t c memo united_states tax_court kevin r johnston petitioner v commissioner of internal revenue respondent docket no filed date kevin r johnston pro_se sherri s wilder nicholas j richards and miles d friedman for respondent memorandum opinion beghe judge respondent determined a deficiency of dollar_figure in petitioner's federal income and self-employment_tax for respondent also determined additions to tax under sec_6651 for failure_to_file a return and under sec_6654 for failure to pay estimated_tax of dollar_figure and dollar_figure respectively we must decide whether petitioner’s gross_income includes certain payments made during for services performed by petitioner petitioner claims these payments are not his income because he did not personally receive them instead petitioner directed the recipients of his services to pay an entity known as universal trust universal petitioner asserts that universal should be recognized as a separate taxable entity and that the payments made by the service recipients should be treated as universal’s income in the alternative petitioner asserts he is entitled to business deductions that offset the services income petitioner has also filed a motion for summary disposition and or judgment and a motion in limine which challenge the validity of the statutory notice question respondent’s ability to make certain arguments or introduce certain evidence and urge a reallocation of the burden_of_proof in addition to rebutting petitioner’s procedural challenges respondent advances three arguments for including in petitioner’s income the payments made to universal first respondent claim sec_1 all section references are to the internal_revenue_code in effect for and all rule references are to the tax_court rules_of_practice and procedure unless otherwise specified petitioner’s attempt to divert to universal the income from his personal services was an invalid assignment_of_income under the long line of authority beginning with 281_us_111 second respondent asserts that universal should not be recognized as a separate taxable entity because it is a sham with no economic_substance third respondent asserts that even if universal is recognized for tax purposes it is a grantor_trust whose income is taxable to petitioner under sections respondent has also moved for a penalty under sec_6673 on the ground that petitioner’s primary position----that the payments made to universal are not petitioner’s income---is frivolous moreover respondent has filed a motion and expressed reservations in stipulations asking us to dismiss the case at hand treat certain facts as established or exclude certain evidence as a sanction for petitioner’s failure to respond to discovery requests and to exchange documents as required by our standing_pretrial_order we reject petitioner’s procedural challenges to respondent’s actions deny petitioner’s motions and hold that petitioner’s attempted diversion to universal of the income from his personal services was an invalid assignment_of_income we also hold that petitioner has failed to show he is entitled to additional deductions from that income except to the very limited extent described below notwithstanding these conclusions we deny respondent’s motion for a penalty under sec_6673 we also deny respondent’s motion and other requests for the exclusion of evidence or other relief as a sanction for petitioner’s conduct procedural setting the statutory notice sent to petitioner determined that petitioner had failed to report dollar_figure in business gross_receipts respondent also sent notices to julia ghavami ms ghavami and to universal for reflecting determinations that ms ghavami and universal had each received an identical amount ie dollar_figure of business gross_receipts as explained in more detail below these notices were whipsaw notices designed to protect respondent’s position if it should be decided that universal had economic_substance and should be respected as a separate taxable entity ms ghavami filed a petition with this court contesting respondent’s determination for see julia ghavami v commissioner docket no ghavami jimmy c chisum mr chisum as managing agent for trustee purported to file a we note that mr chisum and a myriad of purported trusts with which he has claimed to be connected are well continued petition on behalf of universal contesting the notice sent to universal for see universal trust four ws tto1 trustee v commissioner docket no universal due to the common issues involved we granted respondent’s motion to consolidate ghavami and universal with the case at hand shortly before trial however respondent moved to dismiss universal for lack of jurisdiction on the ground that mr chisum had failed to establish his capacity to file a petition on behalf of universal respondent also moved to sever universal from the consolidated case and we granted that motion shortly thereafter mr chisum submitted a motion to dismiss universal on various jurisdictional and procedural grounds because respondent and ms ghavami have agreed to a decision that there is no deficiency in ms ghavami’s tax for we have also granted respondent’s motion to sever ghavami from the case at hand continued known to this court see eg lipari v commissioner tcmemo_2000_280 sec_6673 penalty imposed on taxpayers who claimed they were unable to obtain records from mr chisum the trustee of their trust banana moon trust v commissioner tcmemo_2000_73 dismissed for lack of jurisdiction because mr chisum who claimed to be trustee did not have capacity to file petition jeff burger prods llc v commissioner tcmemo_2000_72 bantam domestic_trust v commissioner tcmemo_2000_63 photo art mktg trust v commissioner tcmemo_2000_ george v commissioner tcmemo_1999_381 trust of which mr chisum was trustee was a sham and payments received by that trust were income of osteopathic physician who performed services that generated the income a hearing on the cross-motions to dismiss universal was held on june and mr chisum claimed to represent universal at this hearing he also testified briefly on its behalf at the end of this hearing the court took the motions under advisement pending resolution of the case at hand although petitioner was pro_se the court allowed mr chisum who does not claim to be a member of the bar of any court to sit beside petitioner at trial it appears that mr chisum has been advising petitioner on the conduct of his case petitioner testified neither at the universal hearing nor in the case at hand background the record consists primarily of two sets of stipulations with exhibits and a very limited amount of testimony the stipulations are incorporated herein by this reference petitioner resided in lake forest california when the petition was filed petitioner neither filed an income_tax return for nor paid any estimated_tax for that year respondent sent the statutory notice to petitioner on date the notice stated that dollar_figure of unreported business schedule c profit or loss from business gross_receipts were includable in petitioner’s income it contained no further explanation of this item the computation of tax included in the notice did not allow petitioner any deductions other than the standard_deduction for single filing_status anda deduction for one-half the self-employment_tax determined by the notice also on date respondent sent a statutory notice for to ms ghavami which stated that an identical amount of unreported business gross_receipts ie dollar_figure was includable in her income at some time or times ms ghavami and petitioner lived at the same address approximately year before respondent sent the notices to petitioner and ms ghavami the commissioner sent a statutory notice to universal for the notice to universal stated that universal had dollar_figure of unreported gross_receipts because universal had reported dollar_figure of gross_receipts on its fiduciary income_tax return form_1041 the notice reflected a determination that universal’s gross_receipts were dollar_figure the same amount of income set forth in the notices sent to petitioner and ms ghavami the notice to universal stated that the amount of unreported gross_receipts was determined using the bank_deposits method the notice to universal also disallowed for lack of substantiation universal’s claimed deductions for dollar_figure of expenses and dollar_figure of distributions petitioner asserts that if payments made to universal are includable in his income he is entitled to deduct many of the expenses paid_by universal on his behalf respondent contends that almost all amounts paid_by universal were petitioner’s nondeductible personal expenses not trade_or_business_expenses during a checking account at the bank of california the universal account was held in universal’s name petitioner and ms ghavami were signatories on this account and wrote checks on the account during as the parties have stipulated dollar_figure was deposited in the universal account during of this amount dollar_figure was paid_by third parties for work done by petitioner and dollar_figure was paid for work done by ms ghavami thus all but dollar_figure of the dollar_figure deposited into the universal account during was paid as consideration for services performed by petitioner or ms ghavami after review of some canceled checks drawn on the universal account respondent has conceded that petitioner is entitled to deduct as trade_or_business_expenses dollar_figure paid_by universal for postage dollar_figure paid_by universal to sponsor sports teams and dollar_figure paid_by universal for printing petitioner does not have and did not maintain during a record of his business and personal automobile mileage the amount of the distribution_deduction claimed by universal on its return dollar_figure was equal to the entire net_income shown on the return the return states that the dollar_figure was distributed to an entity known as oak hargor sic finance with the following address p o box guelth sic ontaria sic canada n1h 6k9 facts concerning petitioner’s connection with universal on date donna l chisum as settlor four ws tto1 as first trustee and mr chisum and another individual as witness es executed a document the indenture purporting to create an entity known as universal trust the indenture stated that universal was a common_law business_trust organization also known as a contractual company with certain assets to be administered by the trustee for capital unit holders represented by certificates in accordance with the inalienable common_law rights afforded to man notwithstanding this language purporting to create a_trust the indenture also stated that it is expressly declared that an unincorporated business organization by contract is hereby created and not a_trust agreement by gift or a partnership or a company or a corporation or a joint_venture or any entity of statutory nature emphasis added other documents dated date show that all capital units that could be issued by universal were issued on that date to petitioner and ms ghavami these documents state that the capital units were issued in exchange for petitioner’s and ms ghavami’s contribution to universal