t c memo united_states tax_court alfonso j and elena l diaz del castillo petitioners v commissioner of internal revenue respondent docket no filed date alfonso j and elena l diaz del castillo pro sese scott a hovey for respondent memorandum findings_of_fact and opinion gerber judge respondent determined a dollar_figure deficiency in petitioners’ federal_income_tax respondent’s determination was based on the disallowance of a deduction claimed on petitioners’ joint federal_income_tax return for an dollar_figure charitable_contribution carryover petitioners contend alternatively that they are not liable for the deficiency under any of the following three theories the statutory_notice_of_deficiency is invalid respondent is contractually estopped from determining a deficiency for the tax_year and the manufacturer of the software used by petitioners to prepare their return was responsible for the deficiency and petitioners should be allowed to interplead and make the software manufacturer a responsible_party in this proceeding findings_of_fact petitioners resided in pomfret maryland at the time that their petition was filed in this proceeding petitioners timely filed a joint federal_income_tax return for that they prepared using intuit turbotax software turbotax the turbotax software programs are designed so that a taxpayer’s responses to questions ostensibly are automatically placed onto approved forms and the tax due or overpaid is automatically computed the promotional material on the software packaging states that it double-checks for overlooked deductions missing information and entries that could trigger an audit and e ven gives you personalized advice as you go by this methodology petitioners provided answers to turbotax’s questions and were able to produce and print a copy of their return which they signed and submitted to respondent for filing petitioners’ turbotax-generated federal return contained an dollar_figure deduction of a charitable_contribution carryover on line of schedule a itemized_deductions labeled gifts to charity carryover from prior year petitioners were not entitled to deduct an dollar_figure charitable_contribution carryover from prior years petitioners believe that the dollar_figure on line was caused by faulty software in the turbotax product approximately years after petitioners’ return was filed on date respondent sent a letter to petitioners notifying them of a income_tax examination solely involving their claimed gifts to charity in that same letter respondent advised of the intention to disallow their deduction of an amount you claimed on line of schedule a as a carryover contribution from a prior year subsequently respondent in a date letter provided petitioners with an examination_report 30-day_letter explaining the proposed changes to petitioners’ return the first page of the date transmittal letter advised petitioners that they owed income_tax in the amount of dollar_figure on form_4549 income_tax examination changes however the amount of tax due was shown as dollar_figure on two other pages of the day letter the tax due was also shown as dollar_figure along with interest computed to date of dollar_figure for total_tax and interest of dollar_figure in response to respondent’s date 30-day_letter petitioners sent a letter dated date along with their check in the amount of dollar_figure to respondent in that letter petitioners explained that the dollar_figure claimed contribution carryover deduction was an error attributable to turbotax software in a date letter respondent answered petitioners’ july letter and among other matters advised petitioners that the changes to their tax_return resulted in a total_tax obligation apparently including interest to date of dollar_figure respondent on date sent petitioners a statutory_notice_of_deficiency for their year determining an income_tax deficiency in the amount of dollar_figure petitioners thereafter commenced this proceeding opinion the controverted item in this case is an dollar_figure contribution carryover deduction petitioners do not contend that they were entitled to that deduction instead they make a collateral attack contending alternatively that respondent’s deficiency_notice was invalid or that respondent agreed to a lesser deficiency or that the tax preparation software manufacturer is liable petitioners’ first argument is that the notice_of_deficiency is invalid petitioners argue that the notice has errors and does not reflect the correct amount of income_tax deficiency in particular petitioners argue that the dollar_figure income_tax deficiency determined in the notice differs from the dollar_figure referenced in the 30-day_letter that discrepancy according to petitioners makes the deficiency_notice unclear inaccurate and invalid the basic minimum requirements for a notice_of_deficiency are the following it must advise a taxpayer that respondent has determined a deficiency for a particular year it must specify the amount of the deficiency and it must provide sufficient information to permit the computation of the deficiency 932_f2d_1128 5th cir affg in part and revg in part tcmemo_1990_68 the notice_of_deficiency sent to petitioners is in no way contradictory or unclear on its face it meets or exceeds the minimum standards and provides petitioners with the amount year and means to compute the deficiency petitioners are correct in their observation that the various tax_liability amounts set forth in the 30-day_letter are inconsistent they are also correct in observing that the it is not clear how respondent treated the dollar_figure payment made by petitioners prior to issuance of the notice_of_deficiency it appears that the dollar_figure was not treated as an assessable payment of tax because the notice determines a dollar_figure deficiency see revproc_2005_18 2005_1_cb_798 in any event respondent has acknowledged petitioners’ payment and the court expects that petitioners will not be required to pay more than dollar_figure plus any applicable_interest amounts on the first page of the 30-day_letter and the deficiency_notice differ petitioners do not argue or contend that the dollar_figure determined in the deficiency_notice is not the correct income_tax deficiency that would result based upon the disallowance of the claimed dollar_figure contribution carryover deduction respondent counters that the dollar_figure income_tax deficiency set forth in the deficiency_notice constitutes a valid determination under the statute respondent points out that the deficiency_notice is the jurisdictional document upon which this proceeding is based additionally respondent points out that no agreement was reached with petitioners regarding the amount of deficiency attributable to the adjustment disallowing the dollar_figure that was erroneously claimed as a contribution carryover respondent admits that the dollar_figure amount stated on the first page of the 30-day transmittal letter that forwarded the examination_report to petitioners was incorrect but nevertheless contends that it is not binding we agree with respondent the notices that may precede the statutory_notice_of_deficiency during the administrative portion of the controversy are generally irrelevant to establishing the deficiency amount see 62_tc_324 it is the determination in the deficiency_notice that constitutes respondent’s determination or position from which a taxpayer may appeal to this court accordingly we hold that the deficiency_notice is adequate and valid petitioners’ second argument is that respondent is limited to assessing or collecting the dollar_figure amount stated on the first page of the 30-day transmittal letter in that regard petitioners correctly point out that respondent stated albeit erroneously that dollar_figure was the liability that resulted from the dollar_figure correction to their claimed contribution deduction in addition petitioners make the point that they in reliance on respondent’s statement paid the dollar_figure amount those events contend petitioners bind the parties to the dollar_figure respondent agrees with petitioners’ characterization of the circumstances and counters that those circumstances do not rise to the level of a binding agreement or form the basis for an estoppel respondent makes clear that in response to petitioners’ payment of the dollar_figure he sent a letter followed by a deficiency_notice advising that petitioners’ income_tax deficiency was dollar_figure respondent also points out that the form_4549 forwarded with the 30-day_letter and seeking petitioners’ consent to the tax_liability was not executed or returned by petitioners we agree with respondent that payment of the dollar_figure set forth in the 30-day_letter does not by itself rise to the status of constituting a binding agreement between petitioners and respondent nor did these events provide the basis for an estoppel that would have affected the parties’ rights section permits the commissioner to enter into binding closing agreements regarding the amount of a taxpayer’s income_tax_liability a closing_agreement as provided in sec_7121 is the prescribed method for the commissioner to bind himself to a particular tax_liability and other approaches are generally not approved by the courts see eg 58_tc_69 see also sec_301_6213-1 proced admin regs respondent’s error in the 30-day_letter followed by petitioners’ payment by itself did not result in a meeting of the minds or formal agreement this is especially so here where respondent clearly communicated the correct amount of the income_tax deficiency in subsequent but contemporaneous correspondence and in the notice_of_deficiency accordingly we hold that respondent is not contractually bound to the lesser amount shown on the first page of the 30-day_letter petitioners’ final argument in essence is that the software manufacturer that produces and sells turbotax is at fault for any_tax deficiency determined in this case section references are to the internal_revenue_code as amended and in effect for the period under consideration petitioners believe that software flaws in the turbotax program they used to prepare their return caused the erroneous dollar_figure contribution carryover deduction petitioners appear to base their theory on commissioner’s revrul_85_189 1985_2_cb_341 which considers the question of who is an income_tax_return_preparer for purposes of sec_7701 in addition that revenue_ruling discusses software developers’ potential for liability under tax_return_preparer penalty provisions see sec_6107 sec_6695 respondent counters that this case does not involve preparer penaltie sec_5 and that the software manufacturer is not relevant to the resolution of this income_tax deficiency case finally respondent points out that the only issue we consider is whether petitioners are entitled to an dollar_figure contribution carryover deduction petitioners have not asserted that they are entitled to the dollar_figure contribution deduction the focus of their argument is that the software manufacturer should be responsible because of petitioners’ belief that the deficiency was caused by turbotax procedurally petitioners amended their petition in an attempt to interplead the software manufacturer into this income_tax deficiency proceeding petitioners also attempted to call an officer of the software manufacturer as a witness ultimately petitioners were not permitted to interplead the manufacturer respondent did not determine any penalties against petitioners with respect to their tax_year if such penalties were in issue we note that this court does not have jurisdiction over them petitioners’ argument must fail in this proceeding because our jurisdiction is limited to deciding whether petitioners are liable for the deficiency determined by respondent this court is without jurisdiction to join unrelated third parties to an individual taxpayer’s deficiency proceeding under the circumstances of this case accordingly we hold that petitioners are liable for the dollar_figure income_tax deficiency for their tax_year to reflect the foregoing decision will be entered for respondent we note that it is petitioners’ belief that the software caused the error on their return the record in this case does not support or reject petitioners’ belief as discussed we note that respondent has acknowledged petitioners’ payment of dollar_figure in response to respondent’s day letter accordingly the amount of tax due from petitioners will be less than the determined deficiency


