational activities for their members sec_512 defines the term unrelated_business_taxable_income as follows unrelated_business_taxable_income means the gross_income derived by any organization form any unrelated_trade_or_business as defined in sec_513 regularly carried on by it less the deductions allowed by this chapter which are directly form 886-a ceev department of the treasury - internal_revenue_service page -2- form 886a name of taxpayet explanation of items schedule no or exhibit year period ended department of the treasury - internal_revenue_service 20xx12 and 20xx12 org connected with the carrying on of such trade_or_business both computed with the modifications provided in subsection b sec_513 provides that the term unrelated_trade_or_business means any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its charitable educational or other purpose or function constituting the basis for its exemption under sec_501 the term does not include any trade_or_business in which substantially_all the work in carrying on such trade_or_business is performed for the organization without compensation federal tax regulation d of the regulations provides that a trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has a causal relationships to the achievement of exempt purposes other than through the production_of_income and that it is substantially related for purposes of sec_513 of the code only if the causal relationship is a substantial one thus for the conduct of trade_or_business to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the service from which the gross_income is derived must contribute importantly to the accomplishment of those purposes whether the activities productive of gross_income contribute importantly to the accomplishment of any purpose for which an organization is granted exemption depends in each case upon the facts and circumstances involved sec_6001 of the code provides that every person liable for any_tax imposed by the code or for the collection thereof shall keep adequate_records as the secretary_of_the_treasury or_his_delegate may from time to time prescribe sec_1_6001-1 of the regulations in conjunction with sec_1_6001-1 provides that every organization exempt from tax under sec_501 of the code and subject_to the tax imposed by sec_511 of its unrelated_business_income must keep such permanent books or accounts or records including inventories as are sufficient to establish the amount of gross_income deduction credits or other matters required to be shown by such person in any return of such tax such organization shall also keep such books_and_records as are required to substantiate the information required by sec_6033 sec_1_6001-1 of the regulations state that the books_or_records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and shall be retained so long as the contents thereof may become material in the administration of any internal revenue law form 886-a rev department of the treasury - internal_revenue_service page -3- an 886a name of taxpayer department of the treasury - internal_revenue_service explanation of items schedule no or exhibit year period ended org 20xx12 and 20xx12 taxpayer's position the agent spoke with the treasurer and stated why the organization was not exemption as a veteran’s organization under sec_501 of the code the agent mailed the report and the form 6018-a to the taxpayer the agent explained to the treasurer that if the organization agrees with the findings that form 6018-a would need to be signed and sent back to the agent the agent also explained that the form_1120 would need to be completed for the years ending december 20xx and december 20xx the completed forms would need to be sent back with the form 6018-a before the case would be closed the taxpayer only provided a signed 6018-a agreeing to the organizations exempt status being revoked the organization failed to provide any returns government's position based on the facts from the examination no member log was maintained by the organization to show the amount of bar and motto sales and hall rentals from members and non-members as a result all of the income from bar sales motto sales and hall rental income is deemed to be from non-members the organization’s bar sales motto sales and hall rental income to the public produce the majority of its gross revenue roughly dollar_figure annually opening the bar to the public and conducting gaming activities with non-members are not considered exempt purposes of an organization described under sec_501 these activities are being conducted as a trade_or_business with the public as stated in sec_1_501_c_19_-1 it is not necessary that the organization's purposes or activities include all of the listed purposes to be exempt but they cannot have purposes of a substantial nature that are not listed and retain sec_501 status therefore the organization no longer qualifies for exemption under sec_501 conclusion based on foregoing reasons the organization no longer qualifies for exemption under sec_501 due to its extensive non-exempt activities therefore revocation of the organization’s tax exemption under sec_501 is warranted form 886-a rev department of the treasury - internal_revenue_service page -4- department of the treasury internal_revenue_service south clinton street syracuse ny tax_exempt_and_government_entities_division legend org organization name xx date address address date org address dear during the course of the audit it was determined that the organization does not qualify for exemption as an organization described under sec_501 of the internal_revenue_code enclosed are three forms of form 6018-a for revocation of exempt status please sign and return two of the forms form 6018-a if your organization agrees with the findings if you have any additional questions please feel free to contact me at thank you for your time and cooperation in this matter sincerely kathleen sopchak revenue_agent enclosed form 6018-a form 886-a


t c memo united_states tax_court richards asset management_trust et al petitioners v commissioner of internal revenue respondent docket nos filed date 10767-o0 john m tkacik jr for respondent memorandum opinion chiechi judge these consolidated cases are before us on respondent’s motion to hold petitioner in default in the case at docket no respondent’s motion in the case at docket ‘cases of the following petitioners are consolidated here- with everett d richards docket no everett d richards docket no and richards charitable_trust docket no - no respondent’s motion to dismiss for lack of prose- cution and to impose sanctions under sec_6673 in the case at docket no respondent’s motion in the case at docket no respondent’s motion to dismiss for lack of prose- cution and to impose sanctions under sec_6673 in the case at docket no respondent’s motion in the case at docket no and respondent’s motion to hold petitioner in default in the case at docket no respondent’s motion in the case at docket no we shall refer collec-- tively to those four motions as respondent’s motions at the request of respondent on date the court held a trial in order to enable respondent to present evidence to satisfy the burden of production under sec_7491 that respondent maintains respondent has with respect to the accuracy-related_penalty under sec_6662 that respondent determined for each of the taxable years and in the notice_of_deficiency notice issued to richards asset management_trust richards management_trust in the case at docket no the accuracy-related_penalty under sec_6662 a all section references are to the internal_revenue_code code in effect at all relevant times all rule references are to the tax_court rules_of_practice and procedure swhen referring in this opinion to richards asset management_trust and richards management_trust our use of the word trust and any similar words is for convenience only and is not intended to convey any meaning or have any significance for federal tax purposes - - that respondent determined for