of the following we use the term indenture for convenience and not to suggest that universal should be recognized as a_trust for state law or federal_income_tax purposes -- - desk chair file cabinet typewriter wastebaskets telephones vcr tv bedroom furnishings living room furniture dining room set coffee tables end tables pictures etc note owed to lynne b johnston for dollar_figure knowledge talent ability and labor of petitioner office supplies and office tools emphasis added the indenture provided that whenever the board_of trustees determined that universal had income that would be taxable to universal if not distributed the income was to be distributed to capital unit holders in proportion to their holdings any remaining income was to be allocated to principal the indenture also provided that on termination of universal any remaining assets would be distributed to capital unit holders also in proportion to their holdings other documents dated date named petitioner secretary and ms ghavami general manager of universal and gave them authority to conduct universal’s day-to-day business as noted above both petitioner and ms ghavami could and did sign checks on universal’s bank account a document entitled registry of unit certificates purports to show that in date the capital units in universal were transferred to an entity known as isiah and that in date they were transferred to an entity known as oak harbor mr chisum testified that oak harbor was a_trust established in the turks and caicos with a foreign trustee he also testified that neither petitioner nor ms ghavami was a beneficiary of isiah or oak harbor mr chisum claims that he was either universal’s trustee or an officer or agent of universal’s trustee from universal’s formation in until the time of trial except for the period from date until date additional facts relating to petitioner’s services petitioner is a licensed real_estate salesperson in the state of california at some time not specified in the record walter blazyk mr blazyk the president of world wide mortgage corporation wwmc approached petitioner and asked him to work for wwmc petitioner agreed to do the work provided that wwmc pay universal for the work done during petitioner worked for wwmc and a few other parties also during that year wwmc paid universal dollar_figure for work done by petitioner the other parties paid universal dollar_figure for work done by petitioner as set forth above this dollar_figure paid for petitioner’s services was deposited into universal’s bank account petitioner alone did the work for which wwmc paid universal the dollar_figure during as far as wwmc was aware universal was not involved in making any of the business decisions necessary to produce this income moreover universal was never involved in the working relationship between petitioner and wwmc mr blazyk’s only contact with universal occurred when petitioner asked wwmc to issue the checks for his services to universal until date mr blazyk did not know and never had any contact with mr chisum the parties have stipulated that universal is not legally entitled to hold a real_estate license or conduct a mortgage business according to california department of real_estate records wwmc was petitioner’s employing broker in and was still petitioner’s employing broker in facts relating to petitioner’s motions and respondent’s motion for a penalty under sec_6673 on date the court filed respondent’s motion to consolidate for trial briefing and opinion a copy of this motion was mailed to petitioner on date the motion stated the position of counsel for respondent is that the universal trust is a sham and that individual items of income are taxed to the individuals kevin r johnston and julia ghavami personally and individual expense items if substantiated are deductible by them personally on date the court filed a copy of respondent’s reguests for admission which had been served on petitioner on date these requests sought information relating to respondent’s position that universal was a sham for example one request stated that there has been no change in the use of assets assigned or transferred to the universal trust as a result of such transfer or assignment on date the court filed respondent’s motion to compel responses to respondent’s interrogatories that motion stated the primary issue is whether universal trust created by petitioners ghavami and johnston should be disregarded for tax purposes due to its lack of economic_substance and attempted assignment_of_income with the result that the net_income reported by the trust is properly reported by petitioners ghavami and johnston on date during the hearing on the cross-motions in universal the court brought to petitioner’s attention and discussed for his benefit the assignment_of_income sham trust and grantor_trust theories on date the court told petitioner that trial of the case at hand would begin on date the court arranged this l-week delay in order to give petitioner yet more time to gather evidence and to encourage the parties to stipulate as many facts as possible among the factors we consider in deciding whether a purported trust is a sham for tax purposes is whether the grantor’s relationship to the property transferred to the trust was materially different after the trust’s formation see 73_tc_1235 respondent warned petitioner more than months before trial that taxpayers in sham trust cases have been penalized under sec_6673 for advancing frivolous arguments on date respondent’s counsel informed petitioner that he was prepared to move for a penalty under sec_6673 if petitioner continued to insist that the dollar_figure paid to universal for work done by petitioner was not petitioner’s income on date petitioner had stipulated that during wwmc paid universal dollar_figure for work done by petitioner trial began on date after the 1l-week interval arranged by the court the parties submitted a second stipulation of facts in that document petitioner agreed to a number of additional stipulations concerning the payment of dollar_figure to universal for work done by petitioner and concerning deposits made to universal’s bank account during however petitioner refused to testify the parties’ contentions respondent now asserts that petitioner’s gross_income includes dollar_figure paid to universal during for work done by petitioner according to respondent this amount is includable the statutory notice asserted that petitioner’s income included dollar_figure in unreported business gross_receipts respondent now claims that petitioner’s gross_income should be increased by only dollar_figure the amount the record establishes was paid to universal and deposited in its bank account for continued -- - in petitioner’s income under the assignment_of_income_doctrine because universal was a sham or if universal was not a sham because universal’s income is taxable to petitioner under the grantor_trust_rules respondent has conceded that petitioner is entitled to a small amount of trade_or_business deductions relating to this income petitioner maintains that the dollar_figure is universal’s income or in the alternative contends that he is entitled to business deductions that offset the income petitioner has filed a motion for summary disposition and or judgment contesting the validity and effect of the statutory notice petitioner has also filed a motion in limine contesting respondent’s ability to make certain arguments or introduce certain evidence because our disposition of these motions could affect our consideration of the substantive issues we turn our attention to them now i petitioner’s motion for summary_judgment according to petitioner’s summary_judgment motion respondent has failed to establish a sufficient link between continued services performed by petitioner the record also establishes that dollar_figure of the dollar_figure deposited in universal’s account was paid for services performed by ms ghavami the record contains no information about the proper treatment of the remaining dollar_figure deposited in the universal account dollar_figure minus dollar_figure and dollar_figure equals dollar_figure -- - petitioner and the funds paid to universal which respondent claims are petitioner’s income petitioner asserts that as a result the statutory notice was an invalid naked assessment and we must dismiss the case at hand for lack of jurisdiction in the alternative petitioner claims respondent’s failure to supply the necessary predicate evidence deprives the notice of its usual presumption of correctness and respondent must bear the burden_of_proof on all issues a validity of notice petitioner’s claim that the notice was invalid effectively asks us to look behind the notice see 85_tc_1 as a general_rule we do not look behind a deficiency_notice to examine the evidence used the propriety of respondent’s motives or the administrative policy or procedure that informs respondent’s determinations this is because a trial before the tax_court is a proceeding de novo our determination of a taxpayer’s tax_liability must be based on the merits of the case and not on any previous record developed at the administrative level see 62_tc_324 moreover even where a taxpayer has made a showing casting doubt on the validity of respondent’s determination the notice is generally not rendered void and it remains sufficient to vest this court with jurisdiction see 58_tc_792 the court_of_appeals for the ninth circuit to which an appeal of the case at hand would lie has developed an exception to this rule in 814_f2d_1363 9th cir revg 81_tc_855 the court_of_appeals held a notice invalid and dismissed the action for lack of jurisdiction in favor of the taxpayer the notice in scar informed the taxpayers that they had dollar_figure of unreported income from a tax_shelter partnership known as the nevada mining project the notice also stated that tax was being assessed on this income at the maximum marginal_rate because the taxpayers’ original return was unavailable at trial however the taxpayers established that they had no connection with the nevada mining project and that they had in fact filed their tax_return as a result the court_of_appeals concluded that the taxpayers proved that a determination of their deficiency had not been made see scar v commissioner supra pincite n petitioner has made no such showing in the case at hand the notice sent to petitioner stated that he had dollar_figure in unreported business receipts during petitioner has stipulated that an identical amount was deposited in the universal bank account during petitioner has also -- - stipulated that dollar_figure of that dollar_figure was paid for personal services petitioner performed moreover the record reveals that petitioner was a signatory on the universal account that he was one of the original capital unit holders in universal and that as a unit holder he was entitled to receive distributions of income and of corpus from universal therefore a comparison of the facts in the record with the notice sent to petitioner confirms that respondent actually determined a deficiency in petitioner’s tax moreover as we conclude in our discussion