internal_revenue_service department of the treasury number release date index no 2601-dollar_figure p o box ben franklin station washington dc person to contact telephone number refer reply to cc psi - plr-140668-01 date date re legend settlor trust agreement trust bank x date y company z date court corporation date date dear this is in response to a letter dated date and subsequent correspondence requesting a ruling regarding the generation-skipping_transfer_tax gstt consequences of the severance and modification of trust facts the facts submitted and representations made are as follows before date settlor executed an irrevocable_trust agreement creating trust no additions constructive or otherwise have been made to trust since date under article of trust agreement the trustee has discretion to pay any part of the net_income of trust to any of settlor’s grandchildren upon the basis of need as determined by the trustee and to pay any part of the principal of trust for the emergency need of any of settlor’s grandchildren plr-140668-01 article further provides it is the intention of the settlor that in the exercise of its discretion the trustee should give preference to any of the said grandchildren attending a school_college_or_university excepting any such grandchild who may have an emergency need because of illness or other disaster it is the intention of the settlor that until the termination of this trust the trustee shall have the power and discretion to determine distribution of income or principal among or between the said grandchildren in the same manner and to the same extent as the settlor might so determine if she were the sole owner of said property free from any trust article provides as follows this trust shall terminate when the youngest grandchild of the settlor living at the time of the death of the settlor shall attain his or her twenty-first 21st birthday upon such termination the trustee shall pay over and deliver all of the assets of the trust estate in equal shares to the grandchildren of the settlor living at that time provided that if any such grandchild shall have died prior to the termination of this trust leaving issue surviving such issue shall take the share that such grandchild would have taken had he or she been living at the time of termination article paragraphs a and b authorize the trustee to sell any assets of trust upon any terms and conditions and at any price the trustee deems best and to retain any assets of trust or to dispose_of them except that common_stock in company and real_estate cannot be sold during settlor’s lifetime without her written consent trust agreement states that trust was initially funded with y shares of common_stock in company dollar_figurez in cash and a parcel of real_estate marketable common_stock in corporation company’s successor_in_interest constitutes a large part of trust’s current_assets trust also holds cash bank is designated as trustee settlor is currently age x and has seven grandchildren the youngest of whom will reach age on date on date court construed administrative provisions of trust on date the trustee filed a petition with court to sever trust into seven separate equal trusts one for the benefit of each of settlor’s grandchildren and to modify the termination provisions of trust the petition also sought to modify the distribution provisions of trust so that four of the seven separate trusts would permit plr-140668-01 distributions of income or principal for the best interests of a grandchild for whom the trust was created and the other three separate trusts would require the annual distribution of the greater of the net_income of the separate trust and a fixed percentage of the value of the assets on date court issued an order granting the trustee’s request to sever trust and to modify the termination provisions order in addition court construed the trust provision to grant the trustee discretion to distribute income and principal for the best interests of each grandchild however the order did not require annual distribution of the greater of the net_income of the separate trust and a fixed percentage of the value of the assets under order the trustee is authorized to divide trust into seven equal trusts one for the benefit of each of settlor’s living grandchildren each separate trust will be funded with a pro_rata share of each existing trust asset and will be permitted to pursue different investment programs subject_to settlor’s direction and to the investment and fiduciary obligations applicable to settlor or her delegate pursuant to the court’s date order bank will be the trustee of each separate trust the original terms of trust as modified and construed by order will apply to each separate trust if a new grandchild of settlor is born or adopted before the termination of trust each existing grandchild’s trust will contribute an equal amount of assets to create a new trust for the new grandchild equal in value at its inception to the total value of all of the trusts divided by the new number of grandchildren if the assets of any of the grandchildren’s trusts are insufficient for making the total required_contribution the remaining grandchildren’s trusts will equally contribute to make up the shortfall subject_to the receipt of a favorable ruling from the internal_revenue_service and effective upon the receipt of such a ruling the termination provisions of trust will be modified to provide as follows u pon settlor’s death the termination_date each separate trust shall be distributed outright to the grandchild for whom the trust is named provided that if any grandchild is deceased and leaves one or more surviving descendants that grandchild’s trust shall be distributed outright to his or her then living descendants per stirpes if any grandchild is deceased and leaves no surviving descendant that grandchild’s trust shall be added in equal shares to and distributed as part of the other grandchildren’s trusts if a grandchild dies after trust is severed but before the termination_date without surviving issue or the evidence of issue in gestation the grandchild’s separate trust will be added in equal shares to the separate trusts for the then-living grandchildren however if such deceased grandchild is survived by issue or if the trustee receives unambiguous evidence that the grandchild left issue in gestation the plr-140668-01 grandchild’s separate trust will be maintained until the termination_date when the trust will be distributed outright to the deceased grandchild’s then-living issue per stirpes or if none in equal shares to the other grandchildren’s trusts under order trust is construed to grant the trustee sole and absolute discretion to distribute income and principal of trust for the best interests of settlor’s grandchildren order further provides that this discretion will continue to apply to each separate trust after the severance of trust except that each grandchild may then only receive distributions from the grandchild’s respective trust order provides that the date order applies to the separate trusts for the grandchildren and order construes administrative provisions of trust we have been asked to rule that the proposed severance of trust and modification of the termination provisions under order will not subject the separate trusts to the generation-skipping_transfer gst tax by reason of b a of the tax_reform_act_of_1986 and sec_26_2601-1 of the generation-skipping_transfer_tax regulations law sec_2601 imposes a tax on each generation-skipping_transfer made by a transfer to a skip_person under a of the tax_reform_act_of_1986 the generation-skipping_transfer_tax is generally applicable to generation-skipping transfers made after date however under b a of the tax reform act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the tax does not apply to a transfer from a_trust if the trust was irrevocable on date and no addition actual or constructive was made to the trust after that date under sec_26_2601-1 any trust in existence on date will be considered irrevocable unless the settlor had a power that would have caused inclusion of the trust in his or her gross_estate under sec_2038 or sec_2042 if the settlor had died on date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax will not cause the trust to lose its exempt status sec_26_2601-1 provides that a modification will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the plr-140668-01 original trust a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer analysis in the present case trust was irrevocable on date it is represented that no additions actual or constructive have been made to the trust after that date under order trust will be severed into seven separate trusts for each of settlor’s seven grandchildren who are currently beneficiaries of trust each separate trust will be subject_to the original terms of trust as modified and construed under order under the original terms of article trust terminates at the later to occur of settlor’s death and settlor’s youngest then-living grandchild reaching age under order all of the separate trusts will terminate at settlor’s death even if settlor’s youngest then-living grandchild has not yet reached age thus under order the separate trusts could terminate earlier than under the original terms of trust but would not terminate any later under the original terms of article when trust terminates the assets of trust will be distributed in equal shares to settlor’s then-living grandchildren however if a grandchild dies with surviving issue before trust terminates such issue shall take the share that such grandchild would have taken if the grandchild had been alive when trust terminates under order on the termination_date settlor’s date of death each separate trust will be distributed to the grandchild for whom it is held the trust of a grandchild who dies without issue or evidence of issue in gestation will be immediately distributed equally among the trusts of the then-living grandchild however if a grandchild dies after the establishment of the grandchild’s separate trust but before the termination_date leaving issue or unambiguous evidence of issue in gestation then the deceased grandchild’s separate trust will be maintained until the termination_date when it will be distributed per stirpes among the deceased grandchild’s then-living issue or if none in equal shares among the separate