the taxable_year in the notice issued to everett d richards mr richards in the case at docket no the accuracy-related_penalty under sec_6662 for the taxable_year that respondent deter- mined in the notice issued to mr richards in the case at docket no and the addition_to_tax under sec_6651 for each of the taxable years and that respondent determined in the notice issued to richards charitable_trust in the case at docket no background the record establishes and or the parties do not dispute the following at the time the respective petitions in these cases were filed richards management_trust mr richards and richards charitable_trust listed in those petitions the same address in canton ohio richards management_trust filed form_1041 u s income_tax in the case at docket no respondent issued the notice to mr richards and joy a richards deceased although the petition in that case was filed in the name of mr richards and joy a richards deceased on date the court dismissed the case for lack of jurisdiction as to joy a rich- ards deceased for convenience we shall refer hereinafter to the notice issued with respect to the case at docket no as the notice issued to mr richards when referring in this opinion to richards charitable_trust our use of the word trust and any similar words are for convenience only and is not intended to convey any meaning or have any significance for federal tax purposes - return for estates and trusts trust return for each of the taxable years and in separate schedules k-1 benefi- ciary’s share of income deductions credits etc that richards management_trust included with each of its and trust returns richards management_trust showed mr richards and richards charitable_trust as beneficiaries and mr richards as the fiduciary of richards management_trust in each of its and trust returns richards manage- ment trust deducted depreciation with respect to certain personal assets of mr richards including mr richards’ personal resi- dence that he had transferred to richards management_trust at a time that is not disclosed by the record richards management_trust also deducted other_amounts in its and trust returns with respect to personal expenses of mr richards during respondent’s examination of richards management trust’s and trust returns and thereafter no books records or other information was provided to respondent estab-- lishing the jurisdiction under the laws of which richards management_trust was purportedly organized the person who is authorized to act on behalf of richards management_trust and that richards management_trust was at all relevant times a_trust cognizable for federal tax purposes nor did richards management_trust at any time provide any books records or other information to respondent establishing the income reported and - the expense deductions claimed in richards management trust’s and trust returns in the notice issued to richards management_trust respon- dent determined inter alia that richards management_trust is liable for each of the taxable years and for the accuracy-related_penalty under sec_6662 respondent has no record of richards charitable trust’s having filed with respondent form_990-pf return of private_foundation form_990-pf for either of the taxable years and nor does respondent have a record of any other federal tax returns having been filed by richards charitable_trust for those years in response to a request by respondent for information with respect to richards charitable_trust respondent was provided with a copy of form_990-pf for the taxable_year that showed richards charitable_trust as the organization to which such form pertained however as discussed above respondent has no record that richards charitable_trust filed with respondent form_990-pf for the taxable_year during respondent’s examination of richards charitable trust’s taxable years and and thereafter no books records or other information was provided to respondent estab-- lishing the jurisdiction under the laws of which richards charitable_trust was purportedly organized the person who is -- - authorized to act on behalf of richards charitable_trust and that richards charitable_trust was at all relevant times a_trust cognizable for federal tax purposes nor did richards charitable_trust at any time provide any books records or other information to respondent establishing the income shown and the expense deductions claimed in the copy of form_990-pf for the taxable_year that was provided to respondent during respon- dent’s examination of richards charitable_trust in response to respondent’s request for information with respect to richards charitable_trust and that showed richards charitable_trust as the organization to which such form pertained in the notice issued to richards charitable_trust respon- dent determined inter alia that richards charitable_trust is liable for each of the taxable years and for the addition_to_tax under sec_6651 joy a richards and mr richards jointly filed form_1040 u s individual_income_tax_return return for the taxable_year and mr richards filed a return for during respon- dent’s examination of those and returns and thereafter no books records or other information was provided to respon- dent establishing the income reported and the expense deductions claimed in those returns in the notice issued to mr richards with respect to the taxable_year respondent determined inter alia that he is - liable for that taxable_year for the accuracy-related_penalty under sec_6662 in the notice issued to mr richards with respect to the taxable_year respondent determined inter alia that he is liable for that taxable_year for the accuracy- related penalty under sec_6662 james binge mr binge was the return preparer for each of richards management trust’s and trust returns mr richards and joy a richards’ return and mr richards’ return mr binge was also listed as the return preparer for richards charitable trust’s form_990-pf for the taxable_year that was provided to respondent during respondent’s examination of richards charitable_trust but that respondent has no record of having been filed with respondent respondent has identified mr binge as an individual involved with purported trusts used for tax_avoidance purposes on date respondent filed separate motions to compel answers to interrogatories and to compel production of documents in each of the cases at docket nos and oo on date the court granted each of those motions mr richards did not answer respondent’s interrogato- ries or produce the documents requested by respondent as ordered by the court on date on date richards management_trust mr richards and richards charitable_trust filed a joint motion to continue - - the trial in these cases which the court denied on date on date these cases were called from the court’s trial calendar at the court’s trial session in cleveland ohio cleveland trial session at that calendar call there was no appearance by or on behalf of richards management_trust mr richards and richards charitable_trust at that time respon- dent orally moved to dismiss each of these cases for failure to prosecute and respondent requested and the court held a trial because according to respondent respondent has the burden of production pursuant to sec_7491 with respect to the accuracy-related_penalties under sec_6662 for and that respondent determined against richards management_trust the respective accuracy-related_penalties under sec_6662 for and that respondent determined against mr richards and the additions to tax under sec_6651 for and that respondent determined against richards charitable_trust at the trial in these cases on date there was no appearance by or on behalf of richards management_trust mr richards and richards charitable_trust on date respondent filed a written motion to hold petitioner in default in each of the cases at docket nos and and a written motion to dismiss for lack of --- - prosecution and to impose sanctions under sec_6673 in each of the cases at docket nos and on date the court