of the substantive issues below the record also proves the accuracy of the determination made equally importantly the court_of_appeals for the ninth circuit has limited the application of scar to the narrow circumstances where the notice_of_deficiency reveals on its face that no determination was made see 998_f2d_1514 9th cir 875_f2d_1396 9th cir 90_tc_110 petitioner argues that respondent’s three statutory notices to petitioner ms ghavami and universal which attributed the same amount of income to each of them show that respondent failed to determine a deficiency in petitioner’s tax and that petitioner’s notice was invalid on its face we disagree in clapp v commissioner supra the individual taxpayers transferred their businesses to foreign trusts the commissioner issued notices to both the individuals and the trusts the notices attributed many of the same items of income to both parties the notices also disallowed numerous deductions as unsubstantiated including all business_expenses claimed by the individuals and the trusts the taxpayers in clapp challenged the validity of the notices stressing the commissioner’s alternative positions and the blanket disallowance of deductions in response the court_of_appeals for the ninth circuit observed that the commissioner’s alternative notices were intended to ensure that the commissioner would be able to proceed whether or not the trusts were found to be shams the court_of_appeals stated that taking such alternative positions seems to be a reasonable response to a tax_evasion scheme for which there is not as yet a settled legal interpretation any other approach would reward the tax evader who could come up with a novel scheme and force the commissioner to take a single consistent legal interpretation on previous occasions we have upheld notices of deficiency which took alternative positions for precisely this reason 302_f2d_700 9th cir 273_f2d_649 9th cir clapp v commissioner supra pincite fn ref omitted the statutory notices sent to petitioner ms ghavami and universal like the notices in clapp v commissioner supra were - - whipsaw notices designed to protect respondent’s ability to proceed if a purported trust should be recognized as a separate taxable entity in the circumstances of the case at hand the notice sent to petitioner was proper for this and the other reasons set forth above we hold that the notice sent to petitioner was valid and that we have jurisdiction of the case at hand petitioner’s argument to the contrary has no merit b presumption of correctness in general a deficiency_notice is presumed correct and the taxpayer has the burden of proving it wrong see rule a 290_us_111 ’ there are certain exceptions to this rule however where the notice alleges that the taxpayer has received unreported income the court_of_appeals for the ninth circuit has held in unreported income cases that the presumption of correctness applies only where the commissioner’s determination is supported by some substantive evidence that the taxpayer received the unreported income see 774_f2d_932 9th cir 596_f2d_358 9th cir revg 67_tc_672 92_tc_661 discussing court of ’ we do not find that the burden-shifting provisions of current sec_6201 or sec_7491 apply appeals for the ninth circuit authorities once the commissioner has introduced the necessary predicate evidence concerning the unreported income however the taxpayer has the usual burden of establishing by a preponderance_of_the_evidence that the commissioner’s determination is arbitrary or erroneous see rapp v commissioner supra pincite petzoldt v commissioner supra pincite the court_of_appeals has described the required evidentiary foundation as minimal 116_f3d_1309 9th cir moreover this exception to the presumption of correctness applies only to unreported income the taxpayer always has the burden of proving entitlement to any deductions see 724_f2d_808 9th cir petitioner asserts that the notice in the case at hand should not be presumed correct because there is insufficient evidence linking petitioner to the funds paid to universal which respondent claims are petitioner’s income petitioner notes that universal not petitioner actually received payment of the funds moreover although petitioner was one of the original capital unit holders in universal petitioner asserts that there is no evidence that petitioner was a unit holder or other beneficiary of universal during the year in issue as a result according to petitioner the presumption of correctness does not apply because respondent has failed to show that petitioner personally received the unreported income described in the notice although some of the authorities cited by petitioner such as 181_f3d_1002 9th cir and rapp v commissioner supra pincite do mention the taxpayer’s receipt of income it is nevertheless clear that the commissioner may satisfy the predicate evidence requirement in unreported income cases by introducing evidence linking the taxpayer to tax-generating acts see shriver v commissioner t cc alternatively respondent may satisfy the predicate evidence requirement by showing the taxpayer was connected to unexplained bank_deposits or cash see 87_tc_609 discussing court_of_appeals for the ninth circuit authorities 87_tc_74 the record contains ample evidence linking petitioner both to tax-generating acts and to bank_deposits of the income the authorities cited by petitioner when read in full support this conclusion for example although 774_f2d_932 9th cir does mention evidence of receipt it also states that once the government has carried its initial burden of introducing some evidence linking the taxpayer with income-producing activity emphasis added the burden_of_proof shifts to the taxpayer moreover 181_f3d_1002 9th cir states that the exception to the presumption of correctness applies only where the commissioner has failed to provide any evidentiary foundation for the deficiency_notice - - generated by those acts for example it is undisputed that petitioner a licensed real_estate salesperson worked for wwmc and a few other parties during it is also undisputed that wwmc and the other parties paid a total of dollar_figure for petitioner’s services during that year moreover it is clear that this dollar_figure was deposited into universal’s bank account that petitioner was one of the signatories to that account and that petitioner wrote checks on that account finally it is clear that petitioner was one of the original capital unit holders of universal and as such was once entitled to receive distributions of income and corpus from universal all this more than amply links petitioner with the unreported income described in the notice petitioner asserts that as a matter of law none of this evidence may be used to support the statutory notice because respondent has not shown that respondent had the evidence when the notice was issued and the evidence was not described in the notice itself we disagree in general any admissible evidence may be used to support a deficiency_notice see 46_fedclaims_110 which stated that an assessment was not naked even if the administrative file supporting its entry was lost because what is critical given the de novo nature of the proceedings is that admissible evidence exists to support the assessment if such evidence exists and is admitted by the court it is irrelevant whether it is the same evidence that the service relied upon in originally making its assessment id pincite citations omitted see also 83_tc_269 stating that in case appealable to court_of_appeals for the second circuit deficiency_notice based on hearsay must be held arbitrary unless we can find admissible evidence in the record to support it 46_tc_681 we know of no rule_of law calling for a review of the materials that were before the commissioner in order to ascertain whether he relied upon improper evidence so that the burden_of_proof might be shifted to him cf 58_tc_792 notice not entitled to presumption of correctness where it was stipulated that notice was based entirely on constitutionally inadmissible evidence ’ petitioner’s proposed rule if accepted would require courts to discover and examine the information actually used by the commissioner in determining a deficiency whenever a taxpayer challenged the validity of a notice such routine inquiries would violate the well-settled rule that we do not except in exceptional circumstances look behind a deficiency_notice in we also note that in one of the cases cited by petitioner hardy v commissioner supra pincite the court_of_appeals in part relied on the taxpayer’s stipulations in deciding that the predicate evidence reguirement was satisfied - - effect the exception set forth in 814_f2d_1363 9th cir revg 81_tc_855 would no longer be limited to cases where the notice_of_deficiency is invalid on its face in the case at hand petitioner has not offered any evidence that could lead us to conclude or made any assertions that could even lead us to suspect that the statutory notice was either arbitrary or based upon constitutionally tainted evidence moreover the record contains a great deal of evidence showing that petitioner in fact received almost all the income charged in the statutory notice as a result petitioner is not being put in the position of having to prove a negative ie the non- receipt of income simply because respondent issued a notice entitled to a presumption of correctness cf weimerskirch v commissioner f 2d pincite for this and the other reasons described above we hold that the notice sent to petitioner is amply supported by the evidence in the record the unreported income exception to the presumption of correctness does not apply to the case at hand petitioner’s arguments to the contrary have no merit ii petitioner’s motion in limine the statutory notice stated that petitioner’s income included unreported business gross_receipts but it did not give any further explanation for this determination - - petitioner’s motion in limine asserts that respondent’s failure to include a fuller explanation in the statutory notice should have consequences more particularly petitioner claims respondent should not be permitted to raise the assignment_of_income sham or grantor_trust theories in the case at hand in the alternative petitioner asserts that respondent should bear the burden_of_proof on factual issues relating to those theories a issue preclusion we note that respondent is not necessarily limited to the issues or theories discussed in the statutory notice or the answer for example we have considered arguments raised by the commissioner for the first time on brief see 92_tc_1267 where we stated the rule that a party may not raise a new issue on brief is not absolute rather it is founded upon the exercise of judicial discretion in determining whether considerations of surprise and prejudice require that a party be protected from having to face a belated confrontation which precludes or limits that party’s opportunity to present pertinent evidence more generally we have stated in 91_tc_200 affd 905_f2d_1190 8th cir it is well established that a party may rely upon a theory if the opposing party has been provided with