trusts of settlor’s then-living grandchildren the provisions under order for distribution of the assets of the separate trusts at their termination are substantially identical to the provisions for the distribution of the assets of trust at its termination under the original terms of article the trustee has discretion to distribute to any of settlor’s grandchildren any amount of income on the basis of need and any amount of principal for emergency needs the trustee can exercise this discretion as settlor would if she owned trust assets outright order construes article to grant the trustee discretion to distribute the income and principal of a grandchild’s separate trust to the grandchild for the grandchild’s best interests this construction does not provide a narrower standard under which the trustee may distribute income and plr-140668-01 principal to settlor’s grandchildren from their separate trusts consequently under order the trustee may distribute at least as much income and principal to each grandchild as the trustee could before order was issued and may be able to distribute more sec_26_2601-1 discusses certain actions taken with respect to a_trust which will not cause a_trust to lose its exempt status under sec_26_2601-1 a modification will not cause an exempt trust to lose its exempt status if the modification does not shift a beneficial_interest in the trust to any beneficiary in a generation lower than the persons who held the beneficial interests prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification that does not cause an increase in the amount of a gst transfer or the creation of a new gst transfer will not cause the trust to lose its exempt status in this case the proposed severance of trust and modification of the termination provisions under order will not result in a shift of any beneficial_interest in trust to any beneficiary who occupies a generation lower than the persons holding the beneficial interests prior to the proposed severance and modification further the proposed severance of trust and modification of the termination provisions under order will not extend the time for vesting of any beneficial_interest in trust beyond the period provided for in trust agreement further the proposed severance of trust and modification of the termination provisions under order will not constitute an addition to trust within the meaning of b a of the tax_reform_act_of_1986 accordingly based on the facts submitted and the representations made the proposed severance of trust and modification of the termination provisions under order will not subject the separate trusts to gst tax by reason of b a of the tax_reform_act_of_1986 and sec_26_2601-1 except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent acting senior technician reviewer office of associate chief_counsel by lorraine e gardner passthroughs and special industries sincerely yours enclosure copy for sec_6110 purposes


t c summary opinion united_states tax_court ralph d and brenda konchar petitioners v commissioner of internal revenue respondent docket no 5388-01s filed date ralph d and brenda konchar pro sese jason w anderson and thomas yang for respondent dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the years at issue the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined deficiencies in petitioners' federal income taxes of dollar_figure for dollar_figure for and dollar_figure for the issue for decision is whether brenda konchar petitioner conducted her mary kay cosmetics distribution activity with the intent to earn a profit and if so whether she has substantiated that she incurred ordinary and necessary business_expenses some of the facts have been stipulated and are so found the stipulation of facts and the exhibits received in evidence are incorporated herein by reference at the time the petition was filed petitioners resided in hobart indiana background during the years at issue petitioners had four minor children all of whom lived with them at home mr konchar worked full time in construction in and petitioner worked about hours a week at a montgomery ward department store as a furniture salesperson petitioner changed her place of work to the men's fragrance department of a may department store for about a month full time during the christmas season of in may of petitioner joined mary kay cosmetics as an independent beauty consultant before petitioner's sister was a mary kay consultant when petitioner became a consultant in she took over of her sister's customers consisting of family members and friends during the subject years three of petitioner's customers lived in pennsylvania two lived in florida and seven lived in texas in addition all of petitioner's extended family live in those three states including her parents who live in san antonio texas petitioner owned a dodge caravan that she used in her mary kay activity for the year she maintained a mileage log for her use of the caravan the log consisted of a notebook containing dates odometer readings and daily mileage driven during petitioner accompanied by her children and sometimes her husband made several trips to pennsylvania dallas and san antonio texas and florida she recorded the trips in her log and deducted the mileage on the schedule c profit or loss from business attached to her federal_income_tax return petitioner did not produce any log for or nor did she provide substantiation for schedule c expenses in those years petitioner did not maintain a separate checking account for her mary kay activity for any year petitioner reported returns and allowances plus cost_of_goods_sold cogs in excess of gross_receipts on schedule c for and for her mary kay activity for petitioner reported gross_income gross_receipts exceeding returns and allowances plus cogs of dollar_figure net reported business_losses for the years were dollar_figure dollar_figure and dollar_figure included in petitioner's business_expense deductions are automobile and travel and meals and entertainment_expenses of over dollar_figure for and and over dollar_figure for the parties agree that petitioner did not assess the profitability of her mary kay activity and did not analyze any records to determine whether she could improve her mary kay profitability respondent determined that petitioner did not conduct her mary kay activity with the honest objective to make a profit and that if she did so conduct her activity she has failed to substantiate some of her business_expenses for and has failed to substantiate any of her business_expenses for and discussion because petitioner failed to meet the requirements of sec_7491 the burden_of_proof does not shift to respondent in this case 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 sec_7491 is effective with respect to court proceedings arising in connection with examinations by the commissioner commencing after date the date of its enactment by the internal_revenue_service restructuring and reform act of publaw_105_206 sec a 112_stat_726 as otherwise provided in sec_183 an activity_not_engaged_in_for_profit means any activity other than one for which deductions are allowable under sec_162 or under paragraph or of sec_212 sec_183 deductions are allowed under sec_162 for the ordinary and necessary expenses of carrying on an activity that constitutes the taxpayer's trade_or_business deductions are allowed under sec_212 for expenses paid_or_incurred in connection with an activity engaged in for the production_or_collection_of_income or for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income with respect to either section however the taxpayer must demonstrate a profit objective for the activity in order to deduct associated expenses see 66_tc_312 sec_1_183-2 income_tax regs the profit standards applicable for sec_212 are the same as those used for sec_162 see 934_f2d_573 5th cir affg tcmemo_1989_687 893_f2d_656 4th cir affg t c sec_183 permits a deduction for expenses that are otherwise deductible without regard to whether the activity is engaged in for profit such as personal_property_taxes sec_183 permits a deduction for expenses that would be deductible only if the activity were engaged in for profit but only to the extent that the gross_income derived from the activity exceeds the deductions allowed by sec_183 72_tc_28 34_tc_1146 whether the required profit objective exists is to be determined on the basis of all the facts and circumstances of each case see 315_f2d_731 9th cir affg tcmemo_1961_256 72_tc_411 affd without published opinion 647_f2d_170 9th cir sec_1_183-2 income_tax regs while a reasonable expectation of profit is not required the taxpayer's objective of making a profit must be bona_fide see 84_tc_227 affd without published opinion 782_f2d_1027 3d cir in making this factual determination the court gives greater weight to objective factors than to a taxpayer's mere statement of her intent see 781_f2d_724 9th cir affg lahr v commissioner tcmemo_1984_472 78_tc_642 affd without published opinion 702_f2d_1205 d c cir sec_1_183-2 income_tax regs sec_1_183-2 income_tax regs sets forth nine nonexclusive factors that should be considered in determining whether a taxpayer is engaged in a venture with a profit objective they include the manner in which the taxpayer carried on the activity the expertise of the taxpayer or her 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 that are earned the financial status of the taxpayer and whether elements of personal pleasure or recreation are involved no single factor is controlling and we do not reach our decision by merely counting the factors that support each party's position see 70_tc_715 affd 615_f2d_578 2d cir sec_1_183-2 income_tax regs rather the relevant facts and circumstances of the case are determinative see golanty v commissioner supra pincite after considering all the factors we agree with respondent that petitioner did not have an actual and honest objective of making a profit from her mary kay activity petitioner did not carry on the activity in a businesslike manner see sec_1_183-2 income_tax regs she maintained no separate checking account for her business and no business records except for the automobile mileage log for according to her schedule c petitioner's returns and allowances and cogs exceeded her gross_receipts for two of the tax years at issue an indication that the activity was not conducted with a profit objective see theisen v commissioner tcmemo_1997_539 when questioned at trial about this fact she could not explain it petitioner did not seem to understand that it suggests here that she was selling her products at or near cost petitioner's mary kay activity had a substantial component of personal pleasure see sec_1_183-2 income_tax regs petitioner's customers appear to have been mostly family and friends she traveled with her children and sometimes her husband as far as pennsylvania florida and texas to conduct her mary kay activity as a result she and her family were able to see her parents her sister and other relatives and friends the expertise of the taxpayer or her advisers is a factor to be considered see sec_1_183-2 income_tax regs there is no evidence in the record of petitioner's prior experience operating her own business petitioner has provided no evidence that before she commenced her mary kay activity in she sought to consult someone who could have provided an objective opinion on the advantages and disadvantages of conducting a mary kay