sua sponte issued separate orders date show cause orders directing each party in the case at docket no in which richards asset management_trust is named as petitioner and in the case at docket no in which richards charitable_trust is named as petitioner to show cause in writing why the court has jurisdiction over this case including the identity of any purported fiduciary of petitioner and a detailed analysis of why such purported fiduciary has the capacity to litigate in the court on behalf of petitioner on date respondent filed separate written responses to the date show cause orders in the cases at docket nos and in which respondent con- tended inter alia that richards management_trust and richards charitable_trust respectively failed to establish that a trustee if authorized acted on its behalf when the purported petition was filed with the court on date failed to file a proper petition with this court in that the petition was not brought by and with the full descriptive name of the fiduciary enti- tled to institute a case on its behalf respondent further argued in those separate responses to the date show cause orders in the cases at docket nos and that since the petition in this case was not brought by a -- - party with proper capacity as required by the tax_court rules_of_practice and procedure the court lacks juris-- diction on date richards management_trust and richards charitable_trust filed separate written responses to the date show cause orders in the cases at docket nos and richards management trust’s response to the decem-- ber show cause order and richards charitable trust’s response to the date show cause order respectively each of which was signed by terrence a bentivegna mr bentivegna who identified himself in each such response as trustee each such response asserted that petitioner does not believe that this court has jurisdiction in support of that position richards management trust’s response to the date show cause order and richards charitable trust’s response to the date show cause order set forth statements and contentions that the court finds to be frivolous and or ground- less ‘rach such response to the date show cause order stated in pertinent part petitioner petitioned this court after having received false and misleading information from the respondent and attorneys david wise and his asso- ciate carol jackson the respondent has failed to properly assess any taxes in accordance with their required administrative procedures and yet ad- vised the petitioner that the only method of dis- agreeing with the purported tax_liability was to petition this court continued on date richards management_trust filed a response to respondent’s motion to hold petitioner in default in the case at docket no and mr richards filed a re- e continued this courts’ sic order states petitioner purports to be a_trust petitioner is a_trust and the respondent has never been able to prove otherwise nor does the respondent have the right or ability to set_aside a contract petitioner does not want this false tax claim to be litigated in court and has petitioned this court to have this case removed from the docket as having been petitioned in error due to the errone- ous instructions given by the respondent wherefore it is prayed that this court dismiss this case at petitioner’s re- guest as the original petition was issued in error due to false directions given to petitioner by respondent petitioner believes that he has the right to correct his mistake and withdraw the original petition this court and the respondent recognize the peti- tioner as a_trust and cease attempting to set_aside a contract in direct opposition to the con- stitution of the united_states of america this court sanction the respondent for using this court for illegal purposes respondent has no legal tax claim as petitioner has noted to respon- dent and this court on numerous occasions with- out a legal claim respondent fraudulently in- structed petitioner to use this court to legiti- mize his illegal attempt to deprive petitioner of his assets this court instruct the respondent to cease now and forever harassment of petitioner -- sponse to respondent’s motion to dismiss for lack of prosecution and to impose sanctions under sec_6673 in the case at docket no ’ each of those respective responses contained arguments and contentions that the court found in an order dated date date order in the cases at docket nos and to be frivolous and or groundless in the date order the court reminded each petitioner about sec_6673 ’on date richards charitable_trust filed a re- sponse to respondent’s motion to hold petitioner in default in the case at docket no although the court did not receive and have that response filed until date it appears to have been mailed to the court around date presumably because of the delays in mail delivery that the court has been experiencing since mid-date the court’s receipt of that response was delayed sec_6673 states sec_6673 sanctions and costs awarded by courts a tax_court proceedings ---- procedures instituted primarily for de- lay etc ---whenever it appears to the tax_court that-- a proceedings before it have been instituted or maintained by the taxpayer primarily for delay b the taxpayer’s position in such proceeding is frivolous or groundless or c the taxpayer unreasonably failed to pursue available administrative remedies the tax_court in its decision may require the continued ards on date richards management_trust mr rich- and richards charitable_trust filed a joint brief in these cases that brief sets forth statements contentions and arguments that the court finds to be frivolous and or ground- less part continued taxpayer to pay to the united_states a penalty not in excess of dollar_figure petitioners’ joint brief in these cases states in pertinent this is a proceeding to determine if the internal_revenue_service can ignore the strict limitations imposed on it by congress via the code_of_federal_regulations and its’ sic own required administrative procedures to extort assets from unsuspecting inhabit-- ants of one of the fifty states of the united_states of america to wit everett d richards et al u s c title_26 sec_7602 is the i r s ’s authority to examine books_and_records regarding internal reve- nue tax --not income_tax this is corroborated by the fact that the implementing regulation for sec_7602 is located in c f_r title parts and in accordance with c f_r f petitioners et al do not receive any income or receipts from a taxable source petitioners et al have never been legally assessed any_tax as required by u s c title_26 sec_6203 and c f_r regulation and corroborated in 295_us_247 petitioners et al determinations are based on supreme court decisions treasury orders u s c title_26 continued discussion richards management_trust and richards charitable_trust tive on date the court sua sponte issued the respec-- date show cause orders regarding the court’s continued codes and implementing or lack of implementing c f_r title_26 regulations and various other refer- ences and as such cannot be considered frivolous or a hodgepodge of unsupported assertions irrele- vant platitudes and legalistic gibberish everett d richards et al petitioners in the cases at docket nos and are not liable for any income_tax penalties and or interest pursuant to any u s c title_26 code sections petitioners et al have at all times rebutted and refuted respondents prima facie allegations thus the burden_of_proof is on the respondent treasury order dated date establishes the bureau of alcohol_tobacco_and_firearms and trans- fers u s c title_26 sec_61 through inclusive to u s c title and the bureau of alcohol_tobacco_and_firearms petitioners et al are not now and never have been involved in the manufacture distribu- tion or sale of alcohol tobacco or firearms or been involved in any other excise taxable activity this is corroborated by the code_of_federal_regulations table of authority and rules a review of the department of