t c no united_states tax_court john m and rita k monahan petitioners v commissioner of internal revenue respondent docket no filed date held this court may raise sua sponte the doctrine_of issue preclusion or collateral_estoppel held further interest payments that were credited to a partnership's bank account are taxable to ps because p controlled_partnership matters and benefited from and controlled the funds in that account held further a dollar_figure payment that was deposited in ps' bank account is taxable to ps because ps failed to prove that the payment represents reimbursement of legal fees paid_by p on behalf of a corporation held further sec_6662 i r c accuracy- related penalty imposed for substantial_understatement_of_income_tax f michael kovach jr for petitioners cathy a goodson for respondent opinion halpern judge by notice_of_deficiency dated date respondent determined a deficiency in petitioners' federal_income_tax for of dollar_figure and a penalty under sec_6662 of dollar_figure unless otherwise noted all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure in addition all references to petitioner are to john m monahan after concessions by respondent the issues for decision are whether certain interest payments that were credited to a partnership's bank account are taxable to petitioners whether a dollar_figure payment that was deposited in petitioners' bank account is taxable to petitioners and whether petitioners are liable for the penalty the parties have stipulated various facts which we so find the stipulation of facts with accompanying exhibits is incorporated herein by this reference we need find few facts in addition to those stipulated accordingly we shall not separately set forth our additional findings_of_fact and shall include those findings in the discussion that follows petitioners bear the burden_of_proof on all questions of fact rule a i background petitioners resided in seattle washington when the petition in this case was filed petitioner is a lawyer specializing in corporate and international trade law with emphasis in tax planning and complex corporate transactions petitioner received an ll m with emphasis in taxation from new york university school of law petitioners are calendar_year taxpayers ii interest payments credited to aldergrove's bank account a introduction aldergrove aldergrove investments co aldergrove was a partnership between grove management ltd gml see infra sec ii a and petitioner aldergrove's principal_place_of_business was on anguilla an island of the british west indies aldergrove did not file a u s partnership return of income for petitioners did not report any income from aldergrove for pursuant to the aldergrove partnership_agreement effective date partnership interests and capital contributions were as follows class a percent dollar_figure percent dollar_figure class b percent dollar_figure none gml petitioner class b partnership units were nonvoting and in partnership matters affecting both classes partners voted in proportion to their percentage ownership of class a partnership units gml gml was a wholly owned subsidiary of span corp ltd which in turn was wholly owned by lynwood s bell mr bell a canadian citizen residing in anguilla petitioner and gml entered into an agreement effective date that required petitioner to manage gml's investments and to provide investment advice gml transferred assets to aldergrove for management jaguar holdings ihatsu fudosan and hansa finance jaguar holdings ltd jaguar holdings was wholly owned and controlled by mr bell and on or about date its name was changed to ihatsu fudosan capital ltd ihatsu fudosan hansa finance and trust b v hansa finance was owned and operated by mr bell chestnut grove and group m during petitioner was a 45-percent shareholder of both chestnut grove investments inc chestnut grove and group m construction inc group m petitioner's brothers timothy e monahan and peter j monahan owned percent and percent respectively of the outstanding_stock of both chestnut grove and group m those corporations were organized for the purpose of acquiring and developing a 16-acre parcel located in yakima washington the yakima property that parcel was purchased in date for dollar_figure b transactions in issue a check that was drawn on an account held by chestnut grove and made payable to ihatsu fudosan or aldergrove investment in the amount of dollar_figure for interest was endorsed dep only to account number at security pacific bank sp bank which account was held in the name of aldergrove the aldergrove account on date sp bank credited the aldergrove account in the amount of dollar_figure a check that was drawn on an account held by group m and made payable to ihatsu fudosan or aldergrove investment in the amount of dollar_figure for interest was endorsed dep only to the aldergrove account on date sp bank credited the aldergrove account in the amount of dollar_figure on date sp bank credited the aldergrove account in the amount of dollar_figure for interest earned by the account c analysi sec_1 issue the issue is whether the interest payments that were credited to the aldergrove account in the amounts of dollar_figure dollar_figure and dollar_figure the interest payments are taxable to petitioners the interest issue arguments of the parties petitioners argue that mr bell and his wholly owned corporations provided the financing that allowed chestnut grove and group m to acquire the yakima property petitioners argue that the checks in the amounts of dollar_figure and dollar_figure both made payable to ihatsu fudosan or aldergrove the yakima interest payments represent interest payments to mr bell for the yakima property loans and were held in trust for mr bell by aldergrove until those funds were transferred to a bank of bermuda account over which petitioner did not exercise any control and therefore mr bell is taxable on those payments regardless of whether aldergrove investments co was petitioner's alter ego alternatively petitioners argue that petitioner lacked sufficient dominion and control_over the aldergrove account to be taxable on the interest payments petitioners argue that petitioner has received no benefit from any of the interest payments and that those funds were transferred to a bank of bermuda account over which petitioner did not exercise any control lastly petitioners assert that even if the court were to find that aldergrove must recognize the interest payments as income petitioners are taxable only on petitioner's distributive_share of that income respondent asserts that this court in monahan v commissioner tcmemo_1994_201 monahan i affd without published opinion 86_f3d_1162 9th cir found that in petitioner controlled aldergrove partnership matters and benefited from and controlled the funds in the aldergrove account relying on the doctrine_of collateral_estoppel respondent argues that petitioner is precluded from relitigating those issues since the interest payments were deposited in the aldergrove account in respondent argues that those payments are taxable to petitioner it should be noted that 9th cir r provides that dispositions other than opinions or orders designated for publication shall not be regarded as precedent and shall not be cited to or by the court_of_appeals for the ninth circuit or any district_court of the ninth circuit except when relevant under the doctrines of law of the case res_judicata or collateral_estoppel respondent argues alternatively that if the court finds the doctrine_of collateral_estoppel to be inapplicable the interest payments are taxable to petitioners because petitioner made acquisition and development loans for the yakima property to chestnut grove and group m and benefited from and exercised control_over the interest payments relevant legal principles a interest_income sec_61 provides that gross_income means all income from whatever source derived including interest generally interest earned on investment is taxable to the person who controls the principal 820_f2d_1084 9th cir citing 311_us_112 affg tcmemo_1984_549 c ommand over property or enjoyment of its economic benefits ' which is the mark of true ownership is a question of fact to be determined from all of the attendant facts and circumstances see 95_tc_74 quoting 164_f2d_870 7th cir affg 5_tc_443 mere legal_title is not determinative of beneficial_ownership see 80_tc_1090 affd 765_f2d_1051 11th cir b the doctrine_of issue preclusion the doctrine_of issue preclusion or collateral_estoppel provides that once an issue of fact or law is actually and necessarily determined by a court of competent jurisdiction that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation 440_us_147 citing 439_us_322 n issue preclusion is a judicially created equitable doctrine whose purposes are to protect parties from unnecessary and redundant litigation to conserve judicial resources and to foster certainty in and reliance on judicial action see eg id pincite 627_f2d_996 9th cir this court in 90_tc_162 affd 904_f2d_525 9th cir set forth the following five conditions that must be satisfied prior to application of issue preclusion in the context of a factual dispute the peck requirements the issue in the second suit must be identical in all respects with the one decided in the first suit there must be a final judgment rendered by a court of competent jurisdiction collateral_estoppel may be invoked against parties and their privies to the prior judgment the parties must actually have litigated the issues and the resolution of these issues must have been essential to the prior decision the controlling facts and applicable legal rules must remain unchanged from those in the prior litigation citations omitted see also 966_f2d_1318 9th cir highlighting conditions and above discussion a preliminary matters by order of this court dated date respondent's motion for leave to file an amended answer to raise the affirmative defense of collateral_estoppel in this case was granted respondent now bears the burden of proving the applicability of that defense rule a the jurisdictional competency of this court in monahan i is not contested by the parties in this case in addition decision in monahan i was entered by this court on date and was affirmed on appeal without modification by the court_of_appeals for the ninth circuit on date cf 100_tc_590 refusing to apply the doctrine_of collateral_estoppel when an appellate court affirms a trial court's judgment on different grounds no petition for certiorari having been duly filed decision in monahan i has become final under sec_7481 lastly there is complete identity of parties between monahan i and this case both petitioners and respondent were parties in monahan i and are bound by that decision in sum conditions and of the peck requirements are satisfied b the interest issue the ultimate issue with respect to the interest payments is whether those payments constitute gross_income to petitioners that issue was not litigated in monahan i thus petitioners are not precluded from contesting respondent's determination that the interest payments are taxable to petitioners although this