fair warning of the intention to base an argument upon that theory fair warning means that respondent’s failure to give notice in the notice_of_deficiency or in the pleadings of his intention to rely ona particular theory did not prejudice the taxpayer’s ability to prepare its case of key importance in evaluating the existence of prejudice is the amount of surprise and the need for additional evidence on behalf of the party opposed to the new position citations omitted see also 96_tc_226 where we observed that we have refused to consider a new_theory raised by the commissioner where consideration of the theory would prejudice the taxpayer in sundstrand corp we concluded that the taxpayer was prejudiced because it would have presented additional evidence at trial if it had known of the new_theory in advance in the case at hand respondent’s motion to consolidate informed petitioner more than months before trial of respondent’s position that universal was a sham and that individual items of income were taxed to petitioner personally more than months before trial respondent’s requests for admission sought information that once again put petitioner on notice of respondent’s position that universal was a sham in addition almost months prior to trial respondent’s motion to compel informed petitioners the primary issue is whether universal trust created by petitioners ghavami and johnston should be disregarded for tax purposes due to its lack of economic_substance and attempted assignment_of_income with the result that the net_income reported by the trust is properly reported by petitioners ghavami and johnston finally on date the court discussed the assignment_of_income sham and grantor_trust theories with petitioner the - - court did not start trial until week later to allow petitioner yet more time to gather additional evidence and to attempt to settle as many factual issues as possible when trial resumed after this l1-week period petitioner refused to testify moreover petitioner has not claimed that he could have found or offered any additional evidence relevant to any of respondent’s three theories if given more time for all these reasons it is clear petitioner had fair warning of the assignment_of_income sham and grantor_trust theories and would not be prejudiced by our consideration of them accordingly we hold that respondent may raise and we may consider any of those theories in this proceeding ’ petitioner’s argument to the contrary has no merit b burden_of_proof rule a provides that the burden_of_proof shall be upon the petitioner except that in respect of any new_matter increases in deficiency and affirmative defenses pleaded in the petitioner also asserts that respondent should be precluded from introducing any evidence relating to the sham grantor_trust and assignment_of_income theories because we have just decided that petitioner had fair warning of these theories we can think of no reason why respondent should be prohibited from introducing evidence relevant to those theories see rule b which states if evidence is objected to at the trial on the ground that it is not within the issues raised by pleadings then the court may receive the evidence and shall do so freely when justice so reguires and the objecting party fails to satisfy the court that the admission of such evidence would prejudice such party in maintaining such party’s position on the merits - - answer it shall be upon the respondent because the statutory notice did not mention the assignment_of_income sham or grantor_trust theories petitioner asserts that those theories are new_matter on which respondent has the burden_of_proof for many years a deficiency_notice was not required to contain an explanation a notice that simply informed the taxpayer that there was a deficiency and the amount thereof was sufficient to raise the presumption of correctness and place the burden_of_proof on the taxpayer see 644_f2d_1385 9th cir revg tcmemo_1978_392 88_f2d_650 2d cir consistent with this approach some courts held that where a deficiency_notice was broadly worded a theory raised by the commissioner after the notice was issued was not new_matter unless the new_theory was inconsistent with some position necessarily implicit in the determination itself abatti v commissioner supra pincite 29_tc_959 affd per curiam 271_f2d_741 2d cir in sec_7522 was enacted by the technical_and_miscellaneous_revenue_act_of_1988 publaw_100_647 102_stat_3735 sec_7522 provides that any deficiency_notice mailed after shall describe the basis for the tax due included in such notice -- - in 112_tc_183 we considered whether a theory raised by the commissioner for the first time on brief was new_matter on which the commissioner had the burden_of_proof after discussing sec_7522 we held that where the commissioner relied on a basis that was not stated in the statutory notice and that regquired the presentation of different evidence the new basis was new_matter for purposes of rule we need not consider this question further in the case at hand as we explain in our discussion of the substantive issues immediately below the record establishes that dollar_figure of the dollar_figure paid to universal was petitioner’s income under the assignment_of_income rule we would reach the same result no matter who had the burden_of_proof on respondent’s theories til does petitioner’s income include the dollar_figure paid to universal according to documents executed in date petitioner transferred his knowledge talent ability and labor to universal in exchange for certain capital units in universal respondent claims that petitioner’s attempt to transfer his knowledge talent ability and labor to universal was an archetypical example of an invalid assignment_of_income under the record also establishes that dollar_figure of the dollar_figure paid to universal was paid for work done by ms ghavami respondent has conceded that this dollar_figure and the remaining dollar_figure deposited in the universal account were not income to petitioner --- - the long line of authority beginning with 281_us_111 accordingly respondent asserts petitioner’s gross_income includes the dollar_figure paid for petitioner’s services during even though petitioner did not directly receive the payments of that income but instead caused the payments to be diverted to universal petitioner claims that universal and not petitioner should be taxed on the dollar_figure in question because universal was the true_earner of that income according to petitioner universal provided the services for which it was paid petitioner was simply universal’s agent or employee petitioner additionally asserts that in these circumstances taxing petitioner on the income in question would conflict with well-settled law recognizing personal_service_corporations as the true earners of the income generated by the efforts of their shareholder employees we agree with respondent the record establishes that petitioner’s transfer to universal was a classic assignment_of_income of the kind described in lucas v karl supra because such assignments are ineffective for federal_income_tax purposes petitioner remained the party taxable on the income generated by his services one of the primary principles of the federal_income_tax is that income must be taxed to the one who earns it the supreme - - court has referred to this assignment_of_income rule as the first principle of income_taxation 337_us_733 and as a cornerstone of our graduated income_tax system 410_us_441 attempts to subvert this principle by deflecting income away from its true_earner to another entity by means of contractual arrangements however cleverly drafted are not recognized as dispositive for federal_income_tax purposes notwithstanding their validity under state law see 73_tc_1246 citing united_states v basye supra and lucas v earl supra the assignment_of_income rule applies with particular force to personal_service_income in the landmark case of lucas v barl supra mr earl and his wife entered into a contract providing that any property acquired by either of them including salary and fees would be considered joint property the supreme court assumed that the contract was valid under state law but held that mr earl was still taxable on his entire salary and professional fees stating this case is not to be decided by attenuated subtleties it turns on the import and reasonable construction of the taxing act there is no doubt that the statute could tax salaries to those who earned them and provide that tax could not be escaped by anticipatory arrangements and contracts however skillfully devised to prevent the salary when paid from vesting even for a second in the man who earned it x lucas v karl supra pincite - - petitioner does not dispute that the dollar_figure paid to universal for work done by petitioner must be taxed to the earner of that income instead petitioner asserts that for tax purposes universal should be considered to have earned that income e was the true_earner of the income we are therefore required to decide whether petitioner or universal is the proper party to be taxed on the dollar_figure generated by petitioner’s work but paid to universal in cases similar to the case at hand we have held that the taxable party is the person or entity who directed and controlled the earning of the income rather than the person or entity who received the income see vercio v commissioner supra pincite citing 69_tc_1005 56_tc_828 see also 333_us_591 the crucial question remains whether the assignor retains sufficient power and control_over the assigned_property or over receipt of the income to make it reasonable to treat him as the recipient of the income for tax purposes 281_us_376 revocable_trust created by husband for benefit of wife and children treated as invalid assignment_of_income supreme court stated that taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed the income that is subject_to a - -- man’s unfettered command and that he is free to enjoy at his own option may be taxed to him as his income whether he sees fit to enjoy it or not the record shows that mr blazyk president of wwmc approached petitioner and asked him to work for wwmc petitioner then agreed to do the work provided that wwmc pay universal for the work done during wwmc paid universal dollar_figure for work done by petitioner also during that year a few other parties paid universal dollar_figure for work done by petitioner this dollar_figure paid for petitioner’s services was deposited into universal’s bank account petitioner had signatory authority over that account and wrote checks on the account during moreover on brief petitioner has conceded that he used the universal account to pay personal expenses during he also appears to argue that only approximately dollar_figure of the dollar_figure of expenses claimed by universal on its return for were in fact business_expenses the record also shows that petitioner alone did the work for which wwmc paid universal during as far as wwmc was aware universal was not involved in making any of the business decisions necessary to produce this income more importantly the parties have stipulated