the treasury organization chart reveals that the internal_revenue_service is not administered by any of the organizations with enforce- ment authority this is corroborated by the fact that there are no title_26 implementing regulation under title_26 c f_r the established trusts bear no burden_of_proof as their records are not subject_to review boyd vs u s 116_us_618 silver thorne lumber co vs u s us -- - jurisdiction over the cases at docket nos and rule provides in pertinent part a petitioner deficiency or liability actions a case shall be brought by and in the name of the person against whom the commissioner determined the deficiency in the case of a notice_of_deficiency or by and with the full descriptive name of the fiduciary entitled to institute a case on behalf of such person see rule a a case timely brought shall not be dismissed on the ground that it is not properly brought on behalf of a party until a reason- able time has been allowed after objection for ratifi- cation by such party of the bringing of the case and such ratification shall have the same effect as if the case had been properly brought by such party c capacity the capacity of a fiduciary or other representative to litigate in the court shall be determined in accordance with the law of the juris-- diction from which such person’s authority is derived the record does not establish where richards management_trust and richards charitable_trust were organized the respec-- tive petitions in the cases at docket nos and listed an address for richards management_trust and richards charitable_trust in canton ohio ’ which is also the service address used by the court in those cases assuming arguendo that richards management_trust and richards charitable_trust were trusts organized under the laws of the state of ohio the admin- istration of each of which is subject_to the laws of that state the ohio address listed in the respective petitions in the cases at docket nos and is the same address listed by mr richards in the respective cases at docket nos and - under ohio law see rule c a trustee generally is the proper party authorized to act on behalf of a_trust 976_f2d_279 6th cir saxton v seiberling ohio st n e see ohio r civ p a in the cases at docket nos and richards management_trust and richards charitable_trust respectively have the burden of proving that this court has jurisdiction see 65_tc_346 27_tc_837 by establishing affirmatively all facts giving rise to our jurisdiction see 35_tc_177 15_bta_645 in order to meet that burden richards management_trust in the case at docket no and richards charitable_trust in the case at docket no must ohio r civ p a provides in pertinent part rule parties plaintiff and defendant capacity a real party in interest every action shall be prosecuted in the name of the real party in interest an executor administrator guardian bailee trustee of an express trust a party with whom or in whose name a contract has been made for the benefit of another or a party authorized by statute may sue in his name as such representative without joining with him the party for whose benefit the action is brought empha- sis added provide evidence establishing who has the authority to act on its behalf in each such proceeding see natl comm to secure justice in the rosenberg case v commissioner supra pincite 22_bta_686 on the instant record we find that richards management_trust in the case at docket no and richards charitable_trust in the case at docket no have failed to establish who has the authority to act on their behalf in those respective proceedings we further find on that record that neither of the cases at docket nos and was brought by and with the full descriptive name of the fiduciary entitled to institute each such case on behalf of richards management_trust or richards charitable_trust as the case may be as required by rule a on the record before us we conclude that we do not have jurisdiction over the cases at docket nos and accordingly we shall dismiss those cases for lack of jurisdiction ’ mr richards neither mr richards nor any authorized representative of mr richards appeared at the court’s cleveland trial session on ‘2because we shall dismiss the cases at docket nos and for lack of jurisdiction we shall deny respondent’s motion in the case at docket no and respondent’s motion in the case at docket no - - date at the call of these consolidated cases from the court’s trial calendar at the trial held by the court in the cases at docket nos and neither mr richards nor any authorized representative of mr richards appeared the written response by mr richards to respondent’s motion to dismiss for lack of prosecution and to impose sanctions under sec_6673 in the case at docket no does not contain any valid reason why that case should not be dismissed for lack of prosecution ’ that response contained contentions and argu- ments that the court found in the court’s date order to be frivolous and or groundless the joint brief filed by mr richards and richards management_trust and richards charitable_trust also contains statements contentions and arguments that the court finds to be frivolous and or groundless and do not set forth any valid reason why the cases at docket nos and should not be dismissed for lack of prosecution sec_7491 provides in pertinent part sec_7491 burden of proof’ c penalties --notwithstanding any other provi- sion of this title the secretary shall have the burden of production in any court_proceeding with respect to the liability of any individual for any penalty 3mr richards did not file a response to respondent’s motion to dismiss for lack of prosecution and to impose sanctions under sec_6673 in the case at docket no - - sec_6662 imposes an accuracy-related_penalty equal to percent of the underpayment_of_tax resulting from inter alia negligence or disregard of rules or regulations sec_6662 or a substantial_understatement_of_income_tax sec_6662 for purposes of sec_6662 an understatement is equal to the excess of the amount of tax required to be shown in the tax_return over the amount of tax shown in the tax_return sec_6662 d a and is substantial in the case of an individual if it exceeds the greater of percent of the tax required to be shown in the return or dollar_figure sec_6662 a for purposes of sec_6662 the term negligence includes any failure to make a reasonable attempt to comply with the code and the term disregard includes any careless reckless or intentional disregard sec_6662 negligence has also been defined as a lack of due care or failure to do what a reasonable person would do under the circumstances 963_f2d_907 6th cir affg tcmemo_1991_179 91_tc_686 affd 893_f2d_656 4th cir the accuracy-related_penalty under sec_6662 does not apply to any portion of an underpayment if it is shown that there was reasonable_cause for and that the taxpayer acted in good_faith with respect to such portion sec_6664 the determination of whether the taxpayer acted with reasonable_cause - - and in good_faith depends on the pertinent facts and circum-- stances including the taxpayer’s efforts to assess his or her proper tax_liability the knowledge and experience of the tax- payer and the reliance on the advice of a professional such as an accountant sec_1_6664-4 income_tax regs reliance on the advice of a professional such as an accountant does not necessarily demonstrate reasonable_cause and good_faith unless under all the circumstances such reliance was reasonable and the taxpayer acted in good_faith id in the case of claimed reliance on the accountant who prepared the taxpayer’s tax_return the taxpayer must establish that correct information was provided to the accountant and that the item incorrectly omitted claimed or reported in the return was the result of the accoun- tant’s error 70_tc_158 on the record before us we find that respondent has satis-- fied the burden of production that respondent maintains respon- dent has with respect to the respective accuracy-related penal- ties under sec_6662 