court in monahan i found that funds held in aldergrove were used by and benefited petitioner personally including funds credited to the aldergrove account on date see infra sec ii c c and command over property or enjoyment of its economic benefits determines the incidence of taxation see supra sec ii c a the court did not find that all interest payments credited to the aldergrove account in are taxable to petitioners certainly this court in monahan i did not decide the interest issue the equitable doctrine_of issue preclusion requires that petitioners be given an opportunity to litigate the interest issue that may simply be a different way of saying that the doctrine_of claim preclusion does not apply in this context the scope of the issue preclusion analysis blurs the distinction between claim preclusion and issue preclusion see 793_f2d_1031 9th cir the concept of res_judicata embraces two doctrines claim preclusion and issue continued respondent directs our attention to this court's holding in monahan i that interest_income earned by aldergrove on certified deposit accounts in constituted income to petitioners it is unclear whether respondent believes that that determination is dispositive of the interest issue we believe however that our holding in monahan i with respect to the interest_income does not preclude petitioners from litigating the interest issue the doctrine_of issue preclusion must be applied carefully so that fairness to litigants is not compromised for efficiency and economy some courts have advised narrow application of the doctrine in the context of tax litigation see eg 876_f2d_1251 6th cir affg 88_tc_1306 moore moore's federal practice par pincite 3d ed that approach appears to be a product of the separable facts doctrine first enunciated in 333_us_591 although it is unclear whether the separable continued preclusion or collateral_estoppel that bar respectively a subsequent action or the subsequent litigation of a particular issue because of the adjudication of a prior action fn ref omitted see 167_f2d_607 3d cir such a rule_of public policy collateral_estoppel must be watched in its application lest a blind adherence to it tend to defeat the even firmer established policy of giving every litigant a full and fair day in court facts doctrine is still good law in the tax context see 464_us_165 n 904_f2d_525 9th cir affg 90_tc_162 we believe in any event that denying a party the opportunity to litigate an issue is a matter that requires circumspection this court will not use the doctrine_of issue preclusion as a blunt instrument for summarily denying petitioners an opportunity to litigate the interest issue instead we prefer the approach that follows c the aldergrove issue issue preclusion may operate to preclude relitigation of evidentiary facts determined in a prior proceeding see eg 91_tc_273 thus facts that a party is precluded from relitigating in conjunction with other facts established by evidence in the latter proceeding may provide a basis to sustain a deficiency determination by the commissioner id pincite the parties agree that the interest payments are interest payments that were credited to the aldergrove account in to establish that the interest it should also be noted that the court_of_appeals for the ninth circuit to which an appeal in this case would likely lie stated that the supreme court limited the application of 333_us_591 to cases where there has been a significant change in the legal climate see eg 904_f2d_525 9th cir affg 90_tc_162 payments are taxable to petitioners respondent asserts that in petitioner controlled aldergrove partnership matters and that petitioner benefited from and controlled the funds in the aldergrove account respondent relies on monahan i and the doctrine_of issue preclusion to establish those underlying facts in monahan i this court considered the commissioner's determination of deficiencies in and additions to petitioners' federal_income_tax for and this court among other things found that petitioner's purported repayment of his negative capital_account in a partnership span services lacked economic_substance and that petitioner thus recognized gain on the termination of his interest in that partnership in rejecting petitioner's assertion that he had an obligation to repay aldergrove for its payment of an obligation incurred to repay the negative capital_account this court stated petitioners contend that petitioner then had an obligation_to_contribute to or repay aldergrove as a result of its satisfaction of the joint dollar_figure obligation however there was no written_agreement regarding such an obligation petitioner's purported payments to aldergrove on that obligation also lacked economic_substance or remained in petitioner's control by virtue of his control_over aldergrove petitioner's first payment was made years later on date when he transferred dollar_figure to an aldergrove account over which he had signature_authority on the same day pursuant to petitioner's instructions aldergrove transferred dollar_figure to hansa finance and trust b v hansa finance an entity wholly owned and controlled by mr bell on date hansa finance transferred dollar_figure to group m construction inc a washington corporation owned by petitioner from to percent during the years at issue and his brothers from to percent during the years at issue on date hansa finance transferred dollar_figure back to aldergrove petitioner made no additional payments to aldergrove on the dollar_figure obligation prior to filing his petition in this case on date he made two additional payments after this time on date petitioner transferred dollar_figure to aldergrove on date petitioner issued a check for dollar_figure to aldergrove and a check for dollar_figure to ihatsu fudosan ltd or aldergrove investment both checks were deposited into an aldergrove account over which petitioner had signature_authority neither of these additional payments had economic_substance at this time petitioner's right to exercise his sar's stock appreciation rights in gml was unrestricted the contribution to aldergrove increased the value of both petitioner's and gml's partnership_interest in aldergrove thus it also increased the fair_market_value of gml's stock and petitioner's sar's petitioner exercised control_over all aldergrove partnership matters by virtue of his 90-percent voting interest numerous other transactions also support the conclusion that funds held in aldergrove were used by and benefited petitioner personally including other loans to group m construction and chestnut grove investments also partially owned by petitioner made through hansa finance we find therefore that none of the payments made by petitioner to aldergrove in repayment of a purported dollar_figure loan had economic_substance petitioner argued at trial and on brief that mr bell had the ability to remove principal from gml or aldergrove thus reducing the value of petitioner's sar's and placing aldergrove funds beyond petitioner's control mr bell apparently did make such a transfer only once however even in this instance the bulk of the funds removed were immediately transferred to group m construction and later back to aldergrove as we have already discussed petitioner was clearly in control of the activities of both gml and aldergrove the money held by aldergrove was part of petitioner's asset protection plan and primarily benefited petitioner the allocation of aldergrove's profits was subject_to a partner vote over which petitioner had control moreover gml assigned its interest in the principal issues and profits of aldergrove to petitioner as security for payment upon any exercise by petitioner of his sar's finally as discussed above the formation of span hansa management an integral part of petitioner's asset protection plan provided an additional device by which petitioner obtained the benefits of funds flowing between aldergrove span corp and gml petitioner was in fact the primary beneficiary of transactions between all these entities monahan i fn ref omitted the court_of_appeals for the ninth circuit agreed with this court and stated that the taxpayers had ultimate control of the monies involved in all of the transactions at issue monahan v commissioner aftr 2d pincite0 ustc par big_number at big_number big_number 9th cir in sum this court examined petitioner's relationship with aldergrove investments co the same partnership in issue in this case and determined that certain payments made to aldergrove including a payment in the amount of dollar_figure on date the dollar_figure aldergrove payment lacked economic_substance because petitioner exercised control_over all aldergrove partnership matters and benefited from and controlled the funds held by aldergrove the dollar_figure aldergrove payment considered in monahan i was deposited in account number at sp bank the same account in which the interest payments were deposited indeed the dollar_figure aldergrove payment was credited to the aldergrove account on the same day as the yakima interest payments were credited to that account thus petitioner's control_over aldergrove partnership matters on date and his benefit from and control_over funds in the aldergrove account on date together the aldergrove issue is an issue that was decided in monahan i and is identical to a factual issue relevant to respondent's determination_of_a_deficiency in this case in addition the aldergrove issue was actually litigated in monahan i and resolution of that issue was essential to the decision in monahan i petitioners do not dispute satisfaction of that condition of the peck requirements also petitioners do not claim that the applicable legal rules have changed however they assert that issue preclusion does not apply because the although respondent seeks to preclude petitioners from relitigating petitioner's control_over aldergrove partnership matters in and his benefit from and control_over funds in the aldergrove account in we believe that petitioner's control_over aldergrove partnership matters on date and his benefit from and control_over funds in the aldergrove account on date are the only facts that are necessarily established by this court's finding in monahan i that the dollar_figure aldergrove payment lacked economic_substance that is not to say that this court in monahan i found that petitioner's relationship with aldergrove was any different on dates other than date see infra secs ii c d e and f controlling facts have changed in particular petitioners assert that petitioner and mr bell were no longer on friendly terms in because mr bell was being audited by the same revenue_agent who audited petitioners for the taxable years in issue in monahan i as a result petitioners claim that geoffrey briant a canadian citizen became involved as a mediator with control_over distributions from the aldergrove account in that purported change in the controlling facts however would have been relevant to this court in deciding monahan i because the aldergrove issue was critical to the court's conclusion that petitioner's purported repayment of his negative capital_account in span