that universal was not legally entitled to hold a real_estate licence or conduct a mortgage business and it was never involved in the working relationship -- - between petitioner and wwmc mr blazyk’s only contact with universal occurred when petitioner asked wwmc to issue the checks for his services to universal until date mr blazyk did not know and never had any contact with mr chisum although mr chisum claims that he was either universal’s trustee or an officer or agent of universal’s trustee during most of universal’s existence finally petitioner did not report and has not conceded that he received any salary or other income as a result of the payments made to universal for his services all this leads us to conclude that there was no negotiation between petitioner and universal and no contract requiring petitioner to supply his services to universal and giving universal the right to control petitioner’s work it also causes us to conclude that universal did not have a contract with wwmc obligating universal to provide services in this connection we note that petitioner did not testify or offer any other evidence about the nature of his employment relationship if any with universal about the existence of any contracts he had with universal or about universal’s relationships or contracts with the recipients of petitioner’s services in these circumstances we draw the normal inference from petitioner’s failure to offer evidence on these matters which is that the evidence if produced would not have been helpful to his cause - - see 6_tc_1158 affd 162_f2d_513 10th cir for all these reasons the record establishes that petitioner rather than universal was the true_earner of the dollar_figure paid for petitioner’s services during petitioner’s attempted transfer of his knowledge talent ability and labor to universal was a classic assignment_of_income see vercio v commissioner t c pincite4 taxpayers created trusts to which they purportedly conveyed the exclusive use of their lifetime services and all of the currently earned remuneration therefrom held taxpayers retained ultimate direction and control_over earning of the income and the conveyance was an invalid assignment_of_income in part because it was unlikely that a binding contract for services between the trust and the taxpayers had been entered into there was no evidence that the trust had any right to direct the taxpayers’ income-producing activities and it was questionable whether the trusts could in any event obligate the taxpayers to perform services that were inherently_personal in nature see also 621_f2d_1318 8th cir affg tcmemo_1979_164 physician conveyed to a_trust the exclusive use of his lifetime services and all the currently earned remuneration accruing therefrom held physician retained ultimate direction and control and conveyance -- - was an anticipatory_assignment_of_income in part because the trust had no right to supervise the taxpayer’s employment or determine his remuneration and the taxpayer had no legal duty to earn money or perform services for the trust petitioner argues that our conclusion conflicts with the authorities recognizing personal_service_corporations psc’s as the true earners of the income generated by the efforts of their shareholder employees we disagree first we note that in many circumstances arrangements creating psc’s are invalid assignments of income see eg 104_tc_140 78_tc_882 amounts paid_by professional basketball club for player’s services were income to player rather than to psc which received the payments affd without published opinion 734_f2d_20 9th cir we also note that congress has enacted various code provisions in an attempt to end various perceived abuses of psc’s see e g sec_269a second the authorities recognizing psc’s as the true earners of the income generated by the shareholders’ services have noted the tension between the assignment_of_income rule set forth in 281_us_111 and the importance attributed to the corporate form by 319_us_436 see eg johnson v -- - commissioner t c pincite n 77_tc_1014 affd 723_f2d_58 10th cir of course in the case at hand petitioner employed a purported trust in his diversion scheme and the moline properties inc policy favoring the recognition of shareholders and corporations as separate taxable entities is simply not applicable third even when we respect a psc as the true_earner this does not end our examination we then evaluate the arrangement between the shareholder and the psc under sec_482 in so doing we consider whether the shareholder’s total compensation from the psc was essentially equivalent to that which he would have received if he had not employed the psc structure see eg 88_tc_604 affd without published opinion 855_f2d_855 8th cir keller v commissioner t c pincite5 this analysis ensures that the shareholder will be taxed on the reasonable value of his services except to the extent his taxable_income is reduced by code provisions that specifically provide for deferral or nonrecognition of income eg qualified_pension plan provisions we repeat that in the case at hand petitioner did not report and has not conceded that he received any salary or other income as a result of the payments made to universal for his services moreover universal’s tax_return claimed a deduction for a distribution of universal’s entire net_income to -- -- a beneficiary with a foreign address which mr chisum asserted was a turks and caicos trust with a foreign trustee fourth we have held that two elements must be present before a psc rather than its service-performing employee can be considered the true_earner of the income first the service- performing employee must be just that---an employee of the psc whom the psc has the right to direct or control in some meaningful sense second the psc and the person or entity using the employee’s services must have a contract or similar arrangement recognizing the psc’s controlling position see johnson v commissioner t c pincite neither of these element sec_1s present in the case at hand in short the authorities concerning the taxation of psc’s confirm rather than challenge our conclusion that petitioner’s attempted diversion to universal of the compensation_for his services was an invalid assignment_of_income we hold that petitioner’s gross_income includes the dollar_figure paid to universal as determined by respondent because we reach this holding under the assignment_of_income rule we need not consider respondent’s alternative arguments that universal was a sham or a grantor_trust petitioner also argues that our holding conflicts with certain courts of appeals decisions concerning the tax treatment of contingent legal fees see eg estate of clarks v united continued -- - iv is petitioner entitled to additional deductions the statutory notice did not allow petitioner any deductions for trade_or_business_expenses on the basis of copies of a few checks drawn on the universal account respondent has conceded that petitioner is entitled to deduct as trade_or_business_expenses the following amounts paid_by universal dollar_figure for postage dollar_figure to sponsor sports teams and dollar_figure for printing continued states 202_f3d_854 6th cir contingent-fee agreement is not invalid assignment_of_income and client’s income does not include portion of recovery paid to attorney pursuant to the agreement 263_f2d_119 5th cir affg in part and revg in part 28_tc_947 petitioner’s argument has no merit not only do other courts of appeals including the court_of_appeals for the ninth circuit to which the present case is appealable and the tax_court disagree with estate of clarks and cotnam see eg 213_f3d_1187 9th cir 43_f3d_1451 fed cir 114_tc_399 but more importantly the purported trust arrangement in the case at hand is completely different from the contingent_fee agreements at issue in estate of clarks and cotnam in estate of clarks and cotnam the courts of appeals stressed that the client’s claim was for all practical purposes worthless without the services of the attorney who could bring it to fruition in estate of clarks the court_of_appeals even characterized the attorney-client relationship in a contingent-- fee arrangement as similar to a joint_venture or partnership by contrast in the case at hand the record shows that petitioner’s services had value by themselves universal had nothing to do with and no control_over the earning of petitioner’s service income in short petitioner’s control of the income generated by his services was more than sufficient to make him the party taxable on that income - al --- petitioner asserts he is entitled to additional trade_or_business deductions on account of other expenses paid_by universal in an aggregate amount of approximately dollar_figure petitioner refused to testify or supply any other evidence about the business_purpose of these expenses the only proof petitioner offered in support of his claim consists of copies of various checks drawn on the universal account respondent objects to the admission of these checks because petitioner did not exchange them with respondent days prior to trial as required by our standing_pretrial_order respondent also argues that petitioner has not proved his entitlement to any additional deductions whether or not the checks are admitted before we can consider these issues we need to address one preliminary matter we have redetermined the amount of petitioner’s income under the assignment_of_income rule we have not found it necessary to decide whether universal was a sham we also note that respondent has never argued that the income and deductions in issue should be attributed to different taxpayers respondent has stipulated that petitioner is entitled to deductions for some amounts paid_by universal these stipulations were not conditioned on our deciding that universal was a sham accordingly we conclude respondent has conceded that because we have decided petitioner’s income includes payments received by universal petitioner may deduct amounts paid_by universal to the - -- extent petitioner establishes the amounts were paid for valid trade_or_business_expenses of petitioner a should the checks offered by petitioner be admitted we conclude that the copies of checks submitted by petitioner should be admitted notwithstanding respondent’s objection the parties have stipulated the existence of the universal account respondent has introduced copies of checks drawn on that account as evidence that petitioner and ms ghavami were authorized to and did write checks on that account during petitioner has stipulated the admission of those copies in addition at the court’s urging petitioner worked with respondent’s counsel during the week before trial to agree on many additional stipulations including stipulations concerning deposits to the universal account that helped prove respondent’s case we also note that as part of these additional stipulations respondent conceded that petitioner is entitled to deduct some expenses paid with checks drawn on the universal account in light of the foregoing it is clear respondent has not been surprised by the existence of the universal account and does not question or need