that respondent determined to impose on mr richards for the taxable years and based on our examination of the entire record before us we we are not deciding in the cases at docket nos and whether the commissioner of internal revenue has the burden of production in cases subject_to sec_7491 when a taxpayer fails to appear for trial --- - shall grant respondent’s motion in the case at docket no oo and respondent’s motion in the case at docket no in that we shall dismiss each of those cases for failure by peti- tioner in each such case to prosecute such case and we shall enter a decision in each of those cases sustaining the determina- tions that respondent made in the notice to which each such case pertains but in the reduced amounts which respondent concedes are appropriate in order to reflect the duplication of certain income determinations in the respective notices issued to mr rich- ards ’ in respondent’s motions in the cases at docket nos and respondent also asks the court to impose a penalty ‘as explained in respondent’s respective motions in the cases at docket nos and respondent attributed the income reported for the taxable_year by richards manage- ment trust percent to joy a richards deceased mr rich- ards and richards charitable_trust and respondent attributed the income reported for the taxable_year by richards manage- ment trust percent to mr richards and richards charitable_trust the amounts of such income attributed to richards chari- table trust for were reattributed for that year to mr richards and the amounts of such income attributed to richards charitable_trust for were reattributed to mr richards which resulted in a duplication of said amounts of income in the respective notices issued to mr richards with respect to the taxable_year and to mr richards with respect to the taxable_year as set forth in respondent’s respective motions in the cases at docket nos and and in the respec-- tive exhibits attached to those motions the revised deficiencies for mr richards for the taxable years and are dollar_figure and dollar_figure respectively consistently the revised accuracy- related penalties under sec_6662 imposed on mr richards for the taxable years and are dollar_figure and dollar_figure respectively - under sec_6673 on mr richards in each of those cases as grounds therefor respondent contends that mr richards instituted proceedings in the court primarily for delay advanced frivolous and groundless positions in such proceed- ings and unreasonably failed to pursue administrative remedies on the record before us we find that mr richards insti- tuted the proceedings in the cases at docket nos and primarily for delay we also find on that record that mr richards’ position in the cases at docket nos and is frivolous and or groundless on the record before us we shall impose a penalty in those cases on mr richards pursuant to sec_6673 in the amounts of dollar_figure and dollar_figure respectively to reflect the foregoing an appropriate order of dis-- missal for lack of jurisdiction and denying respondent’s motion will be entered in each of the cases at docket nos and and an appropriate order granting respondent’s motion and decision will be entered in each of the cases at docket nos and - - sustaining respondent’s determinations in reduced amounts and imposing a penalty under sec_6673 in each of those two cases


department of the treasury internal_revenue_service washington d c jun number release date cc tege eoeg et1 - cor-115997-01 uilc memorandum for from subject office of division counsel associate chief_counsel tax exempt and government entities cc tege eoeg et1 - cor-115997-01 railroad retirement act tax status in accordance with the coordination procedure established between the service and the railroad retirement board rrb the rrb has provided us with its opinion that the following business is not an employer under the railroad retirement act and the railroad unemployment insurance act we have reviewed the opinion of the rrb and based upon the information submitted to the rrb we also conclude that is not an employer under the railroad_retirement_tax_act please take the appropriate action regarding this business cc will e mcleod


t c summary opinion united_states tax_court julie tishkoff petitioner v commissioner of internal revenue respondent docket no 16337-15s filed date julie tishkoff pro_se nicholas r rosado for respondent summary opinion panuthos chief special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not unless otherwise indicated subsequent section references are to the continued reviewable by any other court and this opinion shall not be treated as precedent for any other case in a notice_of_deficiency dated date respondent determined a deficiency of dollar_figure in petitioner’ sec_2012 federal_income_tax a sec_6651 addition_to_tax of dollar_figure a sec_6651 addition_to_tax of dollar_figure and a sec_6654 addition_to_tax of dollar_figure after concessions the issues for decision are whether petitioner may exclude dollar_figure from gross_income relating to proceeds received from the settlement of a lawsuit whether petitioner is liable for the sec_6651 addition_to_tax for failure to timely file her federal_income_tax return whether petitioner is liable for the sec_6651 addition_to_tax for failure to timely pay income_tax for and whether petitioner is liable for the sec_6654 addition_to_tax for failure to pay estimated income_tax for continued internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure petitioner concedes that she received settlement proceeds of dollar_figure in and that she did not file a federal_income_tax return for background some of the facts have been stipulated and we incorporate the stipulation of facts by this reference petitioner resided in california when the petition was timely filed petitioner worked as an employee for wells fargo from date until date in petitioner was working as the administrative assistant to the market president petitioner’s employment was terminated in date in date petitioner filed a complaint with the u s department of labor alleging that wells fargo had violated whistleblower protection provisions of the sarbanes-oxley_act of wells fargo denied the claim in date and supplemented its response in date in date petitioner filed a complaint against wells fargo in the superior court of california county of san francisco alleging four causes of action wrongful termination for whistleblowing hostile work environment harassment intentional infliction of emotional distress and whistleblower retaliation in her complaint petitioner alleged that her employment was wrongfully terminated in retaliation for her complaining about wells fargo’s illegal and fraudulent business practices claiming that wells fargo had engaged in a campaign of retaliation intended to coerce her resignation which escalated from to petitioner’s complaint detailed the alleged retaliation as harassment which included attacking her job performance issuing unwarranted discipline public criticism and humiliation removal of job duties and harassing her due to her protected complaints as well as constant insults verbal assaults screaming yelling and false accusations of misconduct petitioner’s complaint further alleged that she suffered severe emotional distress and physical injuries and has necessarily expended sums in the treatment of such injuries the complaint alleged that the emotional distress included anxiety depression trouble focusing and weight gain and that petitioner had to seek therapy and take medication for treatment of this emotional distress petitioner’s complaint did not provide further detail about the type or extent of her alleged physical injuries and physical sickness at trial petitioner asserted that because of the alleged abusive treatment by her employer on one occasion she fell and twisted her ankle and on another occasion she cut her thumb while slicing a bagel petitioner asserts that both injuries required doctor’s visits