t c memo united_states tax_court terry l yaryan and dorothy h yaryan petitioners v commissioner of internal revenue respondent docket no filed date william l henry david a sprecace and lucas p frei for petitioners michael t garrett and matthew a houtsma for respondent memorandum findings_of_fact and opinion kerrigan judge respondent determined the following deficiencies addition_to_tax and accuracy-related_penalties with respect to petitioners’ federal_income_tax for and years in issue year deficiency addition_to_tax sec_6651 penalty sec_6662 dollar_figure big_number big_number big_number big_number --- --- --- dollar_figure --- --- --- --- dollar_figure 1in the first amendment to answer respondent asserted that petitioners are liable for the sec_6662 penalty for unless otherwise indicated all section references are to the internal_revenue_code code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure we round all monetary amounts to the nearest dollar the issues for our consideration are whether petitioners may deduct under sec_166 business bad_debts that they contend they incurred during the years in issue whether petitioners are liable for the addition_to_tax for and whether petitioners are liable for the accuracy-related_penalties for and 1petitioners conceded that if they are entitled to deductions for business bad_debts for the years in issue their deductions for capital losses for and should be disallowed findings_of_fact some of the facts have been stipulated and the stipulated facts and exhibits are incorporated in our findings by this reference petitioners resided in colorado when they timely filed their petition i petitioner’s background and relationship with prime realty inc terry l yaryan petitioner holds a bachelor’s degree and a master’s degree in electrical engineering in he joined ugc consulting a firm that specialized in providing consulting services related to geographic information systems petitioner retired in in petitioners purchased a home in colorado from prime realty inc prime a colorado corporation petitioner met leslie olson l olson a general contractor who worked on building custom homes and other projects through prime from at least to prime was an s_corporation and its sole shareholder was pat olson p olson l olson’s wife shortly after petitioner’s retirement petitioners hired prime as the general contractor to work on a greenhouse that they planned to build on their property after completing work on petitioners’ home l olson approached petitioner to discuss prime’s construction business generally prime’s business model at that time was to build and market one new home at a time petitioner believed that prime’s business model was inefficient and he suggested a new strategy in which prime would focus on building three homes at once ii joint_venture agreement l olson with the assistance of his attorney drafted a joint_venture agreement jva that he presented to petitioner on or about date petitioner and l olson on behalf of prime executed the jva dorothy h yaryan petitioner wife was not a party to the jva the jva named petitioner and prime as joint venturers and stated the purpose of the joint_venture as follows t he joint_venture is formed to invest in real_estate vacant lots and construct single family residences upon the joint_venture residential lots for the purpose of resale to the general_public it provided that the jva shall not be deemed held or construed as creating a tax_partnership between petitioner and prime pursuant to the jva prime would purchase residential lots in its name and petitioner would hold a secured interest in the lots for his contributions and for a 2petitioners describe their agreement as a joint_venture agreement we use this term in our findings to describe the agreement between petitioner and prime with no inference as to the type of arrangement formed between them fee to be paid to him as required by the agreement the terms of the jva applied only when prime granted a deed_of_trust to petitioner the jva provided that petitioner shall provide capital funds as needed to purchase mutually agreed upon vacant residential lots the residential lots would be purchased by prime and prime would be responsible for funding construction of the residences on the lots either with its own funds or with separate construction loans solely in the name of prime the jva stated that t he total amount invested by petitioner shall not exceed dollar_figure unless mutually agreed by petitioner and prime to the extent that prime used petitioner’s funds to purchase a lot the jva provided that a promissory note payable to petitioner secured_by a deed_of_trust for the specific lot will be executed against the ownership of prime it provided further that petitioner shall subordinate his interest in his deed_of_trust to the interests of the construction lender and shall promptly sign such subordination agreement upon request by prime the jva provided that petitioner would be paid a sum equal to and not to exceed of his investment in a lot which sum shall be so stated in the promissory note for each lot subject_to this joint_venture agreement and due at closing under the jva prime was to receive two fees for its services to the joint_venture both calculated as percentages of the costs associated with constructing the residences on the lots prime would receive fees equal to of construction costs as compensation_for construction supervision and coordination payable at closing of the sale of the constructed residence and of construction costs as an overhead fee payable monthly based on the last month’s construction costs and from the proceeds available from the construction loan the jva provided that after all debts and liabilities of the joint_venture had been paid in full investment distributions of any remaining net_proceeds from the sale would be paid to prime and petitioner in the same proportions as the investment made or obligation incurred for the purchase of the lot and the construction of the residence the jva stated that e xcept as set forth in this agreement prime and petitioner shall have equal rights in the management of the joint_venture business it provided further that prime shall be solely and exclusively responsible for all aspects of development design construction marketing and sale of the residences built on the lots that were the subject of the jva with respect to all joint_venture lots it stated i t is understood that leslie olson shall be substantially in charge of the construction development and sale of the lots iii activities conducted under the jva a joint_venture profits after executing the jva petitioner worked with l olson in surveying and selecting lots for the joint_venture and prime purchased the lots that he and l olson agreed upon prime was responsible for and performed the day-to-day activities of constructing homes on the joint_venture lots from through petitioner and prime through the joint_venture completed real_estate transactions for each