distributorship there could have been no expectation that the assets petitioner used in the mary kay activity would appreciate in value see sec_1_183-2 income_tax regs although petitioner testified that she hoped to develop a customer base she did not explain how she would realize a profit from such a customer base aside from selling mary kay products another important factor is that there is no indication that petitioner had any chance of ever recovering the losses she suffered see 45_tc_261 affd 379_f2d_252 2d cir sec_1_183-2 income_tax regs petitioner's mary kay activity has shown large net losses in each of the years at issue moreover petitioner agreed with respondent that she did not assess the profitability of mary kay or analyze any mary kay records to determine whether she could improve her profitability this suggests that making a profit was not the primary objective of the mary kay activity petitioners have substantial income from sources other than petitioner's mary kay activity the mary kay expense deductions sheltered that income to a large degree only the significant salary of mr konchar enabled petitioner to incur the losses generated by her mary kay activity the court has considered the remaining factors and finds them either neutral or unhelpful to petitioner the court finds that petitioner did not engage in her mary kay activity with the actual and honest objective of making a profit petitioner's schedules c for her mary kay activity indicate that she is not entitled to claim any deductions otherwise allowable under sec_183 because petitioner reported no gross_income from her mary kay activity for and she is not entitled to any deductions under sec_183 for those years for petitioner reported gross_income of dollar_figure and her deductions for that year are limited to that amount id respondent however determined that petitioner did not substantiate any of her expenses for the year and petitioner produced no such evidence at trial petitioner is therefore not entitled to any deductions for her mary kay activity for reviewed and adopted as the report of the small_tax_case division decision will be entered for respondent


id office uilc cca-820855-08 -------------- number release date from ------------------- sent wed am to ---------------- cc --------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- subject re ---------- payment option request it is legally permissible to have the two pass-through partners pay a tax on the net adjustments passing though them at the highest marginal tax rather than flowing the adjustments to the hundreds of indirect partners i understand that the pass-through partners will reflect the payments as distributions on schedules k-1 to the partners on whose behalf the payments are made so that economically both the partners and the service will be put in the same situation as if the service_center flowed through all of the adjustments and the partners had paid the assessments individually ultimately the decision to agree to this procedure is up to exam -- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------


id office uilc cca-911154-08 ----------------------------- number release date from ------------------ sent thu pm to -------------------- cc subject re stimulus payments for exempt individuals ------ we handle the fica seca exemptions i thought the hook for getting the stimulus payment was filing a form_1040 it is not clear to me why the seca exemption would impact the receipt of a stimulus check if they otherwise filed a i think the remedy for no stimulus check is to seek a refund have they sought a refund if there are more facts here and you would like to discuss please give me a call thanks --------------------- -------------------------------- --------------------------------------- ------------------------------------ -------------------


tcmemo_2010_144 united_states tax_court willard michael christine and patricia ethel borgia petitioners commissioner of internal revenue respondent v docket no filed date r determined a deficiency in income_tax for ps’ taxable_year on account of disallowed business_expense deductions held although ps established that h’s author activities were an existing trade_or_business engaged in for profit they failed to substantiate most of their claimed deductions and those expenses are therefore nondeductible held ps are not liable for a penalty under sec_6673 i r c willard michael christine pro_se amy long and miles friedman for respondent memorandum findings_of_fact and opinion wherry judge this case is before the court on a timely petition for redetermination of a dollar_figure income_tax deficiency that respondent determined for petitioners’ tax_year the issues for decision are whether petitioners are entitled to deduct unreimbursed employee business_expenses of dollar_figure for the tax_year whether petitioners are entitled to deduct home_office expenses of dollar_figure for the tax_year and whether the court should impose a penalty on petitioners under sec_6673 findings_of_fact some of the facts have been stipulated by the parties the stipulations with accompanying exhibits are incorporated herein by this reference at the time the petition was filed petitioners resided in california during willard christine was employed by the los angeles times l a times as a horse racing reporter in the l a times reimbursed mr christine for approximately dollar_figure of employee_expenses 1unless otherwise indicated all section references are to the internal_revenue_code code of as in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure 2this determination is based on records of the l a times kept in the ordinary course of business for the tax_year continued petitioners filed a joint form_1040 u s individual_income_tax_return for the tax_year on schedule a itemized_deductions petitioners claimed dollar_figure for unreimbursed employee business_expenses and dollar_figure for home_office expenses less dollar_figure percent of adjusted_gross_income during examination of their joint federal_income_tax return petitioners mailed respondent more than pages of copied receipts calendar pages and account statements the date notice_of_deficiency disallowed petitioners’ dollar_figure of claimed miscellaneous deductions a trial was held on date in los angeles california on date respondent filed a motion to impose a penalty under sec_6673 on date at the court’s direction petitioners filed a response to respondent’s motion i burden_of_proof opinion as a general_rule the commissioner’s determination_of_a_deficiency is presumed correct and the taxpayer bears the burden of proving that the determination is improper see rule a 290_us_111 however pursuant continued including an expense report for mr christine consisting of approximately pages of itemized and reimbursed expenses for the and tax years and the tribune company american express travel entertainment cardholder agreement form to sec_7491 the burden_of_proof on factual issues that affect the taxpayer’s tax_liability may be shifted to the commissioner where the taxpayer introduces credible_evidence with respect to such issue the burden will shift only if the taxpayer has inter alia complied with substantiation requirements pursuant to the code and cooperated with reasonable requests by the secretary for witnesses information documents meetings and interviews sec_7491 petitioners did not argue that the burden should shift and they failed to comply with the substantiation and cooperation requirements accordingly the burden_of_proof remains on petitioners ii unreimbursed employee_expenses a general rules deductions are a matter of legislative grace and the taxpayer bears the burden of proving that he is entitled to any claimed deductions 503_us_79 taxpayers must maintain records relating to their income and expenses and must prove their entitlement to all claimed deductions credits and expenses in controversy see sec_6001 rule a indopco inc v commissioner supra pincite welch v helvering supra pincite pursuant to sec_162 a taxpayer is entitled to deduct all of the ordinary and necessary unreimbursed business_expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business 79_tc_1 however an employee cannot deduct such expenses to the extent that the employee is entitled to reimbursement from his or her employer for expenditures related to his or her status as an employee 788_f2d_1406 9th cir affg tcmemo_1984_533 lucas v commissioner supra pincite along with other miscellaneous_itemized_deductions unreimbursed employee_expenses are subject_to the two percent of adjusted_gross_income limitation under sec_67 the taxpayer bears the burden of proving that claimed expenses were ordinary and necessary as required by sec_162 in certain circumstances the taxpayer must meet specific substantiation requirements in addition to sec_162 see sec_274 to be ordinary the transaction which gives rise to the expense must be of a common or frequent occurrence in the type of business involved 308_us_488 to be necessary an expense must be appropriate and helpful to the taxpayer’s business welch v helvering supra pincite additionally the expenditure must be directly connected with or pertaining to the taxpayer’s trade_or_business sec_1 a income_tax regs a claimed expense other than those subjected to heightened scrutiny under sec_274 may be deductible even where the taxpayer is unable to fully substantiate it there must however be sufficient evidence in the record to provide a basis upon which an estimate may be made and to permit us to conclude that a deductible expense rather than a nondeductible personal_expense was incurred in at least the amount allowed 245_f2d_559 5th cir 39_f2d_540 2d cir 85_tc_731 but see 50_tc_823 affd per curiam 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date in these instances the court is permitted to make as close an approximation of the allowable expense as it can bearing heavily against the taxpayer whose inexactitude is of his or her own making cohan v commissioner supra pincite sec_274 applies to any traveling expense including meals_and_lodging away from home entertainment amusement and recreational expenses or the use of listed_property as defined in sec_280f including personal computers to deduct such expenses the taxpayer must substantiate by adequate_records or sufficient evidence to corroborate the taxpayer’s own testimony the amount of the expenditure or use the time and place of the travel entertainment amusement recreation or use its business_purpose and in the case of entertainment the business relationship to the taxpayer of each expenditure or use sec_274 to satisfy the adequate_records requirement of sec_274 a taxpayer must maintain records and documentary_evidence that in combination are sufficient to establish each element of an expenditure or use sec_1_274-5t and temporary income_tax regs fed reg date although a contemporaneous log is not required corroborative evidence to support a taxpayer’s reconstruction of the elements of the expenditure or use must have a high degree of probative value to elevate such statement to the level of credibility of a contemporaneous record sec_1_274-5t temporary income_tax regs supra petitioners presented to respondent hundreds of pages of receipts bills and account statements to substantiate unreimbursed employee_expenses for much of the information presented is illegible and unorganized however the claimed expenses can be separated