services lacked economic_substance but petitioners failed to raise mr briant's alleged involvement in aldergrove despite the opportunity to present evidence on that issue in monahan i the observation of the court_of_appeals for the tenth circuit in 466_f2d_131 10th cir is apt evidence of this type is not the result of a different factual situation or changed circumstances it is instead historical in nature and could have been admitted at the first trial if properly submitted if the taxpayers' case was not effectively presented at the first trial it was their fault affording them a second opportunity in which to litigate the matter with the benefit of hindsight would contravene the very principles upon which collateral_estoppel is based and should not be allowed see also 961_f2d_245 d c cir quoting jones v united_states supra petitioners also assert the following as another change in the controlling facts w hen the case monahan i was tried in january of lyn bell had not yet caused grove management limited to be stricken from the registry of companies his demonstrated and undisputed ability to dissolve grove management demonstrates his control_over that company and proves that aldergrove was not petitioner's alter ego that purported change in controlling facts according to petitioners is sufficient to prevent application of issue preclusion petitioners' assertion appears to be a variation of an argument made in a memorandum in support of their motion for reconsideration of monahan i filed date the reconsideration motion in that memorandum petitioners argued as follows when the case monahan i was tried in january of grove management limited was a solvent entity the court might reasonably conclude as it did that petitioner's sar's in grove management ltd were valuable assets in december of however petitioners were advised by anguillan counsel that gml was listed as an inactive corporation and was to be stricken from the anguillan register of companies petitioners' sar's were rendered worthless by the striking and the court's conclusion that the monahans' retained control_over funds placed in gml by virtue of those sar's became untenable the court_of_appeals for the ninth circuit in reviewing this court's denial of the reconsideration motion rejected that argument by stating that this court relied on evidence clearly showing that during the relevant time period taxpayers retained control_over the funds that they lost their investments many years later is not relevant to their tax_liabilities for the years at issue monahan v commissioner aftr 2d pincite1 ustc par big_number at big_number 9th cir similarly we believe that this court in monahan i determined that on date petitioner controlled aldergrove partnership matters and benefited from and controlled the funds in the aldergrove account upon consideration of evidence relating to the relevant time period the fact that mr bell may have exercised control_over gml in is insufficient to deny preclusive effect to this court's finding on the aldergrove issue in monahan i essentially petitioners question the propriety of that finding by claiming the existence of new evidence but fail to show that the controlling facts underlying the aldergrove issue have changed this court in monahan i was presented with evidence and argument relating to mr bell's purported control_over gml but upon consideration of that evidence and countervailing evidence the court rejected petitioners' assertion new evidence of mr bell's purported control_over gml would be cumulative only and does not alter the controlling facts underlying the aldergrove issue during the relevant time period cf 880_f2d_260 10th cir this court did not err in concluding that new expert testimony regarding the taxpayer's mental incompetency did not change the controlling facts for purposes of collateral_estoppel when similar evidence had been presented and considered in the prior proceeding affg tcmemo_1984_392 in conclusion we find that all five conditions of the peck requirements have been satisfied with respect to the aldergrove issue and therefore petitioners are precluded from relitigating that issue thus we find that on date petitioner controlled aldergrove partnership matters and benefited from and controlled the funds in the aldergrove account d petitioners attempt to cast doubt on the sufficiency of the aldergrove issue we shall now turn to an examination of the evidence in this case in light of the aldergrove issue established in monahan i there is no dispute that the interest payments are interest payments that were credited to the aldergrove account on date and date that fact in conjunction with our finding that on date petitioner controlled aldergrove partnership matters and benefited from and controlled the funds in the aldergrove account permits this court to infer that petitioner had control_over and benefited from the interest payments that inference would lead this court to conclude that petitioners are taxable on the interest payments see supra sec ii c a in an attempt to rebut the inference that petitioner had control_over and benefited from the yakima interest payments portion of the interest payments petitioners assert the following on date petitioner borrowed dollar_figure from mr bell through hansa finance and loaned those funds to chestnut grove and group m to make the initial downpayment on the yakima property on date chestnut grove and group m executed notes to petitioner for dollar_figure and dollar_figure respectively on date petitioner borrowed dollar_figure from mr bell through hansa finance and loaned those funds to group m to make a second payment for the yakima property on date group m executed a note to petitioner for dollar_figure on date mr bell assigned petitioner's promissory notes to jaguar holdings which became ihatsu fudosan on date group m borrowed dollar_figure from ihatsu fudosan to make the final payment on the yakima property and to maintain working_capital and on date chestnut grove and group m executed assumption_of_liabilities agreements for the notes originally made by petitioner to hansa finance on the basis of those alleged facts petitioners argue that the yakima interest payments represent interest payments to mr bell for the yakima property loans and were held in trust for mr bell by aldergrove until those funds were transferred to a bank of bermuda account over which petitioner did not exercise any control and therefore petitioners are not taxable on those payments petitioners present the testimony of petitioner and of timothy monahan petitioner's brother and president of both chestnut grove and group m and numerous documents to support their assertion that the yakima interest payments represent interest_paid to mr bell in response respondent essentially relies on the aldergrove issue and petitioners' concession that the funds allegedly loaned to petitioner by hansa finance were previously transferred to hansa finance from aldergrove petitioners' concession respondent asserts hansa finance should be considered a mere straw man' aldergrove advanced at least dollar_figure of the money to hansa before hansa provided dollar_figure to petitioner petitioners respond as follows when respondent ominously intones that john monahan acknowledges on cross examination that hansa first received the initial land acquisition funds dollar_figure from aldergrove she forgets that dollar_figure of aldergrove investments sic initial dollar_figure of capital was contributed to aldergrove by bell acting through grove management ltd the wholly owned subsidiary of his wholly owned span corp ltd lynwood s bell shifted those funds from aldergrove to hansa finance for the purpose of loaning the money to john monahan whose own dollar_figure capital_contribution to aldergrove investments played no significant part in the transaction although respondent argues that petitioner made the loans to group m and chestnut grove investments the partnership_agreement reflects that bell and not john monahan is the ultimate source of the funds used by group m and chestnut grove investments to purchase the 16-acre yakima parcel accordingly bell and not petitioners is taxable on the interest_paid by those corporations regarding the loans we agree with petitioners that the aldergrove issue and petitioners' concession do not necessarily undermine petitioners' assertion that the yakima interest payments represent interest_paid to mr bell because respondent has not established that aldergrove was anything other than what it purported to be when funds were transferred to hansa finance in other words the aldergrove issue relates to petitioner's relationship with aldergrove on date and may provide reasonable inferences regarding petitioner's relationship with aldergrove during the entirety of but does not provide a sufficient basis to undermine petitioners' contention that mr bell was the ultimate source of the funds loaned to chestnut grove and group m in and e other factual issues established in monahan i introduction in respondent's brief respondent asserts that this court should give effect to the unambiguous findings of monahan i and find that petitioner is collaterally estopped from relitigating the factual determinations that the petitioner controlled aldergrove partnership matters in and that the petitioner benefitted from and controlled the funds in the aldergrove account in although respondent's affirmative defense is broad in one respect see supra note respondent restrictively frames the issue that respondent seeks to preclude petitioners from relitigating since respondent directs our analysis of that affirmative defense to the facts relating to and also bears the burden of proving the applicability of the defense we must assume that respondent does not seek to preclude petitioners from relitigating this court's findings in monahan i regarding petitioner's relationship with aldergrove and other entities prior to the pre-1991 issues the authority of this court to raise issue preclusion sua sponte issue preclusion is an affirmative defense that must be pleaded rule otherwise it is deemed to be waived see eg 50_tc_963 whether a party is precluded from relitigating an issue requires particularized analysis and thus respondent must be deemed to have waived the defense of issue preclusion with respect to the pre-1991 issues even though respondent has properly raised that defense with respect to the aldergrove issue this court however need not always accept waivers of the defense of issue preclusion this court may raise the doctrine_of issue preclusion sua sponte cf 891_f2d_1211 6th cir a district_court may raise the doctrine_of res_judicata sua sponte 793_f2d_1031 9th cir a bankruptcy court may raise the doctrine_of res_judicata sua sponte when it allowed the parties to submit posttrial briefs on the applicability of the doctrine 688_f2d_765 when necessary the court may raise the question of claim or issue preclusion sua sponte 105_tc_436 this court may raise the doctrine_of judicial estoppel sua sponte the purposes of the doctrine_of issue preclusion include the conservation of judicial resources and the