and that the cut on her thumb required stitches and left a scar petitioner also asserts that the emotional distress caused her to gain about pounds have a fast heartbeat and panic attacks and have high blood pressure petitioner asserts she also had to visit a doctor for these medical problems petitioner asserts she did not have a prior medical history of these ailments petitioner also asserted in her petition that the emotional distress caused her to have severe headaches throw up and suffer pain and nausea and that she attempted suicide and has the scars to prove it petitioner and wells fargo engaged in voluntary mediation and reached a settlement the agreement titled conditional settlement agreement and mutual release provided that wells fargo denied all of petitioner’s claims and that she would receive dollar_figure in full settlement and release of all of her claims against wells fargo of that dollar_figure settlement amount after attorney’s fees and litigation costs petitioner received dollar_figure before payroll_taxes for lost wages and dollar_figure for alleged emotional distress as specifically described by the settlement agreement petitioner did not file a timely federal_income_tax return for nor did she request an extension petitioner also did not file a federal_income_tax return for petitioner paid dollar_figure in federal_income_tax during the year as income_tax withheld for the internal_revenue_service irs or respondent prepared a substitute for return for petitioner for the tax_year under sec_6020 this substitute for return included the dollar_figure of settlement proceeds in petitioner received a check from wells fargo on date for dollar_figure for the alleged emotional distress wells fargo reported this payment via form 1099-misc miscellaneous income respondent submitted as evidence exhibits 6-j and 7-j petitioner’s account transcripts for and showing that no tax_return was filed for either year petitioner also admitted at trial that she did not file a tax_return for either year the account transcript for shows that petitioner does not owe any_tax for that year petitioner’s taxable_income as other income and was mailed to petitioner in a notice dated date the irs included this substitute for return with the notice_of_deficiency dated date petitioner timely filed a petition for redetermination on date after filing her petition petitioner provided respondent with a form 1040ez income_tax return for single and joint filers with no dependents for this delinquent_return was prepared by a certified_public_accountant and dated date on her form 1040ez petitioner reported dollar_figure in wages and did not include the dollar_figure settlement proceeds in her taxable_income i burden_of_proof discussion in general the commissioner’s determination set forth in a notice_of_deficiency is presumed correct and the taxpayer bears the burden of proving that the determination is in error rule a 290_us_111 pursuant to sec_7491 the burden_of_proof as to factual matters shifts to the commissioner under certain circumstances petitioner did not allege the substitute for return calculated an income_tax_liability of dollar_figure less income_tax withheld of dollar_figure resulting in a tax_deficiency of dollar_figure or otherwise show that sec_7491 applies see sec_7491 and b therefore petitioner bears the burden_of_proof see rule a in unreported income cases the commissioner must base the deficiency on some substantive evidence that the taxpayer received unreported income 181_f3d_1002 9th cir aff’g tcmemo_1997_97 774_f2d_932 9th cir if the commissioner introduces some evidence that the taxpayer received unreported income the burden shifts to the taxpayer the parties stipulated to a form 1099-misc issued by wells fargo and petitioner confirmed receipt of the settlement proceeds since petitioner acknowledges receipt of the settlement proceeds the only issue before us is whether the settlement proceeds are excludable under sec_104 see hardy v commissioner f 3d pincite rapp v commissioner f 2d pincite ii proceeds from settlement agreement generally gross_income includes all income from whatever source derived see sec_61 sec_1_61-1 income_tax regs the scope of sec_61 is broad and exclusions from income are narrowly construed see 515_us_323 504_us_229 348_us_426 the taxpayer must demonstrate that she is within the clear scope of any statutory exclusion see commissioner v schleier u s pincite burke u s pincite 141_tc_331 aff’d __ f app’x __ wl 9th cir date sec_61 indicates that items specifically excluded from gross_income are listed in part iii sections damages excluding punitive_damages received for personal physical injuries or physical sickness may generally be excluded from gross_income sec_104 although emotional distress is not by itself considered a physical injury or physical sickness damages for emotional distress attributable to a physical injury or physical sickness qualify as damages excludable from income under sec_104 sec_1_104-1 income_tax regs stress-induced sickness does not qualify the personal physical injury or personal physical sickness must instead be the cause of the stress prasil v commissioner tcmemo_2003_100 wl at according to the legislative_history of sec_104 emotional distress includes symptoms caused by stress such as insomnia headaches and stomach disorders id at citing h_r conf rept no pincite ndollar_figure 1996_3_cb_741 n the small_business job protection act of pub_l_no sec a stat pincite amended sec_104 to limit the exclusion inter alia to personal physical injuries or physical sickness when damages are received pursuant to a settlement agreement the nature of the claim that was the basis for settlement and not the validity of the claim controls whether the damages are excludable under sec_104 burke u s pincite see also 105_tc_396 t he critical question is in lieu of what was the settlement amount_paid aff’d 121_f3d_393 8th cir if the settlement agreement lacks an express statement of what the settlement amount was paid to settle we look at the intent of the payor which we determine on the basis of all the facts and circumstances of the case including the complaint that was filed and the details surrounding the litigation 349_f2d_610 10th cir aff’g tcmemo_1964_33 102_tc_116 aff’d in part rev’d in part and remanded on another issue 70_f3d_34 5th cir the court is not required to accept a taxpayer’s self-serving testimony asserting that there was a physical injury or physical sickness prasil v commissioner wl at petitioner asserts that the payor her former employer intended these proceeds to compensate her for the physical injuries and physical sickness she suffered from the alleged abuse petitioner asserts that because of the stress on one occasion she was rushing and fell and twisted her ankle which began bleeding and on another occasion she cut her thumb while slicing a bagel petitioner asserts that she had to visit the doctor for both incidents and that the cut on her thumb required stitches and left a scar petitioner asserted in her petition that the emotional distress caused her to have severe headaches throw up suffer pain and nausea and attempt suicide which left scars petitioner also asserts that the emotional distress caused her to gain excessive weight have a fast heartbeat suffer from panic attacks and have high blood pressure petitioner asserts that she had to visit a doctor for all of these ailments which are all documented in my medical history and that she did not have a prior history of high blood pressure as indicated petitioner received the damages pursuant to a settlement agreement the agreement states that the payment of dollar_figure is for alleged emotional distress the agreement does not refer to physical injuries or physical sickness since the settlement agreement does not refer to physical injuries or physical sickness we look to the complaint and other details surrounding the settlement see burke u s pincite knuckles v commissioner f 2d pincite bagley