into two groups those relating to mr christine’s employment as an l a times reporter and those relating to author activities mr christine undertook in the materials submitted to substantiate the claimed unreimbursed employee_expenses relating to mr christine’s employment at the l a times appear to fall into the following categories travel_expenses entertainment_expenses mileage expenses and other miscellaenous expenses b l a times unreimbursed employee expense sec_1 travel_expenses strict substantiation requirements of sec_274 apply to travel_expenses petitioners presented various documentation relating to air travel accommodations car rentals and meals and transportation_expenses for l a times business-related travel in however petitioners were also reimbursed by the l a times over dollar_figure for employee_expenses for the tax_year most of which were travel related upon careful examination of the record it is unclear to the court which expenses petitioners are claiming as deductions and which expenses they are acknowledging were reimbursed by the l a times for example petitioners included in the materials they submitted to substantiate unreimbursed employee_expenses for a receipt from the algonquin hotel dated date for total amount billed of dollar_figure this receipt relates to accommodation and telephone charges for the period october to date petitioners wrote on the receipt biz breeders cup however the l a times expense report for mr christine for indicates that dollar_figure was paid to mr christine in relation to lodging for the breeders cup that ended on date additionally in the entry for breeders cup the l a times expense report for mr christine indicates that a further dollar_figure was reimbursed to petitioners in relation to airfare mileage meals car rental telephone other entertainment gifts parking tolls taxi bus limo and tips yet the materials petitioners submitted include receipts related to breeders cup travel for tolls meals parking car rental entertainment mileage and taxicabs petitioners have not shown that any of the travel_expenses they submitted in relation to breeders cup travel were not included in the expenses previously reimbursed by the l a times the l a times reimbursed mr christine for similar travel_expenses relating to other races in including the belmont stakes del mar hollywood park the florida derby and the preakness yet petitioners included in the materials they submitted to substantiate unreimbursed employee_expenses for receipts and statements relating to the same categories of expenses for these races as were reimbursed by the l a times mr christine testified during trial that he understands he cannot claim a deduction for expenses that were previously reimbursed by his employer but from the record the court cannot discern which expenses petitioners are claiming as unreimbursed on the basis of the materials admitted into evidence petitioners are attempting to claim travel_expenses for that the l a times has previously reimbursed mr christine testified at trial that he did not recall the dollar amount of the expenses that the l a times reimbursed him for in and that he did not subtract this reimbursed amount from the total amount of his employee business_expenses nevertheless he was surprisingly able to determine the difference between the amount that he had claimed on his return and the amount that the l a times had reimbursed him employee_expenses are not deductible if an employee is entitled to reimbursement from his or her employer for expenditures related to his or her status as an employee 79_tc_1 pincite petitioners have failed to carry their burden of proving that any of the separately claimed travel_expenses were not reimbursable by the l a times or did not constitute personal expenses the court cannot determine from the material presented which travel_expenses were reimbursed because petitioners have not shown that the claimed expenses were indeed unreimbursed and unreimbursable we must deny all the travel_expenses entertainment_expenses sec_274 requires the taxpayer to substantiate the amount time place and business_purpose of each entertainment expense by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement 164_f3d_1140 8th cir affg in part and remanding tcmemo_1997_502 petitioners submitted pages of receipts bank statements and credit card bills but did not provide a business_purpose for any of the claimed expenses on some of the submitted materials petitioners wrote the name of a particular race and in some instances a person’s name as well presumably the expense relates to the named race but the court cannot determine from the information provided why petitioners included various names next to each expense or in what way such person relates to the claimed expense petitioners did not testify as to a business_purpose at trial nor have they provided any additional information for any of the claimed entertainment_expenses petitioners were reimbursed by the l a times for numerous meals and entertainment_expenses for petitioners have provided no evidence that the claimed entertainment_expenses were not previously reimbursed or reimbursable petitioners did not carry their burden of properly substantiating any of the claimed unreimbursed entertainment_expenses relating to mr christine’s l a times employment accordingly petitioners are not entitled to a deduction for any entertainment_expenses mileage expenses the strict substantiation requirements of sec_274 also apply to away-from-home business mileage expenses 80_tc_1165 the amount of the business travel may be substantiated by the use of a contemporaneous log or by any reasonable means establishing the number of miles traveled the date the place and the business_purpose of such miles id additionally the amount for away-from-home business mileage can be determined on the basis of a mileage_allowance the commissioner has established mileage allowances deemed to substantiate the amount of the expense incurred operating a vehicle the standard mileage rates for are set forth in revproc_2004_64 2004_2_cb_998 and announcement 2005_2_cb_714 mr christine does not own an automobile and the mileage expenses claimed in are related to rental car usage mr christine testified that he used the standard mileage rate for miles that he drove a rental car which he considered business miles that were not reimbursed the standard mileage rate for employees who claim deductions for the cost of operating automobiles for business purposes applies only to personally owned or leased automobiles kravette v commissioner tcmemo_1987_124 kozlowski v commissioner tcmemo_1977_81 revproc_2004_64 sec_4 c b pincite consequently petitioners may not use the standard mileage rate for computing expenses of travel in rental cars because petitioners did not provide alternative evidence to substantiate the mileage expenses eg a contemporaneous log of business travel petitioners are not entitled to a deduction for vehicle expenses laptop expenses petitioners submitted approximately seven different expenses labeled laptop it appears from the record that most of these expenses are for the purchase of computer_software and or computer accessories expenses relating to the personal_use of computers are subject_to the strict substantiation requirements of sec_274 hence to deduct such expenses the taxpayer must substantiate the amount of the expenditure its business_purpose and the business relationship to the taxpayer of each expenditure or use sec_274 petitioners have not presented to the court any information relating to claimed laptop expenses other than receipts accordingly petitioners have not met the substantiation requirements with regards to the laptop expenses and they are disallowed under sec_274 miscellaneous expenses petitioners claimed miscellaneous l a times unreimbursed employee_expenses relating to dry cleaning trade publications and mailing expenses as previously stated sec_162 authorizes a deduction for all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business a trade_or_business expense is ordinary for purposes of sec_162 if it is normal or customary within a particular trade business or industry and is necessary if it is appropriate and helpful for the development of the business 320_us_467 deputy v du pont u s pincite in contrast personal living or family_expenses are generally nondeductible see sec_262 petitioners have provided no evidence that dry cleaning is a normal or customary expense in the business of sports writing nor have they shown that dry cleaning mr christine’s clothes which were suitable for ordinary everyday wear was appropriate or helpful for the pursuit of his business on the basis of the record mr christine’s dry cleaning is properly classified as a personal_expense and hence is not a deductible business_expense under sec_162 see coppin v commissioner tcmemo_2009_ boltinghouse v commissioner tcmemo_2007_324 johnson v commissioner tcmemo_1982_2 tilney v commissioner a memorandum opinion of this court dated date petitioners submitted expenses relating to various trade publications including an expense for a subscription to the l a times taxpayers are entitled to deduct all ordinary and necessary unreimbursed and unreimbursable business_expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business see sec_162 lucas v commissioner t c pincite mr christine testified that the l a times would provide him with a free paper if he drove in to its offices respondent claims that because mr christine was eligible for a free paper via his status as an employee of the l a times he is not able to claim his subscription as an unreimbursed employee expense the l a times offices are approximately miles from petitioners’ home an employee cannot deduct expenses to the extent that the employee is entitled to reimbursement from his employer for expenditures related to his employment lucas v commissioner supra pincite however it is not reasonable to expect mr christine to drive miles each way to obtain a free newspaper accordingly the subscription to the l a times is allowable as an unreimbursed employee expense under sec_162 on the basis of the record petitioners are entitled to unreimbursed employee_expenses for trade publications in the following amounts for dollar_figure for the l a times subscription dollar_figure for the chrb annual report dollar_figure for the daily racing form dollar_figure for the new york times dollar_figure for the daily racing form’s simulcast weekly dollar_figure for derby books and dollar_figure for the daily racing form for a total of dollar_figure of allowable deductions petitioners also submitted various mailing expenses labeled biz for the tax_year mr christine testified that the mailing expenses were business related to the l a times respondent claims that because the l a times would have paid for mr christine’s mailing expenses had he driven to their offices he is not able to claim his mailing expenses as an unreimbursed employee expense as previously noted the l a times offices are approximately miles from petitioners’ home accordingly it is not reasonable to expect mr christine to drive miles each way for the purposes of mailing on the basis of the record the court finds that petitioners are entitled to a total of dollar_figure for unreimbursed mailing expenses in petitioners also submitted two expenses relating to unreimbursed membership fees for one for the national turf writers association and