promotion of certainty in and reliance on judicial action see supra sec ii c b courts have an independent interest in advancing those purposes see 448_us_371 rehnquist j dissenting and therefore respondent's perhaps inadvertent consent to relitigation of the pre-1991 issues cannot divest this court of the authority to preclude petitioners from denying certain facts established after full and fair litigation in monahan i sua sponte consideration of issue preclusion generally should be limited to circumstances where the parties are given an opportunity to address the applicability of the doctrine to a particular issue see nevada employees association inc v keating 903_f2d_1223 9th cir mcclain v apodaca supra pincite see also 402_us_313 the purpose of requiring claim preclusion and issue preclusion to be pleaded is to give the opposing party notice of the plea of estoppel and a chance to argue if he can why the imposition of an estoppel would be inappropriate emphasis added the court need not subject the issue preclusion decision to the rigors of the adversarial process however if doing so would be futile cf eg 925_f2d_363 10th cir district_court may sua sponte dismiss a complaint under fed r civ p b without notice and an opportunity to respond when it is patently obvious that claimant could not prevail 916_f2d_725 d c cir same 813_f2d_986 9th cir where counterclaimant cannot possibly win relief because its theory was the same as its defense to a claim which defense was rejected after a hearing the trial_court did not err in effectively dismissing counterclaim without notice and an opportunity to oppose but cf 73_f3d_1310 n 4th cir michael j dissenting argues for an absolute prohibition against dismissals on the merits that are entered without notice and an opportunity to respond application of issue preclusion sua sponte this court has been apprised of the decision in monahan i and finds it appropriate to consider sua sponte the preclusive effect of facts established in that proceeding which facts are relevant to an issue in dispute in this case ie whether mr bell was the ultimate source of the funds loaned to chestnut grove and group m petitioners are precluded from denying that on date and date as will be explained below the dates on which aldergrove received certain interest payments petitioner controlled aldergrove partnership matters and benefited from and controlled the funds held by aldergrove the sua sponte issues all five conditions of the peck requirements see supra sec ii c b are satisfied with respect to the sua sponte issues and therefore issue this court sua sponte could preclude petitioners from denying certain facts established in monahan i relating to petitioner's transfer of dollar_figure to aldergrove on date and subsequent transfers but for convenience we shall examine facts relating to certain interest payments made in and preclusion applies in addition we believe that allowing petitioners to examine and contest the application of issue preclusion with respect to the sua sponte issues would be futile this court's official file in monahan i was admitted as evidence for the purpose of deciding whether petitioners are precluded from relitigating the aldergrove issue and posttrial briefs were submitted by the parties to present their respective arguments the only difference between the aldergrove issue and the sua sponte issues is the date with respect to which this court in monahan i examined petitioner's relationship with aldergrove under these circumstances petitioners could add nothing to our analysis of the sua sponte issues and therefore are not prejudiced by the absence of notice and an opportunity to respond in monahan i this court among other things sustained respondent's disallowance of certain interest deductions claimed by petitioners for and petitioners reported those deductions as mortgage interest payments on an alleged loan of dollar_figure from hansa finance made in after concessions petitioners argued that they were entitled to deduct a portion of the interest payments as personal_interest under sec_163 and respondent argued that the loan and the interest payments lacked economic_substance this court found the following facts the ultimate source and resting place for the dollar_figure was aldergrove the interest payments made by petitioners on date and date on the purported loan were immediately transferred to aldergrove and those payments lacked economic_substance because petitioner controlled aldergrove partnership matters and benefited from and controlled the funds held by aldergrove when the payments were made we stated we find that these various payments by petitioners lacked economic_substance petitioner testified that the mortgage on his home was part of his asset protection plan and that by reducing his equity in his home he hoped to replace an unknown liability that could take the house away with a known liability that you know you can repay ie the loan note petitioner neglected to complete the picture in his testimony however for any real protection to occur petitioners would have also had to transfer the equity or loan amount to a place unreachable by unknown creditors from our analysis of the above transactions it appears that petitioners did just that by transferring equity through hansa finance or ihatsu fudosan to aldergrove this fits squarely into petitioner's own testimony since petitioner believed that assets held in aldergrove were protected of course petitioner had to have access and control_over aldergrove's assets to make the plan truly beneficial to him he did through his security_interest in gml's aldergrove capital and profits and through his sar's in gml thus the purported loan amount was never outside of petitioner's dominion and control and the principal and interest payments made by petitioners were nothing more than transfers from one beneficially owned account to another monahan i fn ref omitted as a preliminary matter conditions and of the peck requirements are satisfied and petitioners reasonably could not have argued to the contrary see supra sec ii c a the sua sponte issues are identical in all respects to factual issues that were decided in monahan i the court in monahan i examined petitioner's relationship with aldergrove the same partnership in issue in this case on date and date and determined that on those dates certain interest payments made to aldergrove lacked economic_substance because petitioner controlled aldergrove partnership matters and benefited from and controlled the funds held by aldergrove in addition the sua sponte issues were actually litigated in monahan i and resolution of those issues was essential to the decision in monahan i that the interest payments made in and were not deductible therefore conditions and of the peck requirements are satisfied with respect to the sua sponte issues and we believe that nothing petitioners could have presented would change our conclusion lastly condition of the peck requirements is satisfied any potential argument relating to a change in the applicable legal rules would not be tenable and any potential argument relating to a change in the that condition of the peck requirements is in fact satisfied because those factual issues decided in monahan i are relevant to the interest issue controlling facts would be dismissed in the same manner that similar contentions of petitioners regarding the aldergrove issue were dismissed see supra sec ii c c in conclusion petitioners are precluded from denying that on date and date petitioner controlled aldergrove partnership matters and benefited from and controlled the funds held by aldergrove f are the interest payments taxable to petitioners promissory notes in evidence indicate that petitioner loaned the following amounts to chestnut grove and group m and we so find date maker amount date date date date chestnut grove group m group m group m dollar_figure big_number big_number big_number petitioners present numerous documents and other evidence to explain the fate of the first three of those notes and to support their assertion that the yakima interest payments represent interest_paid to mr bell the findings however that on date and date petitioner controlled aldergrove partnership matters and benefited from and controlled the funds held by aldergrove in conjunction with petitioners' concession that aldergrove was the source of the funds allegedly loaned to petitioner by hansa finance dollar_figure dollar_figure dollar_figure on date and dollar_figure on date cast doubt on petitioners' version of the loan transactions a reasonable inference to be drawn from the sua sponte issues is that petitioner's relationship with aldergrove did not change between date and date which would mean that petitioner controlled aldergrove partnership matters and benefited from and controlled the funds held by aldergrove when aldergrove likely transferred to hansa finance the funds that were loaned back to petitioner therefore petitioners would have us believe that petitioner in substance transferred funds to hansa finance borrowed those funds back from hansa finance made loans with those funds to chestnut grove and group m removed himself from the loan transactions by means of certain agreements received interest payments from chestnut grove and group m by means of his relationship with aldergrove on date but held the interest in trust for mr bell because mr bell was the ultimate source of the funds loaned to chestnut grove and group m we simply do not believe petitioners' paper trail of promissory notes deeds of trust assignment agreements and assumption_of_liabilities agreements tells the whole story because the funds that were loaned to chestnut grove and group m in and previously traveled a circuitous route which begins and ends with petitioner in direct contradiction to petitioners' assertion that mr bell was the ultimate source of those funds in sum we have considered all of the evidence presented by petitioners but because the yakima interest payments were credited to the aldergrove account on date and on that date petitioner controlled aldergrove partnership matters and benefited from and controlled the funds in the aldergrove account we are not persuaded that the yakima interest payments represent anything other than interest_paid to petitioner on account of loans made by petitioner d conclusion we hold that the interest payments are taxable to petitioners iii dollar_figure deposit a introduction in the notice_of_deficiency respondent determined that dollar_figure was deposited in bank accounts held in the name of petitioners during and that those deposits were unexplained respondent increased petitioners' taxable_income accordingly after concessions by respondent a single dollar_figure deposit remains in dispute the issue is whether that deposit is taxable to petitioners b analysis on date petitioner transferred dollar_figure from an account held by group m at sp bank to an account held by petitioners at the same bank the payment petitioners citing 158_fsupp_627 n d ala argue that the payment represents a reimbursement of legal fees paid_by petitioner on