to investigate the authenticity of the copies of checks drawn on that account indeed respondent has relied on check copies and other information about the universal account as proof of respondent’s case in chief some of that -- - information was the subject of stipulations entered into after the 15-day period specified in our pretrial order had expired finally we note that even if we admit the checks offered by petitioner as proof that universal paid the payees named therein petitioner is still required to prove that the payments were ordinary and necessary business_expenses see 319_us_590 taxpayer must prove entitlement to any deduction claimed for all these reasons we conclude that respondent would not be prejudiced by our admission of the checks submitted by petitioner and that in fairness we should admit them into evidence b did petitioner prove his entitlement to deductions petitioner asserts that the checks prove his entitlement to deductions for the following categories of expenses water electricity gas home_office cleaning and maintenance medical insurance life_insurance equipment subscriptions and publications cellular phone service supplies automobile trash pickup and miscellaneous however the information contained on many of the checks does not prove that the checks were actually used to pay expenses of the category claimed more importantly the checks appear to have been used to pay expenses that could be either business or personal depending on the circumstances in the absence of any evidence of the business_purpose of these -- -- claimed expenses petitioner is simply not entitled to deduct them however petitioner has also claimed a deduction for dollar_figure in pager expenses after having examined the checks we are convinced that such amount was in fact spent on pager services and that under the circumstances of this case this expense was more_likely_than_not a business_expense we therefore conclude petitioner is entitled to deduct it we hold that other than this amount and the deductions conceded by respondent petitioner is not entitled to any of the additional deductions claimed v additions to tax sec_6651 imposes an addition_to_tax for the failure_to_file an income_tax return within the time prescribed by law unless it is shown that the failure is due to reasonable_cause and not to willful neglect the taxpayer bears the burden of showing that reasonable_cause exists see rule a 469_us_241 petitioner did not file a return for and there is no evidence he had reasonable_cause for this failure accordingly petitioner is liable for the maximum 25-percent addition for failure_to_file applied to the amount of the deficiency as redetermined in accordance with this opinion - -- sec_6654 provides for an addition_to_tax in the case of any underpayment of estimated_tax by an individual this addition is mandatory absent a showing by the taxpayer that one of the statutory exceptions applies see 75_tc_1 petitioner did not pay any estimated_tax for and he has not shown that any exceptions apply accordingly the sec_6654 addition applies determined in accordance with the rest of this opinion vi respondent’s motion for sanctions under rule approximately weeks before trial respondent moved for sanctions under rule c in response to petitioner’s failure to participate in discovery and to comply with the court’s orders concerning discovery at trial respondent stated that the stipulations entered into by the parties had rendered this motion moot in light of the stipulations and our holdings in this case we agree with respondent respondent’s motion will be denied as moot vii respondent’s motion for a penalty under sec_6673 sec_6673 provides that whenever it appears that the taxpayer has instituted or maintained proceedings in this court primarily for delay or the taxpayer’s position in such proceedings is frivolous or groundless or the taxpayer unreasonably failed to pursue available administrative remedies -- - the court may require the taxpayer to pay a penalty to the united_states of up to dollar_figure at trial after petitioner stated that he would not testify respondent moved for a penalty under sec_6673 according to respondent’s motion petitioner’s claim that the dollar_figure paid to universal is not includable in petitioner’s income is frivolous under the circumstances of the case at hand we decline to impose the sec_6673 penalty on date respondent’s counsel informed petitioner that he was prepared to move for a penalty if petitioner continued to insist that the dollar_figure paid to universal for work done by petitioner was not petitioner’s income respondent’s motion seeks a penalty against petitioner on this ground we note that on date petitioner had stipulated that wwmc paid universal dollar_figure for work done by petitioner we also note that on date the parties submitted a second stipulation of facts in that document petitioner made many additional stipulations concerning the payment of the dollar_figure to universal for work done by petitioner and concerning deposits of that amount to universal’s bank account these stipulations helped prove respondent’s case in chief indeed we note that respondent did not present any witnesses at trial we believe that petitioner’s course of conduct was counseled by mr chisum who appears to have advised petitioner throughout -- - this proceeding ’ in addition after respondent’s last warning on date the bulk of petitioner’s efforts were devoted to jurisdictional and procedural challenges to the statutory notice rather than to the substantive argument respondent complains of ’ for these reasons and in these circumstances we decline to impose a sec_6673 penalty on petitioner in conclusion we note that petitioner’s jurisdictional and procedural challenges had no legal merit they were objectively frivolous and may well have been maintained primarily for delay we also note that petitioner is currently before the court ina case involving other years ’ should petitioner ignore the warnings and holdings of this court in the case at hand there will be ample opportunity to consider whether imposition of a penalty under sec_6673 would be appropriate ‘3 we observe that if mr chisum were a lawyer authorized to practice in this court there might well be grounds under rule g for disqualifying him from representing petitioner and the other participants in the trust arrangements that mr chisum has been promoting and operating see supra note on the ground that mr chisum has a conflict of interest cf para technologies trust v commissioner tcmemo_1992_575 the predicament that petitioner finds himself in would appear to be the direct result of the operation of that conflict see dixon v commissioner tcmemo_2000_116 ndollar_figure and accompanying text 4-in this connection we note that petitioner’s arguments against the validity of the statutory notice are almost identical to mr chisum’s arguments in universal’s case 1s johnston v commissioner docket no -- - we have considered all allegations and arguments of petitioner that we have not discussed herein we find them to be without merit or irrelevant to take account of the foregoing an order will be issued denying petitioner’s motion for summary disposition and or judgment and motion in limine and respondent’s motion for sanctions under rule and motion for sanctions under sec_6673 decision will be entered under rule


internal_revenue_service number release date index number ------------------------ ------------- ------------------------------------------------- ----------------------------- -------------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no ------------- telephone number --------------------- refer reply to cc ita b07 plr-134799-07 date date ------------------------------------------------- ------------------------- ------------------------------------------- ------------------------- --------------------------------------- ------------------------- ---------- ------------------------------------ ----------------------- re request for private_letter_ruling regarding liquidation of taxpayer and distribution of all of its assets legend taxpayer town cfd state a b dear --------------- correspondence submitted on behalf of taxpayer town and cfd requesting a letter_ruling relating to the proper federal_income_tax treatment of the liquidation of taxpayer and the distribution of its assets and liabilities under sec_115 sec_337 sec_1245 and sec_1250 of the internal_revenue_code facts this letter responds to a letter dated date and subsequent taxpayer represents that the facts are as follows on date as a result of a private_letter_ruling request the internal_revenue_service issued plr involving proposed transactions in which town plr-134799-07 would form pursuant to state law cfd a community facilities district which would purchase all the stock of taxpayer then known as a then a taxable corporation and would convert taxpayer to a nonprofit nonstock corporation with cfd a political_subdivision as its sole member in plr the service ruled that following the consummation of the proposed transactions taxpayer’s income was excluded from gross_income under the provisions of sec_115 while the sole member of taxpayer was cfd and that town cfd and taxpayer will not recognize gain pursuant to sec_336 or sec_337 or any other code provision upon cfd’s purchase of taxpayer’s stock and the conversion or by reason of taxpayer’s subsequent exclusion of income under sec_115 in plr the service however stated that it expressed no opinion concerning the tax treatment of future actual or constructive dispositions of assets by taxpayer including the application of sec_1245 or sec_1250 the proposed transactions described in plr were consummated pursuant to a binding agreement on b prior to the date sec_1_337_d_-4 of the income_tax regulations became effective of taxpayer and distribution of its assets to town and the assumption of taxpayer’s liabilities by town taxpayer provides water utility_services to residents of certain areas of town town has also maintained a separate water system which has provided water to areas of town not within the service area of taxpayer’s system although town anticipated being able to maintain the separate existence of taxpayer certain difficulties and administrative expense of operating two separate water systems have caused town to consider liquidation of taxpayer and the distribution of all of its assets to town taxpayer’s amended articles of incorporation provide that in the event of taxpayer’s dissolution all of its assets after payment of debts and obligations will be distributed to cfd or another political_subdivision of state specified by taxpayer’s board_of directors the plan_of_liquidation to be adopted by the board_of directors provides that taxpayer’s assets and liabilities will be distributed to town so that the two separate water systems may be administered as one rulings requested now the proposed transaction of this letter_ruling request involves the liquidation taxpayer requests that the service issue the following rulings the regulations issued under sec_337 do not apply to the liquidation of taxpayer and any income or loss