another for the los angeles press club membership in these organizations can be considered an ordinary business_expense related to the profession of sports writing in los angeles accordingly petitioners are entitled to a deduction for unreimbursed membership fees in the following amounts for dollar_figure for membership in the national turf writers association and dollar_figure for membership in the los angeles press club c author expenses whether mr christine’s author expenses are deductible depends upon whether they are hobby expenses startup expenses or ordinary and necessary expenses of mr christine’s already active trade_or_business sec_183 hobby_losses sec_183 which applies to activities engaged in by individuals generally limits the deductions for an activity_not_engaged_in_for_profit to the amount of gross_income received from the activity sec_183 and b sec_183 defines an activity_not_engaged_in_for_profit as 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 pursuant to the jurisprudence of the court_of_appeals for the ninth circuit the court to which an appeal of this case would lie absent a stipulation to the contrary an activity is engaged in for profit if the taxpayer’s predominant primary or principal objective in engaging in the activity was for profit 4_f3d_709 9th cir affg tcmemo_1991_212 in this context the term profit denotes economic profit independent of tax savings id 91_tc_686 affd 893_f2d_656 4th cir whether the requisite profit objective exists must be resolved on the basis of all surrounding facts and circumstances 72_tc_411 affd without published opinion 647_f2d_170 9th cir sec_1_183-2 income_tax regs a taxpayer’s profit objective need not be reasonable but it must be bona_fide golanty v commissioner supra pincite sec_1_183-2 income_tax regs sets forth a nonexclusive list of nine factors to consider in ascertaining a taxpayer’s objective in engaging in an activity these factors are the manner in which the taxpayer carries on the activity the expertise of the taxpayer or his advisers the time and effort spent by the taxpayer in carrying on the activity the expectation that 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 losses with respect to the activity the amount of occasional profits if any the financial status of the taxpayer and elements of personal pleasure or recreation none of these factors is controlling in and of itself and a decision as to a taxpayer’s intent is not governed by a numerical preponderance of the factors golanty v commissioner supra pincite 72_tc_28 sec_1_183-2 income_tax regs taking into account the above factors and considering the record as a whole the court concludes that during mr christine had a bona_fide intention to derive a profit from his author activities in addition to mr christine’s testimony on this issue which the court found to be credible and forthright the evidence in the record shows an intent and effort by mr christine to engage in and continue in the writing field with the purpose of producing supplemental income and a livelihood we first look to the manner in which mr christine carried on the activities mr christine managed some aspects of this activities in a businesslike fashion while mr christine did not keep a separate checking account or a well-organized set of books he did attempt to keep an accounting albeit difficult to decipher of the expenses he incurred to research his books including bills receipts and schedules for his expenses in sum although mr christine could and should have been more organized in keeping track of his expenditures his efforts to make a financial success of his writing activity show a profit objective we conclude this factor is neutral with regard to the second factor mr christine is a writer by trade and has been actively engaged in the writing business for approximately years he wrote a book in that earned him approximately dollar_figure in royalties as well as some sports anthology books in later years mr christine also engaged an agent of sorts to assist him in publishing his second book we conclude there is no question that mr christine has the requisite expertise to satisfy this factor the third factor focuses on the time and effort expended by the taxpayer in carrying on the activity there is little doubt that during the years at issue mr christine spent numerous hours per week on his writing activity respondent emphasizes that mr christine worked full time for the l a times during and for the previou sec_22 years suggesting that in some manner mr christine’s book-writing could not rise to the level of a trade_or_business because he also had a full-time job we disagree with respondent mr christine’s employment at the l a times does not preclude the possibility that his writing activity constituted a separate trade_or_business we have recognized that a taxpayer may engage in more than one trade_or_business at any one time see 74_tc_525 affd without published opinion 681_f2d_805 3d cir 16_tc_332 the fourth factor takes into consideration the expectation that assets used in the activity will appreciate in value because there are few if any fixed assets involved in writing this factor is irrelevant the fifth factor the success of the taxpayer in carrying on other similar or dissimilar activities is easily met given mr christine’s engagement as a writer for nearly years writing has been his livelihood and has supported him and his family for a lifetime the next two factors the taxpayer’s history of income or losses with respect to the activity and the amount of occasional profits are examined in tandem mr christine was approached by bay meadows racetrack in to write a book on the history of the racetrack before it went out of business there was no written contract but according to mr christine it was a handshake deal mr christine then went on to research and write for approximately the next years he eventually sold the book to the bay meadows racetrack for approximately dollar_figure receiving his first payment of dollar_figure in date additionally mr christine has made approximately dollar_figure in royalty income from his book-writing activity in prior years given mr christine’s history of income and loss from book- writing the court finds that these factors are met and strongly support petitioners’ position respondent asserts that with regard to the next factor the financial status of the taxpayer petitioners’ profit objective is suspect because mr christine’s writing activity resulted in a loss that generated tax benefits in petitioners did not realize any income from the book-writing activity until and were able to use book-writing losses in to shelter their other income however we do not believe that petitioners’ income was so high as to make tax savings their primary objective rather we find it clear from mr christine’s testimony and from the objective evidence that he was a writer and a book author who desired financial success and intended to make a profit from his book-writing activity the last factor looks to elements of personal pleasure or recreation writing has been mr christine’s occupation for nearly years it is apparent to the court that mr christine does not merely engage in writing activity for pleasure but rather it is his livelihood the fact that mr christine may enjoy writing does not change the result that he is in the trade_or_business of writing see 59_tc_312 the court is convinced that mr christine engaged in his book-writing activity during with a profit objective startup expenditures pursuant to sec_195 startup expenditures are not generally deductible however at the election of the taxpayer startup expenditures may be treated as deferred expenses and amortized over at least a 60-month period beginning in the month in which the active trade_or_business begins see sec_195 c sec_195 provides in part 3petitioners reported approximately dollar_figure in income for startup expenditures --the term startup expenditure means any amount-- a paid_or_incurred in connection with-- i investigating the creation or acquisition of an active trade_or_business or ii creating an active trade_or_business or iii any activity engaged in for profit and for the production_of_income before the day on which the active trade_or_business begins in anticipation of such activity becoming an active trade_or_business and b which if paid_or_incurred in connection with the operation of an existing active trade_or_business in the same field as the trade_or_business referred to in subparagraph a would be allowable as a deduction for the taxable_year in which paid_or_incurred the taxpayer must elect to amortize his or her startup expenditures sec_195 the critical distinction in this area is between expenses_incurred in connection with an existing trade_or_business which are deductible under sec_162 and expenses_incurred in establishing a new business which are not currently deductible respondent contends that book writing was a new trade_or_business for mr christine and any expenses associated with such activity should be treated as startup expenses and amortized in accordance with sec_195 as previously determined mr christine was involved in the active trade_or_business of writing with a profit objective given mr christine’s earlier book writing activity dating back to the court does not make a distinction between his book-writing activity and his other for-profit journalism activity rather we consider them as part of the same active trade_or_business and consider the expenses deductible subject_to the constraints of sec_162 and sec_274 see 505_f2d_1185 10th cir petitioners claimed various expenses relating to book- writing activity for including travel entertainment research and storage expenses the book-writing travel and entertainment_expenses petitioners claimed consist mostly of hotel and meal charges these expenses are subject_to the strict substantiation requirements of sec_274 in some instances for meal expenses petitioners have written a name on the receipt however petitioners did not provide the court with adequate_records or testimony explaining the amounts of the expenditures the time and place of the travel or entertainment the business_purpose of such travel or entertainment or the business relationship to petitioners of each expenditure accordingly petitioners have failed to carry their burden_of_proof and are not entitled to a deduction for any travel or entertainment_expenses relating to book-writing activity for research expenses attributable to purchasing books or other intangible_property are ordinary and necessary in the context of book writing accordingly from the record petitioners are allowed a deduction in their taxable_year of dollar_figure for research expenses related to book writing mr christine testified as to offsite storage expenses for of approximately dollar_figure per month however the storage expenses were not documented anywhere in the written materials petitioners submitted accordingly the court will not allow a deduction for storage expenses iii home_office expenses sec_280a generally prohibits the deduction of the costs of a taxpayer’s residence sec_280a however permits a deduction for the allocable portion of a residence that is regularly and exclusively used as a taxpayer’s principal_place_of_business or as a place of business which is used by customers in the normal course of the taxpayer’s trade_or_business in deciding whether a residence is the principal_place_of_business