behalf of group m construction so that the reimbursement is not income to petitioner respondent argues that petitioners have failed to substantiate their explanation of the payment the parties' presentation of the issue with respect to the dollar_figure deposit requires this court to examine only the facts relating to the payment respondent does not contest the legal basis upon which petitioners exclude that payment from their income for timothy monahan testified that although petitioner did not present any documents to group m demonstrating the amount of the legal expenses to be reimbursed he was convinced that petitioner spent at least dollar_figure and thus authorized the payment at trial petitioner stated that he did not remember the exact amount_paid for legal expenses on behalf of group m but stated that the amount was substantially more than dollar_figure there are no documents in evidence that substantiate petitioners' claim that petitioner incurred legal expenses on behalf of group m petitioners contend that the testimony of petitioner and his brother was straight forward and credible we disagree the self-serving testimony of petitioner vaguely corroborated only by the testimony of his brother does not persuade us that the payment represents reimbursement of legal fees paid_by petitioner on behalf of group m cf 975_f2d_534 8th cir the tax_court is not required to give credence to the self-serving testimony of interested parties affg in part and revg in part tcmemo_1991_140 440_f2d_688 9th cir this court did not err when it found that taxpayer's uncontradicted testimony plus the testimony of her accountant both unsubstantiated by any documentary_evidence did not carry the burden_of_proof affg tcmemo_1969_159 petitioners have failed to carry their burden_of_proof therefore we conclude that the dollar_figure deposit is taxable to petitioners iv penalty sec_6662 provides for an accuracy-related_penalty in the amount equal to percent of the portion of an underpayment_of_tax attributable to among other things any substantial_understatement_of_income_tax sec_6662 b in the notice_of_deficiency respondent determined that the entire underpayment_of_tax for the taxable_year was due to a substantial_understatement_of_income_tax petitioners bear the burden of proving that respondent's determination is erroneous see rule a in their briefs petitioners simply assert that there is no substantial_understatement_of_income_tax on the record before us we find that respondent's determination of a penalty under sec_6662 is correct except to the extent that it relates to respondent's concessions regarding the unexplained bank_deposits discussed in supra section iii a v conclusion respondent's determinations of a deficiency in and penalty on petitioners' federal_income_tax for the taxable_year are sustained to the extent set forth in this report decision will be entered under rule


ui department of the treasury masnington dc pere ec contact person 1d number contact number empioyer identification_number dear sir or madam this is in reply to a letter dated date from your authorized representative requesting advance approval of your grant making procedures pursuant to the provisions of sec_4945 of the internal_revenue_code you are exempt from federal_income_tax under sec_501 of the code and are a private_foundation within the meaning of sec_509 you have previously received advance approval under sec_4945 of the code for the procedures to be employed by you for awarding scholarship grants to individuals for science mathematics and technology studies you now propose to pay to educational institutions for the benefit of students receiving such scholarships additional_amounts to cover expenses for a room and board and b research activities as described below in addition to the room and board payments you propose to pay the educational institutions attended by your scholarship recipients funds to cover costs associated with the students participation in supplemental scientific or mathematical research activities that may go beyond the student’s regular courses of curriculum by reimbursing educational institutions agreeable to your proposal for_the_use_of their equipment and facilities you hope to avoid problems associated with ownership patent royalty and exploitation rights which an institution might assert by reason of its sponsorship or deemed funding of such research activities you would disperse such amounts to an agreeable college or university to defray the costs of the deemed university funding thereby preserving the student's ownership rights in any research results you have requested the following rulings grants to be awarded under your proposed program to institutions for the benefit of new grant recipients for a room and board and b research activities as described in your ruling_request will not be taxable_expenditures under sec_4945 of the code if institutions that are already receiving grant funds under your previously approved program use a portion of the grant funds to pay for a recipient's a room and board and b research activities as described in your ruling_request the amounts so used will not be taxable_expenditures under sec_4945 of the code sec_501 of the code provides in part for exemption from federal_income_tax for a corporation organized and operated exclusively for charitable scientific or educational_purposes provided no part of the corporation's net_earnings inures to the benefit of any private_shareholder_or_individual sec_509 of the code provides that unless specifically excepted a domestic or foreign organization described in sec_501 is a private_foundation and subject_to the excise_taxes of chapter sec_4945 of the internal_revenue_code imposes an excise_tax on each taxable_expenditure made by a private_foundation sec_4945 of the code provides that the term taxable_expenditure means any amount_paid or incurred by a private_foundation as a grant to an individual for travel study or similar purposes by such individual unless such grant satisfies the requirements of sec_4945 sec_4945 of the code provides that sec_4945 shall not apply to an individual grant awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the secretary if it is demonstrated to the satisfaction of the secretary that-- the grant constitutes a scholarship or fellowship_grant which would be subject_to the provisions of sec_117 as in effect on the day before the date of the enactment of the tax_reform_act_of_1986 and is to be used for study at an educational_organization described in sec_170 a ii the grant constitutes a prize or award which is subject_to the provisions of sec_74 without regard to paragraph thereof if the recipient of such prize or award is selected from the general_public or the purpose of the grant is to achieve a specific objective produce a report or other similar product or improve or enhance a literary artistic musical scientific teaching or other similar capacity skill or talent of the grantee sec_53_4945-4 of the foundation and similar excise_taxes regulations provides that if by the 45th day after a request for approval of grant procedures has been properly submitted to the service the organization has not been notified that such procedures are not acceptable such procedures shall be considered as approved from the date of submission until receipt of actual notice from the service that such procedures do not meet the requirements of sec_4945 if a grant to an individual for a purpose described in sec_4945 is made after notification to the organization by the service that the procedures under which the grant is made are not acceptable such grant is a taxable_expenditure sec_4945 and b of the code impose certain excise_taxes on the taxable_expenditures of private_foundations sec_4945 defines taxable_expenditures as including any grant to an individual for travel study or other similar purposes unless the grant satisfies the requirements of sec_4945 sec_4945 provides that sub sec_4945 shall not apply to an individual grant awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the secretary that the grant constitutes a scholarship or fellowship_grant that would be subject_to the provisions of sec_117 as in effect on the day before the date of the enactment of the tax_reform_act_of_1986 and is to be used for study at an educational_organization described in sec_170 il of the code sec_117 as then in effect provided generally that in the case of an individual gross_income did not include any amount received as a a scholarship at an educational_organization described in sec_170 or b as a fellowship_grant including the value of contributed services and accommodations and any amount received to cover expenses for a travel b research c clerical help or d equipment which are incident to such a scholarship or to a fellowship_grant but only to the extent the amount is so expended by the recipient sec_1_117-1 of the income_tax regulations provides in part that the requirement that the expenses referred to in sec_117 above be incident to the scholarships or the fellowship_grant means that the expenses of travel research clerical help or equipment must be incurred by the individual in order to effectuate the purpose for which the scholarship or fellowship_grant was awarded sec_1_117-3 of the regulations defines in part a scholarship or fellowship_grant as including the value of contributed services and accommodations and the amount of tuition matricutation and other fees which are furnished or remitted to a student to aid him or her in the pursuit of studies contributed services and accommodations are defined as including such services as room and board laundry service and similar services or accommodations which are received by an individual as part of a scholarship or fellowship_grant in addition your proposed reimbursement of based on the information submitted your proposed awards for room and board expenses are within the definition of contributed services and accommodations and thus are excludable scholarships under sec_1_117-3 and d the law as then in effect an academic institution's research costs and expenses also constitutes a scholarship or fellowship_grant under sec_1_117-3 the law as then in effect however these defrayed university expenses are neither contributed services and accommodations nor amounts received to cover incidental research expenses but rather constitute amount s of tuition matriculation and other fees which are furnished or remitted to a student to aid in the pursuit of studies within the contemplation of sec_1_117-3 of the regulations this matter is addressed in revrul_67_85 1967_1_cb_25 where an amount made available to an educational_organization by the grantor of a fellowship award for expenses_incurred in the training of an award recipient was determined to be in the nature of tuition and as such a part of the recipient's fellowship award in that case the grantor of a fellowship award to a non-degree candidate made an additional_amount available to the educational_organization primarily to defray the expenses involved in training the fellowship recipient the revenue_ruling conciudes that such a payment would appear to be in the nature of tuition and thus a part of the scholarship or fellowship_grant within the meaning of sec_1_117-3 of the regulations see also revrul_71_344 1971_2_cb_94 distinguishing such expenses from sec_117 incidental research and other expenses_incurred by a fellowship recipient accordingly we rule as follows grants to be awarded under your proposed program to institutions for the benefit of new grant recipients for a room and board and b research activities as described in your ruling_request will not be taxable_expenditures under sec_4945 of the code if institutions that are already receiving grant funds under your previously approved program use a portion of the grant funds to pay for a recipient’s a room and board and b research activities as described in your ruling_request the amounts so used will not be taxable_expenditures under sec_4945 of the code these rulings are conditioned on the understanding that there will be no material_change in the facts upon which they are based this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours signed marvin friedlander marvin friedlander manager exempt_organizations technical group