that taxpayer would realize upon liquidation is excluded under sec_115 plr-134799-07 law and analysis ruling_request taxpayer is a tax-exempt_entity the liquidation of taxpayer and the distribution of its assets to town would be a transfer of assets from a tax-exempt_entity to a political_subdivision such transactions are not covered by regulations under sec_337 ruling_request sec_115 provides that gross_income does not include income derived from any public_utility or the exercise of any essential government function and accruing to a state or any political_subdivision thereof the service previously concluded in plr that taxpayer’s income is taxpayer’s amended articles of incorporation provide that in the event of based on the information and representations submitted we hold that the income derived from its activities as a public_utility and that its income accrues to the benefit of cfd a political_subdivision the income of taxpayer continues to be derived from its activities as a public_utility dissolution all of its assets after payment of its debts and obligations will be distributed to cfd or another political_subdivision in plr the service held that taxpayer’s income accrued to cfd a political_subdivision the accrual requirement of sec_115 also will be met where the income attributable to the liquidation of taxpayer will accrue to town another political_subdivision of taxpayer is derived from its activities as a public_utility and will accrue upon liquidation to a political_subdivision for purposes of sec_115 conclusions set forth above we conclude that taxpayer and potential depreciation_recapture income discussed below will be excludable from gross_income under sec_115 the regulations issued under sec_337 do not apply to the liquidation of based solely on the facts and representations and the relevant law and analysis any income that taxpayer would realize upon liquidation other than the in its letter_ruling request taxpayer discussed the interaction of sec_115 and sec_1245 and their application to the proposed transaction described in this letter_ruling plr-134799-07 ie the liquidation of taxpayer and the distribution of its assets to town we discussed this issue among others at taxpayer’s conference of right specifically the issue involves the application of the depreciation_recapture rules under sec_1245 and sec_1250 to depreciation_deductions taken by taxpayer on its pre-acquisition assets at taxpayer’s conference of right taxpayer provided information that suggested that sec_1245 depreciation_recapture would not be pertinent to the discussion of the tax consequences upon liquidation of taxpayer because taxpayer would not realize any gain subject_to depreciation_recapture upon the distribution of the pre-acquisition assets in its submission of additional information following taxpayer’s conference of right taxpayer included a valuation report valuation report that provides a current valuation for taxpayer’s remaining pre-acquisition assets and that assigns a value to the remaining pre-acquisition assets that is less than taxpayer’s basis in such assets given the valuation conclusions of the valuation report taxpayer withdrew any portion of the ruling_request that would apply sec_115 to the potential depreciation_recapture in the pre-acquisition assets federal_income_tax consequences of the proposed transaction under any other provisions of the code and regulations thereunder or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that is not specifically covered by the above rulings specifically no opinion is expressed or implied on i the correctness of the analysis and conclusions of taxpayer’s valuation report including the methodology used to value the assets in taxpayer’s valuation report and the valuations assigned to the assets in taxpayer’s valuation report ii the interaction of sec_115 and the depreciation_recapture rules under sec_1245 and sec_1250 with respect to any disposition of taxpayer’s pre-acquisition assets and iii the application of sec_1245 or sec_1250 upon any disposition of taxpayer’s pre- acquisition assets in accordance with the power_of_attorney we are sending a copy of this letter to taxpayer’s authorized representatives we are also sending a copy of this letter to the appropriate operating division director except as specifically set forth above we express no opinion concerning the the pre-acquisition assets are the depreciable assets that were owned by taxpayer and upon which depreciation was taken by taxpayer when it was a taxable corporation prior to the acquisition of all of its stock by cfd on b plr-134799-07 provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer requesting it sec_6110 sincerely kathleen reed kathleen reed chief branch office of associate chief_counsel income_tax accounting enclosures copy of this letter copy for sec_6110 purposes


id office uilc cca_2011051810563141 ------------- number release date from ------------------- sent wednesday date am to -------------------- cc ----------------------------------------------------------------------- subject re faxed signature for agreements that will generate refunds in as a result of recommendations from an irs cross-divisional task force that assembled to develop a servicewide fax policy the service issued a policy statement that permitted the service to receive by fax consents to assess additional tax of dollar_figure or less and closing agreements involving tax amounts of dollar_figure or less the policy statement provides that taxpayer closing agreements involving tax amounts of dollar_figure or less can be accepted by fax if taxpayer contact has been made and the case history documents the date of contact and the desire of the taxpayer to submit the consent by fax consents to assess additional tax forms and others of dollar_figure or less can be accepted by fax if taxpayer contact has been made and the case history documents the date of contact and the desire of the taxpayer to submit the consent by fax closing agreements involving tax amounts over dollar_figure and consents assessing tax amounts in excess of dollar_figure should be secured with original signatures that are delivered in person or by mail there no specific guidance regarding tefra agreements memorialized on a form pt agreement for partnership items partnership level determinations as to penalties additions to tax and additional_amounts or 870-lt agreement for partnership items partnership level determinations as to penalties additions to tax and additional_amounts and agreement for affected items arguably if the refund amount is less than dollar_figure these forms can be accepted by fax if taxpayer contact has been made and the case history documents the date of contact and the desire of the taxpayer to submit the consent by fax we understand however that your policy is not to accept faxed signatures on tefra agreements that will generate refunds there is no legal prohibition to the service accepting faxed signatures from taxpayers regardless of the amount of tax at issue rather the policy statement reflects a business decision to accept faxed signatures where less than dollar_figure is at issue because in the taskforce determined that dollar_figure was an appropriate amount considering the risk of disavowal the policy statement reflects a business decision and counsel cannot change the policy until the fax policy regarding closing agreements documenting refunds in excess of dollar_figure is changed it should be followed ------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------- please let us know if you have any questions attachment date memorandum for division commissioners chief criminal investigation chief appeals national_taxpayer_advocate from subject bob wenzel deputy commissioner for services and enforcement new policy for use of fax and signatures stamps in taxpayer submissions on monday date the tax_administration council tac approved the expanded use of faxes for receiving information and documents from taxpayers and practitioners these procedural changes were developed by a cross-divisional group led by my staff in response to a request from practitioners the changes are aimed at reducing taxpayer practitioner burden as well as reducing the time it takes to resolve taxpayer cases and inquiries the receipt of faxes should not require any significant changes to how the irs handles open cases with taxpayers it was intended as another means to receive case information the new fax guidelines copy attached can be implemented immediately where possible but all divisions should take the necessary steps so that they can accept faxes as described in the policy no later than date the tac also approved the use of signature stamps by practitioners for return submissions however the policy for using signature stamps will require a change to published guidance and chief_counsel estimates this will be completed within the next few months i will advise you when you can begin accepting practitioner signatures stamps as outlined in the policy to ensure effective implementation i would like each of you to identify the internal revenue manuals assigned to your respective divisions that will need to be revised to incorporate these new procedures as well as the dates you expect these revisions to be completed please forward this information to the office of tax_administration coordination room main irs no later than date if you have any questions please call me staff can contact gary doniger acting deputy director tax_administration coordination at attachments cc deputy commissioner for operations support chief_counsel attachment use of fax and signature stamps for taxpayer submissions background the irs is involved in a significant number of taxpayer contacts to perfect returns during the filing process to resolve issues identified in post-filing and to secure delinquent returns while the primary communication methods for these contacts have traditionally been mail phone or personal interviews the irs is always seeking new ways of communicating with taxpayers that will reduce taxpayer burden and improve organizational efficiency based on requests from the national society of accountants and other outside stakeholders as well as an increased use of facsimile equipment in many operations by irs a cross-divisional group was assembled to develop a servicewide policy for the acceptance of faxes and signature stamps in routine tax_administration operations recommendations the following policies on the acceptance of faxes and signature stamps are recommended for servicewide adoption faxes - general guidelines these general guidelines are applicable to all divisions and cover operations related to income_tax employment_tax excise_tax estate_tax gift_tax and generation skipping tax as well as tax exempt and employee_plans determinations filing of original tax returns via fax will only be allowed as part of a return perfection process eg securing missing schedule or missing signature initiated by the irs or in the post-filing non-filing activities described in next bullet tax returns can be received via fax as part of return perfection even if a