it must be compared to all of the other places where business is transacted see 506_us_168 a deduction is allowed only when the residence is the most important or significant place for the business the two 4this amount was calculated on the basis of research-related receipts petitioners submitted primary considerations are the relative importance of the activities performed at each business location and the time spent at each place see id pincite the relative importance of business activities engaged in at the office in the home may be substantially outweighed by business activities engaged in at another location see 113_tc_106 in the case of a taxpayer who is an employee the home_office must be for the convenience_of_the_employer it cannot just be a place in which the employee chooses to do some of his work sec_280a flush language 82_tc_318 it must be used exclusively for the employer’s work and not for personal_use sec_280a 919_f2d_1273 7th cir affg tcmemo_1989_356 if the conditions in sec_280a are satisfied then even if the home_office is not a separate structure there is a reasonable probability that the taxpayer’s house is actually larger than it would be if he did not imperatively require a home_office cadwallader v commissioner supra pincite further the added expense of the office is incurred solely to produce income it yields no or at least very little personal utility id a taxpayer may have only one principal_place_of_business for each business in which he is engaged see 73_tc_766 to determine the principal_place_of_business within the meaning of sec_280a the court must ascertain the focal point of a taxpayer’s business activities 76_tc_696 74_tc_105 when mr christine first began his employment with the l a times they provided him with a desk and chair but a few years later he came into the office to find his chair was missing mr christine explained that there are approximately sports journalists working for the l a times and if as many as half of us had ever shown up on the same day we would have been working from one another’s laps the fact that the employer provides inadequate office facilities is not dispositive of whether a home_office is for the convenience_of_the_employer see dudley v commissioner tcmemo_1987_607 affd without published opinion 860_f2d_1078 6th cir however it is unclear from the record whether mr christine was able to conduct his book-writing activity at the l a times therefore the court must look to whether mr christine’s home_office is his principal_place_of_business and vital to his profession as a writer mr christine testified that out of the six rooms in his home he used one of the bedrooms and the garage exclusively for his writing with the latter being used for storage petitioners calculated their home_office expenses by computing one-third of the total rent insurance and utilities and adding to that figure all of the television expenses because they subscribed to two horse-racing channels mr christine testified that he wrote stories for the l a times from his home press boxes hotel rooms or on location but he did not testify as to the specific amount of time he spent writing in each location as compared to writing in his home additionally during mr christine was engaged in the business of writing nonfiction and historical fiction anthologies as well as sports writing for the l a times however the record does not show how much time mr christine spent on each respective activity we question the accuracy of petitioners’ calculations in computing their home_office deduction they included in their estimate one-third of all their home expenses but provided no evidence to the court that this is an accurate reflection of the costs of maintaining their home_office second petitioners did not explain to the court why a home_office was vital to mr christine’s profession as a writer or that it was the focal point of his business from the record it is apparent mr christine spent a significant amount of his time traveling and writing stories from locations other than his home the court cannot conclude that petitioners’ residence was the most important or significant place for mr christine’s business given that the record contains little to no information regarding how much time mr christine spent writing in his home versus other locations although it might have been inadequate the l a times did provide mr christine with an office additionally on the basis of the record the court cannot conduct an accurate comparison of the time mr christine spent writing at his home relative to the time he spent working elsewhere or determine that a home_office was vital to his profession accordingly the court finds that petitioners failed to meet the requirements of sec_280a and are not entitled to a deduction for the expenses of maintaining a home_office iv sec_6673 penalty sec_6673 authorizes the tax_court to impose a penalty not in excess of dollar_figure on a taxpayer for proceedings instituted primarily for delay or in which the taxpayer’s position is frivolous or groundless a position maintained by the taxpayer is ‘frivolous’ where it is ‘contrary to established law and unsupported by a reasoned colorable argument for change in the law ’ 114_tc_136 quoting 791_f2d_68 7th cir courts generally impose sec_6673 penalties in cases in which the taxpayer’s lack of good_faith was evident see 752_f2d_1301 8th cir for example in a number of cases the court has imposed a sec_6673 penalty against taxpayers who have filed successive petitions raising the same arguments even though the arguments had been rejected in the prior suits and the taxpayers informed that the arguments were frivolous in other cases the court has assessed a sec_6673 penalty after finding that the taxpayer had knowledge that the claim was frivolous and had asserted it merely to delay payment of taxes whether actual knowledge6 or constructive knowledge that the claim was frivolous 5see 734_f2d_1320 8th cir two prior suits coulter v commissioner 82_tc_580 one prior suit 82_tc_235 one prior suit 74_tc_864 affd 647_f2d_813 8th cir two prior suits 6see eg 82_tc_766 taxpayer admitted he had studied cases statutes and regulations pertaining to federal income taxes and that he knew the theory on which he based his claim had been rejected as frivolous affd 793_f2d_139 6th cir 71_tc_633 commissioner sent copies of opinions which had rejected taxpayer's contentions as frivolous and taxpayer admitted to having read them vickers v commissioner tcmemo_1983_429 commissioner advised taxpayers in deficiency_notice that their claim had no legal basis stamper v commissioner tcmemo_1983_248 taxpayer had been advised in three previous years that his claim was frivolous and commissioner advised him in deficiency_notice that his position had been repeatedly rejected as frivolous and cited in the notice those cases to taxpayer 7see eg 82_tc_403 manley v commissioner tcmemo_1983_558 counsel had continued on date respondent moved the court to penalize petitioners under sec_6673 respondent contends that petitioners have maintained proceedings in this case primarily for delay and that their position is frivolous or groundless respondent cites petitioners’ unreasonable failure to pursue available administrative remedies as grounds for a sec_6673 penalty respondent also points to petitioners’ refusal to respond to requests to provide information relating to reimbursement policies of mr christine’s employer during a conference with the internal_revenue_service on date mr christine admitted that he was making the government jump through hoops petitioners should have been more organized with regard to substantiation for their claimed expenses but the court does not agree with respondent that petitioners’ conduct warrants a penalty under sec_6673 sec_6673 is reserved for extreme cases as mentioned above we find that petitioners took their position in good_faith and with reasonable_cause and hence their claims cannot be classified as frivolous or primarily for the cause of delay therefore we shall exercise great restraint and shall not at this time impose a penalty under sec_6673 petitioners are warned however that we continued previously represented another taxpayer raising same claim in which argument had been rejected as frivolous shall not be so inclined should they again advance before the court arguments such as those advanced in this case and not provide sufficient evidence to sustain them v conclusion the court has considered all of petitioners’ contentions arguments requests and statements to the extent not discussed herein we conclude that they are merit less moot or irrelevant to reflect the foregoing and concessions by both parties an appropriate order will be issued and decision will be entered under rule


id office uilc cca_2009031615030841 ------------ number release date from ------------------ sent monday date pm to ------------ cc --------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- subject re ty2007 fiscal_year partnership returns hi -------- sec_6011 of the internal_revenue_code provides that the irs must require partnerships with more than partners to file returns electronically this requirement applies to form_1065 partnership returns that must be sent to the irs regulations implement this electronic_filing requirement sec_301_6011-3 provides that if a partnership with more than partners is required to file a partnership return the information required by the applicable forms and schedules must be filed electronically unless a waiver from the electronic_filing requirement has been granted returns filed electronically must be made in accordance with applicable revenue procedures or publications current publication sec_1463 and sec_1464 do not list fiscal_year partnerships as an exclusion from the electronic_filing requirement and thus must be filed electronically if the partnership has more than partners announcement only excludes fiscal_year filers for tax_year and admonishes taxpayers to look at irs publications for the list of e-file exclusions announcement provides beginning with taxable years ending on or after date the service will require partnerships with more than partners to file their partnership returns electronically irs publication contains instructions for filing partnership returns electronically and excludes certain partnerships from the electronic_filing requirement for tax_year the irs has excluded partnerships with the following type of returns from the electronic_filing requirement fiscal_year filer sec_2 foreign address partnership sec_3 amended_return sec_4 delinquent returns note for a detailed list of the exclusions refer to publication publication was superseded by publication and so in my view it is clear that fiscal_year partnerships with over partners are required to e-file unless a waiver is granted a careful reading of announcement does not support the conclusion that in there is no e-file requirement for fiscal_year partnership filers with over partners contact me if i can be of further assistance