t c memo united_states tax_court robert triola and nancy v triola petitioners v commissioner of internal revenue respondent docket no 9313-13l filed date robert miles stahl for petitioners elizabeth c mourges and nancy m gilmore for respondent memorandum opinion lauber judge in this collection_due_process cdp case petitioners seek review pursuant to sec_6320 and sec_6330 of the determination by all statutory references are to the internal_revenue_code in effect at all relevant times and all rule references are to the tax_court rules_of_practice and procedure we round all monetary amounts to the nearest dollar the internal_revenue_service irs or respondent to uphold a notice_of_federal_tax_lien filing and a notice_of_intent_to_levy respondent has moved for summary_judgment under rule contending that there are no disputed issues of material fact and that his determination to sustain the proposed collection actions was proper as a matter of law we agree and accordingly will grant the motion background the following facts are based on the parties’ pleadings and respondent’s motions including the attached affidavits and exhibits see rule b peti- tioners resided in maryland when they filed their petition petitioners filed their federal_income_tax returns for and late and failed to pay the full amounts of tax shown as due on those returns the irs as- sessed the tax shown as due and commenced an examination of both returns for the irs made adjustments to petitioners’ tax on account of mathematical or clerical errors on the return see sec_6213 petitioners’ return failed to supply a social_security_number ssn for a claimed dependent and supplied an incorrect ssn for petitioner-wife on account of those errors the irs made adjustments to the recovery rebate credit dependency_exemption deduction child_tax_credit additional_child_tax_credit and earned_income_tax_credit claimed on the return respondent mailed petitioners a letter 474c advising them of these adjustments on account of the missing and incorrect ssns this letter advised petitioners that they had days to request abatement of the additional tax specified therein irs records show that petitioners failed to respond to the letter 474c for the irs sent petitioners a notice_of_deficiency determining a deficiency of dollar_figure a sec_6662 penalty of dollar_figure and a sec_6651 addition_to_tax of dollar_figure petitioners did not file a petition in the tax_court challenging the notice_of_deficiency the irs assessed the additional tax for flowing from the mathematical or clerical adjustments and after petitioners failed to petition from the no- tice the irs assessed the deficiency penalty and addition_to_tax determined for in an effort to collect these assessed amounts the irs sent petitioners in date a final notice_of_intent_to_levy and notice of your right to a hearing for tax_year and a notice_of_federal_tax_lien filing and your right to a hearing for tax years and petitioners timely submitted form request for a collection_due_process or equivalent_hearing which challenged both notices in their request petitioners did not seek a collection alternative rather they argued that they owed no tax for and that their additional liability for was less than dollar_figure on date a settlement officer so from the irs appeals_office sent petitioners a letter scheduling a telephone cdp hearing for date the so informed petitioners that they could not challenge their underlying tax_liability for because they had had an earlier opportunity to do so but had failed to take advantage of it by filing a tax_court petition the so informed petitioners that they were entitled to challenge their additional liability for but that they needed to provide her before the hearing with valid ssns for the claimed dependent and for petitioner-wife the so informed petitioners that if they wished her to consider a collection alternative they would need to provide her with a copy of a completed form 433-a collection information statement for wage earners and self-employed individuals with supporting financial information neither petitioners nor their counsel provided the requested documentation before the scheduled cdp hearing petitioners’ counsel did call in for the hearing but only to ask that it be rescheduled he indicated that he had not read in its en- tirety the letter scheduling the hearing and was thus unaware of the requirement that the requested information be supplied at or before the hearing the so de- clined to reschedule the hearing noting that petitioners had already been allowed more days than is generally permitted to supply the requested information on date the irs issued petitioners a notice_of_determination sustaining the proposed collection actions and they timely sought review in this court petitioners initially requested that this case be conducted under the court’s small_tax_case s procedures on date respondent filed a motion to re- move the s designation because the total unpaid tax penalty and addition_to_tax for and exceed dollar_figure see sec_7463 the court ordered peti- tioners to respond to this motion before date petitioners failed to re- spond and the court removed the s designation on date respondent filed a motion for summary_judgment the court ordered petitioners to file a response by date petitioners have responded neither to respondent’s motion nor to the court’s order a summary_judgment discussion the purpose of summary_judgment is to expedite litigation and avoid costly time-consuming and unnecessary trials fla peach corp v commissioner 90_tc_678 under rule b the court may grant summary_judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law 98_tc_518 aff’d 17_f3d_965 7th cir in deciding whether to grant summary_judgment we construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party ibid however the nonmoving party may not rest upon the mere allegations or denials but instead must set forth specific facts showing that there is a genuine dispute for trial rule d see sundstrand corp t c pincite because petitioners failed to respond to respondent’s motion for summary_judgment the court could enter a decision against them for that reason alone see rule d we will nevertheless consider the motion on its merits we con- clude that there are no material facts in dispute and that this case is appropriate for summary adjudication b standard of review neither sec_6320 nor d prescribes the standard of review that this court should apply in reviewing an irs administrative determination in a cdp case the general parameters for such review are marked out by our prece- dents where the validity of the underlying tax_liability is at issue the court re- views the commissioner’s determination de novo 114_tc_176 where the underlying tax_liability is not properly at issue the court reviews the irs decision for abuse_of_discretion id pincite abuse_of_discretion exists when a determination is arbitrary capricious or without sound basis in fact or law see 125_tc_301 aff’d 469_f3d_27 1st cir sec_6330 permits challenges to the existence or amount of the underlying tax_liability in a cdp proceeding only when the taxpayer did not receive a notice_of_deficiency or otherwise have a prior opportunity to contest that liability petitioners received a notice_of_deficiency for but failed to petition the court they are thus precluded from challenging the underlying tax_liability for and we will accordingly review the so’s action with respect to that year for abuse_of_discretion only for the irs made a summary_assessment under sec_6213 on account of mathematical or clerical errors the so concluded and respondent agrees that petitioners did not have a prior opportunity to challenge this assess- ment and hence that they were entitled to raise the underlying liability for at their cdp hearing see internal_revenue_manual pt date in 129_tc_58 the court held that a taxpayer in a cdp case was entitled to challenge the underlying tax_liability attributable to a summary_assessment made by the irs under sec_6213 on account of a math error see id pincite n respondent does not contend that petitioner’s right to invoke deficiency procedures with respect to the asserted_liability pursuant to sec_6213 concerning requests for abatement of continued an issue is not properly raised at a cdp hearing however if the taxpayer fails to present any evidence to the irs appeals_office concerning that issue after being given a reasonable opportunity to do so see sec_301_6330-1 q a- f3 proced admin regs a taxpayer may not dispute his underlying tax_liability in this court if he did not properly raise that issue at the cdp hearing see 140_tc_173 although the so gave petitioners an opportunity to challenge their under- lying tax_liability for at the cdp hearing petitioners failed to mount a proper challenge because they submitted no evidence the only information the so re- quested consisted of valid ssns for petitioner-wife and for the individual claimed as a dependent on petitioners’ return this information if it exists is not time consuming to supply the so gave petitioners more than a month to furnish these ssns and they have not explained why they were unable to provide the ssns within that period indeed when respondent filed his motion for summary judgment--more than months after the cdp hearing--the irs had yet to receive valid ssns from petitioners given these facts we conclude that petitioners did not properly raise their underlying tax_liability for at the cdp hearing and continued mathematical or clerical errors constituted ‘an opportunity to dispute’ the liability within the meaning of sec_6330 hence that they are barred from disputing that liability in this court we will therefore review the so’s determination for as well as for for abuse_of_discretion only see goza t c pincite c analysis the remaining question is whether the so abused her discretion in sus- taining the proposed collection actions we review the record to determine whe- ther