taxpayer signature is required since chief_counsel has advised that in circumstances where contact with the taxpayer has been made and documented faxed signatures are legally sufficient submission of documentation forms letters and returns related to post-filing non- filing inquiries and interactions can be allowed via fax based on taxpayer or irs request unless there is a specific prohibition this allowance applies to inquiries and interactions conducted by field assistance accounts management compliance services field_examination field collection determinations units appeals and the taxpayer_advocate_service or related to post-submission inquiries and interactions conducted by employee_plans or exempt_organizations in connection with an application_for a determination or a request for a ruling documentation forms letters and returns can be received via fax in these circumstances even if a taxpayer signature is required since chief_counsel has advised that in circumstances where contact with the taxpayer has been made and documented faxed signatures are legally sufficient in the short term acceptance of faxes by some locations may be limited by equipment availability however all operating divisions should take steps to make whatever changes are needed to provide this option for taxpayers as quickly as possible eg procure equipment update irm’s the irs will not acknowledge faxes received from taxpayers in the course of tax_administration activities by a return fax exceptions can be made in unusual circumstances as determined by irs management guidance for some specific forms documents and letters can be found in attachment these items are listed individually based on a request by either outside stakeholders or internal groups this list does not necessarily include all items that could be received by fax based on the general guidelines signature stamps - general guidelines return preparers may sign original returns amended returns or requests for filing extensions using a signature stamp to facilitate signing large numbers of returns taxpayers however must continue to sign their returns with an original signature or other authorized alternative eg pin preparer taxpayer signature stamps will not be permitted when signing other documents such as elections applications for change in accounting_method powers-of- attorney consent forms revenue_agent reports and other case inquiry resolution related documents requiring signature attachment specific guidance on use of faxes in tax_administration processes lists not all inclusive the following specific documents forms letters will continue to be accepted by fax in routine operations - ein requests form ss-4 - power-of-attorney form - taxpayer authorization form - - transcript requests form - request for public inspection or copy of exempt or political_organization irs 1120s election form form form 4506-a - foreign certification requests - appeals_conference requests - responses documentation needed to resolve filing or post-filing questions or correspondence the following specific documents forms letters can be accepted by fax if contact has been made with the taxpayer by phone or in-person and the taxpayer history file is documented with the date of contact and notation is made that the taxpayer wishes to send the document form letter by fax injured_spouse claim form installment agreements form 433-d - requests for innocent spouse relief form - taxpayer statement about a refund form - - - offers in compromise form - collection information statement - wage earner form 433-a - collection information statement - business form 433-b - early_referral requests - fast track mediation requests - request for collection_due_process_hearing form - - - - - - - supporting statement to correct information form 941c - election by a small_business_corporation form letter to designate a payment letter to request non-filing of lien letter to request lien release letter to request lien withdrawal letter to request non-assertion of penalty letter to provide reasonable_cause statement consents to assess additional tax forms and others of dollar_figure or less can be accepted by fax if taxpayer contact has been made and the case history documents the date of contact and the desire of the taxpayer to submit the consent by fax consents to assess tax in excess of dollar_figure should be secured with original signatures that are delivered in person or by mail taxpayer closing agreements involving tax amounts of dollar_figure or less can be accepted by fax if taxpayer contact has been made and the case history documents the date of contact and the desire of the taxpayer to submit the consent by fax closing agreements for tax amounts in excess of dollar_figure should be secured with original signatures that are delivered in person or by mail employee plan and exempt_organization determination_letter applications will not be accepted via fax determination_letter requests related to income_tax gift_tax estate_tax generation- skipping transfer_tax employment_tax and excise_tax matters will not be accepted via fax consents to extend the statute_of_limitations for assessing tax form_872 ss-10 and other consent forms will not be accepted via fax in normal operations


internal_revenue_service number release date index number --------------------------------------------------- -------------------------- -------------------------------- --------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-124818-09 date july x state a b c d e trust c d1 d2 d3 d4 ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ 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------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ --------------------------- plr-124818-09 dear ------------------- this responds to a letter dated date and supplemental correspondence submitted on behalf of x by x’s authorized representative requesting inadvertent termination relief under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated in state and elected to be an s_corporation effective on d1 on d2 a an original shareholder of x died on d3 a’s estate transferred c shares of a to trust and the remainder of a’s shares to b c and d because trust was created under the terms of a’s will trust was a permitted s_corporation shareholder for the 2-year period beginning on d3 x represents that trust is qualified as a subchapter_s_trust qsst described in sec_1361 except that e the sole beneficiary of trust failed to make the election under sec_1361 therefore x’s s_corporation_election terminated on d4 x represents that trust qualifies as a qsst under sec_1361 x further represents that the failure_to_file timely the qsst election for trust was inadvertent and not motivated by tax_avoidance x further represents that x has filed returns consistent with x’s status as an s_corporation and trust as a qsst x and its shareholders have agreed to make such adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which it was made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the event resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination the corporation shall be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we conclude that the termination of x’s s_corporation_election was inadvertent within the meaning of sec_1362 under the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d4 and thereafter this ruling is conditioned upon e the sole plr-124818-09 beneficiary of trust filing an appropriately completed qsst election for trust effective on d4 the qsst election for trust must be filed within days following the date of this letter and a copy of this letter should be attached to such election therefore we conclude that x will continue to be treated as an s_corporation for the period beginning on d4 provided that x’s s_corporation_election was valid and was not otherwise terminated under sec_1362 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code in particular no opinion is expressed as to whether x is an s_corporation for federal tax purposes whether trust is permitted as a shareholder of an s_corporation under sec_1361 or whether trust is a qsst under sec_1361 this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x's authorized representative sincerely bradford r poston senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number -------------------------- ------------------------------ --------------------------- ------------- --------------------------------------- - - department of the treasury washington dc person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi - plr-157794-03 date date legend x a b c d e f ----------------------- ------------------------ ------------------------ ------------------------ ------------------------ ------------------------ ------------------------ ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- g ---------------------------------------------------------------------------------------------------------- ------------------------ ---------------------------------------------------------------------------------------------------------- h plr-157794-03 ------------------------ i j ------------------------ ------------------------ d1 -------------------------- ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- this letter responds to your letter dated date on behalf of x x requests a ruling under sec_1362 that its sec_1362 election will be treated according to the information submitted x’s shareholders a b c d e f g h dear ----------------------- requesting a ruling under sec_1362 of the internal_revenue_code facts i and j intended that x be an s_corporation as of d1 however x’s form_2553 election by a small_business_corporation was not filed timely as timely made for its taxable_year that began on d1 law and analysis corporation generally if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one-half months of a corporation's taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides the rule on when an s election will be effective sec_1362 provides that a small_business_corporation may elect to be an s except as expressly provided herein we express or imply no opinion concerning plr-157794-03 sec_1362 provides that if an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year and sec_1362 shall not apply conclusion based on the facts submitted and representations made we conclude that x has established reasonable_cause for its failing to make a timely s_corporation_election and that x is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 effective d1 within days following the date of this letter then such election will be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether x is otherwise eligible to be an s_corporation for federal tax purposes this letter to your authorized representative provides that it may not be used or cited as precedent enclosures jeanne sullivan senior technician reviewer branch office of associate chief_counsel passthroughs and special industries pursuant to a power_of_attorney on file with this office we are sending a copy of this ruling is directed only to the taxpayer who requested it sec_6110 sincerely s copy of this letter copy for ' purposes