v commissioner t c pincite robinson v commissioner t c pincite in addition to the settlement agreement and petitioner’s testimony we look to the complaint to assist in determining the payor’s intent in the payment of the dollar_figure settlement the complaint states in several places that petitioner suffered physical and mental injuries and has necessarily expended sums in the treatment of such injuries the complaint however does not provide details about the type or extent of these physical injuries petitioner alleges that she suffered anxiety depression trouble focusing and weight gain which are symptoms of emotional distress damages for which are not excludable in the absence of personal physical injury or physical sickness the complaint did not detail any of the physical injuries or sickness that petitioner testified about such as a sprained ankle a cut thumb or high blood pressure petitioner’s testimony at trial is the sole evidence of any physical injury or physical sickness and we will not rely solely on this testimony see knuckles v commissioner f 2d pincite robinson v commissioner t c pincite prasil v commissioner wl at on the basis of this entire record it appears more likely that to the extent petitioner suffered personal physical injury or personal physical sickness that injury or sickness was the result of her emotional distress than that the emotional distress was caused by her physical injuries and physical sickness thus the payor wells fargo did not call any witnesses to testify and petitioner did not present any other witnesses or provide other evidence of the payor’s intent petitioner’s claims of physical injury and physical sickness are not the type for which damages qualify for income exclusion under sec_104 see prasil v commissioner wl at sec_1_104-1 income_tax regs on the basis of this record there is insufficient evidence to show that the settlement proceeds were intended to compensate petitioner for personal physical injuries or physical sickness see sec_104 sec_1_104-1 income_tax regs iii sec_6651 additions to tax a failure to timely file addition_to_tax sec_6651 imposes an addition_to_tax for failure_to_file a return on the date prescribed including extensions unless the taxpayer can establish that the failure is due to reasonable_cause and not due to willful neglect sec_7491 provides that the commissioner has the burden of production in any court sec_104 also excludes damages not in excess of the amount_paid for medical_care described in sec_213 or b for emotional distress sec_1_104-1 income_tax regs petitioner has not provided any receipts or other proof of medical_expenses incurred because of the emotional distress or provided testimony estimating the amounts so expended if the secretary makes a return for the taxpayer under sec_6020 it is disregarded for purposes of determining the amount of the addition_to_tax under sec_6651 but it is treated as a return filed by the taxpayer for purposes of determining the amount of the addition_to_tax under sec_6651 sec_6651 proceeding with respect to liability for an addition_to_tax the commissioner satisfies this burden of production by coming forward with sufficient evidence that indicates that imposing the penalty is appropriate see 116_tc_438 respondent has satisfied his burden of production under sec_7491 by introducing account transcripts reflecting that petitioner did not file a return and petitioner’s testimony at trial that she did not timely file a return and did not prepare a form 1040ez for until after filing the petition in this case see sec_6651 higbee v commissioner t c pincite b failure to timely pay addition_to_tax sec_6651 imposes an addition_to_tax for failure to pay the amount shown as tax on the taxpayer’s return on or before the date prescribed unless the taxpayer can establish that the failure is due to reasonable_cause and not due to willful neglect the sec_6651 addition_to_tax applies only when an petitioner’s federal_income_tax return for was due by date with no extension requested if petitioner had timely requested and been granted an extension she would have an extended due_date of date see sec_6072 sec_6081 petitioner provided a return dated date more than two years after the original due_date the amount of the addition_to_tax under para of sec_6651 reduces the amount of the addition_to_tax under para for any month to which an continued amount of tax is shown on a return filed by the taxpayer or prepared by the secretary sec_6651 g 120_tc_163 aff’d without published opinion wl 3d cir when a taxpayer has not filed a return the sec_6651 addition_to_tax may not be imposed unless the secretary has prepared a substitute for return that satisfies the requirements of sec_6020 127_tc_200 aff’d 521_f3d_1289 10th cir respondent has shown and petitioner does not dispute that the only federal_income_tax she paid for was the amount withheld for income_tax which is approximately one-third of the total_tax due for the year thus petitioner did not meet her income_tax obligation for respondent has established that the secretary prepared a substitute for return that satisfies the requirements of sec_6020 by providing a return for prepared for petitioner and sent to her in the notice dated date thus respondent has met the burden of production under sec_7491 see sec_6651 wheeler v commissioner t c pincite cabirac v commissioner t c pincite higbee v commissioner t c pincite continued addition_to_tax applies under both paragraphs sec_6651 c exceptions to sec_6651 additions to tax reasonable_cause and the absence of willful neglect is a defense to the sec_6651 and additions to tax willful neglect means a conscious intentional failure or reckless indifference 469_us_241 the determination of whether reasonable_cause exists is based on all the facts and circumstances ruggeri v commissioner tcmemo_2008_300 wl at a taxpayer meets the reasonable_cause exception if she shows that she exercised ordinary business care and prudence sec_301_6651-1 proced admin regs this determination is factual and the burden_of_proof is on the taxpayer merriam v commissioner tcmemo_1995_432 wl at aff’d without published opinion 107_f3d_877 9th cir reasonable_cause has been found not to exist when the taxpayer claims the failure_to_file or pay the tax was due to being too busy overworked dealing with personal affairs such as an automobile accident or overwhelmed by business and financial affairs see 92_tc_899 80_tc_588 aff’d and remanded 748_f2d_908 4th cir merriam v commissioner wl at a taxpayer is excused for reasonable_cause to the extent the taxpayer shows she exercised ordinary business care and prudence in trying to pay her tax_liability and either could not pay or would suffer undue_hardship if she paid her tax when due sec_301_6651-1 proced admin regs undue_hardship must be more than an inconvenience to the taxpayer it requires that she had the risk of a substantial financial loss resulting from making the tax payment on time merriam v commissioner wl at petitioner asserts that she did not file a federal_income_tax return for or pay her income_tax due because she was unemployed had lost her apartment and was moving frequently having lived in about ten or twelve different places in a few years petitioner also referred to a fire but did not provide details petitioner did not mention efforts to comply with her tax_return filing and payment obligations until long after tax was due asserting at trial i’ve asked my accountant to get me caught up petitioner by not attempting to comply with her tax_return filing and payment obligations did not exercise ordinary business care and prudence in attempting to meet those obligations petitioner’s assertion that she was overwhelmed by her living situation does not constitute reasonable_cause see crocker v commissioner t c pincite odend’hal v commissioner t c pincite ruggeri v commissioner wl at merriam v commissioner wl at sec_301_6651-1 proced admin regs petitioner claims she was unemployed for a time