the so properly verified that the requirements of any applicable law or administrative procedure have been met any issues raised by the taxpayer have merit and any proposed collection action balances the need for the efficient collection_of_taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary sec_6330 as to the first point this court has authority to review an so’s satisfaction of the verification requirement regardless of whether the taxpayer raised that issue at the cdp hearing see 131_tc_197 however petitioners did not allege in their petition to this court that the summary_assessment failed the requirements of sec_6213 or was otherwise improper that issue is therefore deemed conceded see rule b any issue not raised in the assignments of error shall be deemed to be conceded busche v commissioner tcmemo_2011_285 102_tcm_567 coleman v commissioner tcmemo_2010_51 aff’d 420_fedappx_663 8th cir in any event even if petitioners had properly preserved this issue they have set forth no specific facts showing that there is a genuine issue for trial concerning the propriety of the summary_assessment where an assessment arises from a mathematical_or_clerical_error on the return a notice_of_deficiency is not required see sec_6213 instead the irs typically sends the taxpayer a letter 474c this letter notifies the taxpayer that on account of the mathematical_or_clerical_error an amount of tax in excess of that shown on the return is due and that an assessment of tax has been or will be made on the basis of what would have been the correct amount of tax but for the mathematical_or_clerical_error sec_6213 within days of this notice the taxpayer may request abatement of the assessment due to the mathematical_or_clerical_error sec_6213 upon receipt of such a request the commissioner must abate the assessment and if he subsequently reassesses the tax review is available in this court ibid in the instant case the mathematical_or_clerical_error consisted of peti- tioners’ failure to provide a correct ssn for petitioner-wife and a valid ssn for the dependent they claimed on their return see sec_6213 defining mathematical_or_clerical_error to include an omission of information which is required to be supplied on the return to substantiate an entry on the return f earned_income_credit i child_tax_credit after discerning these errors the irs sent petitioners a letter 474c advising them that their tax_liability would be adjusted in several respects because they had failed to supply these ssns petitioners did not request an abatement of this summary_assessment and it was therefore valid under sec_6213 petitioners have set forth no specific facts showing that there is a genuine issue for trial on this point our review of the record establishes that the so verified that all other re- quirements of applicable law and administrative procedure had been satisfied both as to and as to we also find that in sustaining the proposed collection actions the so properly balanced the need for the efficient collection_of_taxes with the legitimate concern of petitioners that any collection action be no more intrusive than necessary sec_6330 petitioners did not request a collection alternative and they did not submit the financial information required for consideration of a collection alternative finally none of the other issues raised by petitioners has merit as ex- plained above petitioners may not challenge in this court their underlying tax_liabilities for and petitioners assert in their petition that they paid their outstanding balance for and made a partial payment against their tax liability leaving less than dollar_figure owed however the irs transcript of their account shows a balance due as of date of dollar_figure including additional interest and penalty and the irs transcript of their account shows a balance due as of date of dollar_figure including additional interest and penalty if petitioners wanted to contend that these account balances are incorrect they were obligated to come forward with some facts showing that they paid the liabilities in question when confronted with a motion for summary_judgment the nonmoving party may not rest upon the mere allegations or denials but instead must set forth specific facts showing there is a genuine dispute rule d see sundstrand corp t c pincite because petitioners failed to respond to the irs motion for summary_judgment as ordered by this court they have failed to show that there are any material facts in dispute that would prevent the court from granting summary_judgment in respondent’s favor finding no abuse_of_discretion in any respect we will grant summary_judgment for respondent and affirm the proposed collection action to reflect the foregoing an appropriate order and decision will be entered


department of the treasury int ernal revenue service washington d c o f f i c e o f c h i e f c o u n s e l date number release date cc intl br6 tl-n-4511-99 uilc internal_revenue_service national_office field_service_advice memorandum for from jacob feldman field service special counsel subject this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be used or cited as precedent disclosure statement field_service_advice is chief_counsel_advice and is open to public inspection pursuant to the provisions of sec_6110 the provisions of sec_6110 require the service to remove taxpayer identifying information and provide the taxpayer with notice of intention to disclose before it is made available for public inspection sec_6110 and i sec_6110 also authorizes the service to delete information from field_service_advice that is protected from disclosure under u s c sec_552 b and c before the document is provided to the taxpayer with notice of intention to disclose only the national_office function issuing the field_service_advice is authorized to make such deletions and to make the redacted document available for public inspection accordingly the examination appeals or counsel recipient of this document may not provide a copy of this unredacted document to the taxpayer or their representative the recipient of this document may share this unredacted document only with those persons whose official tax_administration duties with respect to the case and the issues discussed in the document require inspection or disclosure of the field_service_advice legend a b products issues tl-n-4511-99 whether royalty income from a non-affiliated person with respect to manufacturing intangibles reduces product_area research for purposes of computing the cost sharing floor under the profit split method conclusions the amount of royalty income received from a non-affiliated person allocable to manufacturing intangibles for products within the same 3-digit sic code as the possession product reduces the product_area research for purposes of computing the cost sharing floor under the profit split method facts a a domestic sec_936 corporation is a wholly owned subsidiary of b a elected to use the profit split method of computing its combined taxable_income cti pursuant to sec_936 b’s products are made and distributed by related and unrelated parties a makes products on behalf of b in puerto rico b receives royalties from unrelated original equipment manufacturers oems for the right to make and distribute products which includes among others a license to use b’s copyrights in those activities for purposes of computing combined taxable_income under the profit split method under sec_936 a determined its cost sharing floor by reducing its product_area research by the amount of the royalty income it received from the oems law and analysis sec_936 of the internal_revenue_code_of_1986 as amended provides a credit against the amount of u s income_tax that would otherwise be due for certain domestic corporations in puerto rico and other possessions that elect such treatment sec_936 limits the availability of the credit with respect to intangible_property_income derived in whole or in part by possession based sales the general_rule set out in sec_936 - provides that intangible_property_income is included in the gross_income of the possession corporation's u s shareholders unless the possession_corporation elects out of the general treatment pursuant to sec_936 the small_business job protection act of p_l_104-188 terminated the puerto rico and possession_tax_credit for tax years beginning after date sec_936 special phaseout rules apply to existing credit claimants tl-n-4511-99 sec_936 enacted in the tax equity and fiscal responsibility act of tefra is intended to benefit business operations that contribute to the economy of the possessions publaw_97_248 h conf rept pincite the mechanics of providing the benefits are a credit for the tax on qualified income of an electing_corporation coupled with a dividend received deduction for dividends made from the possessions_corporation sec_243 sec_936 sec_936 was added in response to the perceived abuse under prior_law by u s businesses in developing intangibles and deducting the development costs in the u s followed by a transfer of the intangibles for exploitation on a tax- favored basis in the possessions the provision as modified is intended to lessen the abuse caused by taxpayers claiming tax-free_income generated by intangibles developed outside of puerto rico h conf rept pincite accordingly under sec_936 of the bill as originally passed by the senate the general_rule excludes income attributable to intangibles from the benefits of sec_936 by treating such income as included by the shareholders rather than by the electing_corporation the house-senate_conference amended sec_936 to provide alternative elections from the general_rule if certain requirements were made in an effort to promote economic development in puerto rico sec_936 was added providing an election out from the general exclusion and permitted specified benefits for intangible_property_income under either the cost sharing or the profit split method the sec_936 election out is available on the condition that the electing_corporation has a significant_business_presence in a possession with respect to the product for which sec_936 benefits are claimed significant_business_presence is measured under three alternative tests geared to a minimum level of specified costs of the product being incurred in the possession sec_936 was in part a response to issues raised in 84_tc_996 aff’d in part rev’d in part and remanded 856_f2d_855 7th cir taxpayer transferred valuable patents and other intangibles to its sec_936 corporation and thereby avoided substantial federal income taxes tl-n-4511-99 where the significant_business_presence threshold is satisfied sec_936 benefits are afforded for intangible_property_income with respect to the possession product under an election out of either the cost sharing or profit split methods under the cost sharing method the sec_936 corporation is treated as the owner for purposes of obtaining a return on manufacturing intangibles if it pays a cost sharing payment under sec_936 the cost sharing payment required is determined by a formula but the payment cannot be less than would be required under