t c memo united_states tax_court robert d and anne t lewis petitioners v commissioner of internal revenue respondent docket no filed date woodford gregory rowland for petitioners patricia montero for respondent memorandum opinion dawson judge this case was heard by special_trial_judge d irvin couvillion pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_183 the court agrees with unless otherwise indicated section references are to the internal_revenue_code in effect for the years at issue all rule references are to the tax_court rules_of_practice and procedure and adopts the opinion of the special_trial_judge which is set forth below opinion of the special_trial_judge couvillion special_trial_judge this case is before the court on petitioners' motion to dismiss for lack of jurisdiction on the ground that no valid notice_of_deficiency was mailed to petitioners and respondent's cross motion to dismiss for lack of jurisdiction on the ground that the petition was not timely filed under sec_6213 a hearing was held on the motions at which time evidence was adduced in addition some of the facts were stipulated and those facts with the annexed exhibits are so found and are incorporated herein by reference in the notice_of_deficiency respondent determined the following deficiencies and additions to tax with respect to petitioners' tax years as indicated additions to tax_year deficiency sec_6651 sec_6653 a sec_6661 dollar_figure dollar_figure dollar_figure -- big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number -- additions to tax percent of interest due under sec_6653 and or sec_6653 will be determined at the time the petition was filed petitioners' legal residence was central point oregon however the motions before the court involve a home and an address pincite grand avenue san rafael california the grand avenue address background petitioners husband and wife filed their through federal_income_tax returns with the internal_revenue_service irs center at fresno california listing the grand avenue address on each of these returns petitioners have maintained a residence at this address since sometime in respondent began an audit of petitioners' through returns during the course of the audit which continued until the latter part of the revenue_agent assigned to the audit telephoned interviewed petitioners and examined their records at the grand avenue address as part of the audit the revenue_agent also received letters from and spoke with petitioners' attorneys to verify the purpose and amount of legal expenses claimed on petitioners' returns for legal services these attorneys had provided petitioners these attorneys however did not represent petitioners in connection with the audit of petitioners' returns in date the revenue_agent made proposed adjustments to petitioners' returns by letter dated date petitioners protested these proposed adjustments thereafter the appeals_division of the irs took over the audit and the case was assigned to an appeals officer the appeals officer who eventually caused a statutory_notice_of_deficiency to be issued contacted petitioners by mail and by telephone and held a conference with petitioner robert d lewis mr lewis at the grand avenue address mr lewis purported to represent petitioners at all times during the audit of their income_tax returns petitioners were not represented by an attorney or by any other third party at any time in connection with the audit accordingly petitioners did not provide either the revenue_agent or the appeals officer with a power_of_attorney authorizing a third party to represent them in the audit at no time during the audit did petitioners notify either the revenue_agent or the appeals officer of any change_of address on date respondent sent to petitioners by certified mail a notice_of_deficiency or deficiency_notice addressed to the grand avenue address shortly thereafter the deficiency_notice was returned undelivered by the post office with the envelope marked unclaimed the returned envelope indicates that the u s postal service attempted to deliver the deficiency_notice twice and returned it to respondent on date after the notice_of_deficiency was returned respondent the court notes that petitioners executed forms 872-a special consent to extend the time to assess tax for each of the taxable years at issue which consent was still in effect on date did not send a copy of the deficiency_notice to petitioners by ordinary mail did not attempt to telephone petitioners regarding the deficiency_notice and did not attempt to contact any of the attorneys who had previously been contacted by respondent's agent the parties agree that petitioners did not receive the deficiency_notice because they were in oregon and not at the grand avenue address in california at the time the deficiency_notice was mailed beginning in about years prior to issuance of the deficiency_notice petitioners began dividing their time between the grand avenue address and their residence in oregon due to the health of petitioner anne t lewis petitioners however never informed respondent that they would not be at the grand avenue address at or near the time the deficiency_notice was sent nor did petitioners take any measures to have anyone monitor their mail at the grand avenue address during their absences on or about date petitioners obtained a copy of the deficiency_notice pursuant to a freedom_of_information_act_request thereafter on date petitioners filed their petition with this court which date was days after the deficiency_notice was mailed if the deficiency_notice was mailed to petitioners' last_known_address the period for filing a petition with this court expired on date which i sec_90 days from the date of the deficiency_notice sec_6213 discussion it is well settled that in order to maintain an action in this court there must be a valid notice_of_deficiency and a timely filed petition 91_tc_1019 sec_6212 authorizes the secretary or_his_delegate upon determining that there is a deficiency in income_tax to send a notice_of_deficiency to the taxpayer by certified mail or registered mail sec_6212 provides that a notice_of_deficiency with respect to any income_tax shall be sufficient if it is mailed to the taxpayer at his last_known_address respondent is entitled to treat the address on the taxpayer's most recently filed return as the last_known_address absent clear and concise notification of a new address abeles v commissioner supra pincite see also 724_f2d_808 9th cir where respondent before mailing a notice_of_deficiency becomes aware of an address other than the one on the taxpayer's return respondent must exercise reasonable care and due diligence in ascertaining the taxpayer's correct address 93_tc_22 petitioners agree that the notice_of_deficiency was mailed to their last_known_address they contend however that respondent had a due process obligation to provide actual notice of the deficiency_notice and respondent did not exercise due diligence in ensuring actual notice to them petitioners cite 485_us_478 in support of their first contention in support of their second contention petitioners argue that respondent should have sent a copy of the deficiency_notice by ordinary mail or should have contacted either petitioners or their attorney by telephone petitioners aver they had a telephone answering machine at their grand avenue address where a message could have been left by respondent's agent that a notice_of_deficiency had been mailed and returned to respondent undelivered as a general_rule the commissioner has no duty to effectuate delivery of the notice after it is mailed monge v commissioner supra pincite the legislative_history of the last_known_address rule suggests that congress considered but rejected requiring actual receipt of the notice because such a requirement would impose an almost impossible burden on the irs to prove actual receipt and to keep track of the whereabouts of all taxpayers see h rept 70th cong 1st sess c b part s rept 70th cong 1st sess c b part instead congress adopted the last_known_address rule thus giving the irs a safe_harbor a notice sent to the last_known_address is valid whether or not the taxpayer actually receives it see eg united_states v zolla f 2d pincite nothing in the code required respondent to take additional steps to effectuate delivery of the instant notice_of_deficiency after it was returned undelivered by the post office 857_f2d_676 9th cir affg 88_tc_1042 15_f3d_970 10th cir affg tcmemo_1992_328 272_f2d_383 2d cir monge v commissioner supra mccart v commissioner tcmemo_1992_3 affd without published opinion 981_f3d_1247 3d cir as a consequence petitioners' arguments that respondent had an obligation to provide actual notice and that respondent did not exercise due diligence must fail with respect to petitioners' reliance on tulsa professional collection servs inc v pope supra the court finds that case to be distinguishable from this case the tulsa case involved a nonclaim provision of the oklahoma probate code under which a creditor's claim against a decedent's_estate would be completely extinguished unless the claim was presented to the executor or executrix within months after the publication of notice of the beginning of probate proceedings the creditor in that case having failed to meet that 2-month deadline successfully argued that notice by publication was insufficient to protect the creditor's property interest and that actual notice was required to satisfy the creditor's right of due process in the present case by contrast where respondent mailed the deficiency_notice to petitioners' last_known_address actual notice of the income_tax deficiencies was not required unlike the creditor in tulsa whose claim would have been totally extinguished under the oklahoma probate code petitioners have alternative routes for pursuing their claims because the tax_court is not the sole venue for litigation of a tax_liability the fact that taxpayers can pay a deficiency file an administrative claim_for_refund and if the claim is disallowed bring an action for a refund in federal district_court or the court of federal claims provides sufficient due process the court also notes with respect to petitioners' argument that their attorney should have been notified the record in this case is clear that at all times during the audit of their returns mr lewis and not an attorney purported to represent petitioners no powers of attorney were ever filed with respondent authorizing a third party to represent petitioners the only contact respondent had with petitioners' attorneys was to verify legal expenses claimed on petitioners' returns this communication did not rise to the level of client representation such that a power_of_attorney was required nor did petitioners ever execute a power_of_attorney moreover this court has held that even if a taxpayer directs that a copy of all communications be sent to the taxpayer's agent the notice_of_deficiency is valid where it was mailed directly to the taxpayer at the taxpayer's last_known_address even though a copy was not sent to the taxpayer's agent 76_tc_750 29_tc_113 madsen v commissioner tcmemo_1988_179 the petition in this case was filed with the court on date days after the date the deficiency_notice was mailed sec_6213 provides in pertinent part that a petition must be filed with the tax_court within days from the date a statutory_notice_of_deficiency is mailed to a taxpayer residing in the united_states this court has no jurisdiction if a petition is filed beyond the prescribed 90-day time period 83_tc_626 since the petition here was not filed within days from the date the notice_of_deficiency was mailed the court has no jurisdiction over the case accordingly respondent's motion to dismiss for lack of jurisdiction will be granted and petitioners' motion will be denied an appropriate order will be entered