although the exact timeframe is not clear although unemployment could be a financial hardship petitioner did not provide further detail about her financial situation when income_tax was due and did not demonstrate that she would have had a risk of substantial loss if she had paid her tax on time thus petitioner has not shown undue_hardship and we do not find that she demonstrated reasonable_cause for her failure to pay her tax when due see merriam v commissioner wl at sec_301_6651-1 proced admin regs since petitioner did not demonstrate that she has a valid defense against her failures to file her federal_income_tax return and pay her federal_income_tax due on time we uphold the additions to tax under sec_6651 and iv sec_6654 addition_to_tax sec_6654 imposes an addition_to_tax on a taxpayer who underpays her estimated income_tax unless an exception applies see sec_6654 the sec_6654 addition_to_tax is determined by applying the underpayment rate established under sec_6621 to the amount of the underpayment for the period of the underpayment this addition_to_tax under sec_6654 is mandatory unless the taxpayer can place herself under one of the computational exceptions provided in that section 75_tc_1 33_tc_1071 sec_6654 provides two mechanical exceptions to the applicability of the sec_6654 addition_to_tax first the addition is not applicable if the tax shown on the taxpayer’s return for the year in question or if no return is filed the taxpayer’s tax for that year reduced by any allowable credit for wage withholding is less than dollar_figure sec_6654 second the addition_to_tax is not applicable if the taxpayer’s tax_liability for the preceding_taxable_year was zero sec_6654 a mount of the underpayment means the excess of the required_installment over the amount if any of the installment paid on or before the due_date for the installment sec_6654 the period of the underpayment runs from the due_date for the installment to the earlier of the 15th day of the 4th month following the close of the taxable_year or with respect to any portion of the underpayment the date on which such portion is paid sec_6654 sec_6654 provides limited situations in which the secretary can waive the addition_to_tax none of which are applicable here with respect to the second mechanical exception on the basis of the account transcript for petitioner did not owe any_tax for that year despite not filing a return therefore petitioner’s tax_liability for the preceding year was zero and she falls under the second mechanical exception we conclude that the addition_to_tax under sec_6654 does not apply for see id grosshandler v commissioner t c pincite estate of ruben v commissioner t c pincite we have considered all of the parties’ arguments and to the extent not addressed herein we conclude that they are moot irrelevant or without merit to reflect the foregoing decision will be entered under rule


internal_revenue_service index number department of the treasury washington dc number release date re person to contact telephone number refer reply to plr-118839-99 cc intl b01 date date tax_year a country b year c year d year e year f date g dear tin this is in response to your letter dated date requesting a ruling under sec_877 of the internal_revenue_code_of_1986 code that a’s surrender of his u s alien registration card green card did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code the information submitted for consideration is substantially as set forth below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by penalty of perjury statements executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination plr-118839-99 a was born in country b and has been a citizen of country b since birth a’s parents were also born in country b a moved to the united_states in year c to attend a graduate level degree program from year d to year f a continuously performed services as an employee in the united_states a became a permanent resident_of_the_united_states in year e in year f a was transferred by his employer back to country b on date g a voluntarily rescinded his green card expatriated a intends to live permanently in country b a is domiciled in country b and is subject_to country b income_tax on his worldwide income at a rate comparable to the applicable u s income_tax base and rate a is also subject_to country b’s estate_tax regime on the date of his expatriation a’s net_worth exceeded the amount prescribed in sec_877 sec_877 generally provides that a citizen who loses u s citizenship or a u s long-term_resident who ceases to be taxed as a lawful permanent resident individuals who expatriate within the 10-year period immediately preceding the close of the taxable_year will be subject_to the special rules of sec_877 for such taxable_year unless such loss did not have for one of its principal purposes the avoidance of u s taxes sec_2107 and sec_2501 provide special estate and gift_tax regimes respectively for individuals who expatriate with a principal purpose to avoid u s taxes a former citizen or former long-term_resident will be treated as having expatriated with a principal purpose to avoid u s taxes for purposes of sec_877 sec_2107 and sec_2501 if the individual’s average income_tax_liability or the individual’s net_worth on the date of expatriation exceed certain thresholds see sec_877 sec_2107 and sec_2501 a former u s citizen whose net_worth or average tax_liability exceeds these thresholds however will not be presumed to have a principal purpose of tax_avoidance if that former citizen is described within certain statutory categories and submits a request for a ruling within one year of the date of loss of u s citizenship for the secretary’s determination as to whether such loss had for one of it principal purposes the avoidance of u s taxes see sec_877 sec_2107 and sec_2501 under notice_98_34 1998_27_irb_30 modifying notice_97_19 1997_1_cb_394 a former long-term_resident whose net_worth or average tax_liability exceeds the applicable thresholds will not be presumed to have a principal purpose of tax_avoidance if that former resident is described within certain categories and submits a complete and good_faith request for a ruling as to whether such loss had for one of its principal purposes the avoidance of u s taxes notice_98_34 requires that certain information be submitted with a request for a ruling that an individual's expatriation did not have for one of its principal purposes the avoidance of u s taxes plr-118839-99 a is eligible to request a ruling pursuant to notice_98_34 because he became fully liable to tax on his worldwide income in country b the country in which he was born a submitted all of the information required to be submitted by notice_98_34 accordingly based solely on the information submitted and the representations made it is held that a has made a complete and good_faith submission in accordance with sec_877 and notice_97_19 as modified by notice_98_34 therefore a will not be presumed under sec_877 to have as one of his principal purposes for expatriating the avoidance of u s taxes it is further held that a will not be treated under sec_877 as having as one of his principal purposes for expatriating the avoidance of u s taxes because the information submitted clearly established the lack of a principal purpose to avoid taxes under subtitle a or b 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 in addition no opinion is expressed as to a’s u s tax_liability for the taxable years prior to expatriation or his united_states tax_liability for periods after his loss of permanent resident status under sections of the code other than sec_877 sec_2107 and sec_2501 a copy of this letter must be attached to a’s u s income_tax return for the year in which a obtained the ruling whether or not a is otherwise required to file a return this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to a’s representative sincerely yours allen goldstein reviewer office of the associate chief_counsel international