sec_367 or sec_482 if the sec_936 corporation were a foreign_corporation the formulary cost sharing payment is determined by multiplying the amount of product_area research with respect to the 3-digit sic code which includes the possessions product by a fraction the numerator of which is possession sales and the denominator of which is worldwide sales in the same digit sic code the second method for affording sec_936 benefits for intangible_property_income is the profit split method unlike the cost sharing method the profit split method does not attempt to distinguish among different types of intangible_property_income with some types qualifying and others not qualifying for sec_936 benefits rather under the profit split method the electing_corporation receives sec_936 benefits with regard to percent of the combined taxable_income cti of the affiliated_group other than foreign affiliates from covered sales of the possession product sec_936 defines covered sales to mean sales by the affiliated_group other than foreign affiliates to persons who are not members of the affiliated_group or to foreign affiliates sec_936 states that cti is computed separately for each possession product produced by the possessions_corporation cti is computed by deducting from the gross_income of the u s members of the affiliated_group from covered sales all expenses losses and other deductions properly apportioned or allocated thereto plus a ratable part of all expenses losses or other deductions of the affiliated_group that cannot definitely be allocated to some item or class_of_gross_income however in computing cti for each possession product the r d expenses and related deductions for the taxable_year cannot be less than of the cost sharing payment the possession_corporation would make for its share of product_area research had the cost sharing method been elected cost sharing floor as provided in sec_936 and in the regulations thereunder the regulations further provide b profit split option -- computation of combined taxable_income question in determining combined taxable_income from sales of a possession product how are the allocations and apportionments of expenses losses and other deductions to be determined tl-n-4511-99 answer i expenses losses and other deductions are to be allocated and apportioned on a fully-loaded basis under sec_1_861-8 to the combined gross_income of the possessions_corporation and other members of the affiliated_group other than foreign affiliates the amount of research development and experimental expenses and related deductions such as royalties paid_or_accrued with respect to manufacturing intangibles by the possessions_corporation or other domestic members of the affiliated_group to unrelated persons or to foreign affiliates allocated and apportioned to combined gross_income shall in no event be less than the amount of the cost sharing payment that would have been required under the rules set forth in sec_936 and paragraph a of this section if the cost sharing option had been elected sec_1_936-6 q a emphasis added a possessions_corporation that has elected the profit split method must therefore make alternate calculations for purposes of computing combined taxable_income ie the corporation must allocate and apportion expenses consistent with sec_1_861-8 and calculate the formulary cost sharing payment therefore the amount of r d expenses deducted in computing combined taxable_income is the greater of the cost sharing floor which i sec_120 of the cost sharing formula or the amount determined under sec_1_861-8 e or sec_1 however in determining the cost sharing payment the regulations under sec_1_936-6 a q a provide that royalty income from a person from outside the affiliated_group with respect to the manufacturing intangibles within a product_area reduces the product_area research pool within the same product_area in other words the royalty income reduces the cost sharing payment unanswered directly in the regulations is whether the royalty income also reduces the cost sharing floor based on an analysis of the statutory and regulatory provisions under sec_936 we conclude that the royalty income described above does reduce the cost sharing floor used in computing cti under the profit split method although sec_1_936-6 which deals with the computation of cti under the profit split method is silent about whether this reduction occurs we believe that this position is supported by the language of the statute sec_936 modifies the computation of the cost sharing payment under sec_936 by increasing the formula’s multiplier from to and removing the requirement that the cost sharing formula not be less than the amounts determined under sec_482 and sec_367 otherwise sec_936 and sec_1_936-6 q a1 direct the cost sharing floor to be determined as the cost sharing payment would have been determined had the cost sharing method been elected thus sec_1_936-6 tl-n-4511-99 q a is applicable for purposes of determining the cost sharing floor under the profit split method note however that in applying our conclusion to the facts in this case it is necessary to determine whether the royalty income b receives derives from a manufacturing or non-manufacturing intangible as only royalty income paid with respect to manufacturing intangibles reduces product_area research and thereby the cost sharing floor under profit split intangibles are defined under sec_936 and manufacturing intangibles are defined under sec_936 see sec_1_936-6q a1 the determination as to whether the intangible is a manufacturing or a non- manufacturing_intangible is a factual one that should be made with reference to sec_936 however the facts presented indicate that the royalty income b receives is at least partially for_the_use_of copyrights copyrights are generally considered to be nonmanufacturing or marketing intangibles sec_936 however under certain circumstances a copyright may be a manufacturing_intangible based upon the function it serves question can a copyright be in whole or in part a manufacturing_intangible for purposes of the allocation of income under the cost sharing method answer in general a copyright is a marketing intangible see sec_936 however copyrights may be treated either as manufacturing intangibles or nonmanufacturing_intangibles or as partly each depending upon the function or the use of the copyright if the copyright is used in manufacturing it will be treated as a manufacturing_intangible but if it is used in marketing even if it is also classified as knowhow it will be treated as a marketing intangible sec_1_936-6 q a to the extent the copyright licensed to the oems is used in manufacturing the royalties received therefrom would reduce product_area research but to the extent the copyright is used for nonmanufacturing purposes the royalties received therefrom should be disregarded when calculating the cost sharing floor factual determinations should be made with regard to what part of the royalty income received by b relates to the licensing of copyrights and whether any portion of the royalty income received that is specific to the copyrights is attributable to a manufacturing function the portion of the royalty income received by b that is allocable to copyrights that are in fact used in manufacturing reduce the cost sharing floor tl-n-4511-99 we recommend that you develop the facts regarding whether and to what extent the royalties b receives are for use of a copyright as opposed to other intangible_property and whether the copyright is used in a manufacturing function we also recommend that you seek field_service_advice as appropriate in conjunction with the above determinations please call if you have any further questions field service special counsel office of associate chief_counsel international jacob feldman


internal_revenue_service index nos number release date cc dom it a plr-111769-99 attention date ein dear this is in reference to a form_1128 application to adopt change or retain a tax_year submitted on behalf of the above- named taxpayers requesting permission to change their accounting_period for federal_income_tax purposes from a taxable_year ending to a taxable_year ending effective the taxpayers have requested that the form_1128 be considered timely filed under the authority contained in sec_301_9100-3 of the procedure and administration regulations the taxpayers' form_1128 requesting a change in accounting_period to a tax_year ending was due on or before the information furnished indicates that the application_for the change in accounting_period was filed late because of an error or misunderstanding however the form was filed within days of the due_date sec_1_442-1 of the income_tax regulations provides that in order to secure the commissioner's consent to a change in accounting_period taxpayers must file an application on form_1128 with the commissioner on or before the 15th day of the second calendar month following the close of the short_period sec_301_9100-3 provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions such as the instant case must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when taxpayers provide evidence to establish that the taxpayers acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government based on the facts and information submitted and the representations made it is held that the taxpayers have acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government accordingly the requirements of the regulations for the granting of relief have been satisfied in this case and taxpayers’ late filed form_1128 requesting permission to change to a tax_year ending effective for the short_period of is considered timely filed pursuant to appendix a of revproc_99_1 1991_1_irb_6 an additional user_fee is required in order to process the form_1128 the user_fee will be requested in a separate correspondence we will begin processing the taxpayers’ application after the user_fee is received the ruling contained in this letter is based upon facts and representations submitted by the taxpayers and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as part of an examination process this ruling addresses the granting of sec_301_9100-3 relief only no opinion is expressed regarding the tax treatment of the instant transaction under the provisions of any other sections of the code or regulations that may be applicable thereto or regarding the tax treatment of any conditions existing at the time of or effects resulting from the instant transaction specifically no opinion is expressed as to whether the taxpayers are permitted under the code and applicable regulations to change to the tax_year requested in the subject form_1128 in accordance with the provisions of a power_of_attorney currently on file we are sending a copy of this letter_ruling to the taxpayers' authorized representative this ruling is directed only to the taxpayers that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent sincerely yours assistant chief_counsel income_tax and accounting s thomas a luxner by thomas a luxner acting deputy assistant chief_counsel enclosures copy of this letter copy for sec_6110 purposes