of these transactions petitioner advanced the funds needed for prime to purchase the lot or in one instance to acquire a purchase option for petitioners reported profits from the joint venture’s real_estate transactions on their jointly filed form sec_1040 u s individual_income_tax_return for each of these years they reported the profits as other income on line of the form_1040 for petitioners did not file schedules c profit or loss from business b homes built on inwood place and grande river inwood place home on date petitioners paid dollar_figure toward the purchase of a lot in the painter’s ridge subdivision pincite inwood place castle rock colorado inwood place before closing petitioners paid an additional dollar_figure to prime to cover costs at closing including dollar_figure in earnest money and dollar_figure in prepaid taxes prime purchased inwood place on date on the same date prime executed a promissory note for dollar_figure payable to petitioner with no interest the note stated that it was secured_by a deed_of_trust for inwood place a home was constructed on inwood place and was completed in the inwood place home did not sell quickly on date petitioner advanced prime an additional dollar_figure which prime needed as working_capital and which was tied to the sale of inwood place l olson on behalf of prime executed a promissory note payable to petitioner for dollar_figure with an interest rate of the note provided that principal and interest would be paid upon the sale of inwood place petitioner did not record this note 3after the closing on prime’s purchase of inwood place petitioners received an overpayment refund of dollar_figure after inwood place failed to sell for an extended period l olson had discussions with prime’s construction lender bank of choice about converting the outstanding construction loan on inwood place into a permanent loan if he could arrange to lease the property petitioner first became aware that inwood place had been leased and was occupied when bank of choice contacted him to request that he subordinate his loan interest to a new loan between bank of choice and prime petitioner agreed to subordinate his interest because he believed that if he did not then bank of choice would refuse to convert prime’s construction loan and prime would lose inwood place before it could be sold in early petitioner met with an officer at bank of choice regarding the outstanding loan for inwood place during that meeting petitioner learned that l olson had misrepresented himself as the owner of prime and that p olson was prime’s sole owner petitioner learned that prime had no retained earnings or working_capital and no substantial physical assets after this meeting petitioner was concerned that he would not be repaid and prime would stop making payments on the inwood place loan and allow the property to go into foreclosure during prime found buyers for inwood place petitioner refused initially to release the deed_of_trust for inwood place however he was told that bank of choice was not going to extend prime’s loan for inwood place and that prime had a limited time to dispose_of the property petitioner agreed to release the deed_of_trust for inwood place for dollar_figure however he stated in a letter to the title company that he was not releasing prime’s obligations on the promissory notes that had been tied to the sale of inwood place on date prime sold inwood place and petitioner received a payoff of dollar_figure prime did not repay petitioner any additional_amounts for his advances for the purchase of inwood place or the dollar_figure advance that prime used as working_capital petitioners’ net_loss ie total advances over total receipts in connection with inwood place was dollar_figure calculated as follows advances for costs at closing lot purchase_price date additional advance less overpayment refund less payoff at sale net lo sec_2 grande river home dollar_figure big_number big_number big_number big_number on date prime purchased a lot pincite grande river court parker colorado grande river grande river was within the tallman gulch subdivision tallman gulch petitioner had found tallman gulch when searching for lots outside of the painter’s ridge subdivision he knew the original planner and developer of tallman gulch arieh szigeti petitioners paid dollar_figure toward the purchase of grande river before closing petitioners also paid prime dollar_figure to use as earnest money and they paid dollar_figure in real_estate_taxes for the property on the date of purchase prime executed a promissory note payable to petitioner for a principal_amount of dollar_figure with no interest the note was payable upon the sale of a home on grande river and the note stated that it was secured_by a deed_of_trust for the property during l olson reduced prime’s construction crews and prime fell behind schedule building the home on grande river petitioner helped with landscaping the property petitioners paid expenses of dollar_figure for landscaping grande river prime reimbursed petitioners dollar_figure of these expenses during construction of the grande river home petitioner suggested that prime should enter the home in the parade of homes parade a trade_show that he believed would bring many prospective buyers to view the property and l olson agreed construction of the grande river home was completed in and the home was successfully entered in the parade petitioners took pictures of the property and produced marketing materials to be handed out to viewers during the parade following the parade in the loans that prime had outstanding on both grande river and inwood place were nearing expiration at petitioner’s request l olson authorized bank of choice to discuss the two loans with petitioner directly petitioner wanted to ensure that the loans were extended so that prime did not lose the homes before they could be sold profitably he met with employees from bank of choice at grande river and they toured the home together after viewing the grande river home bank of choice agreed that prime’s construction loan for grande river should be extended and that the interest rate should be reduced in date l olson informed petitioner that he could not afford to make the monthly interest payment due on prime’s loan with bank of choice for grande river petitioner paid the interest due in date and continued to make monthly interest payments directly to bank of choice through date he made total interest payments of dollar_figure on prime’s loan for grande river he also paid dollar_figure for grande river’s property taxes grande river sold on date before the sale petitioner was aware that the selling_price would not be enough to cover the full amount that prime owed to him and bank of choice for grande river l olson agreed to sign deficiency notes for bank of choice and for petitioner to cover amounts that remained outstanding after the sale of grande river at the request of l olson petitioner released the deed_of_trust and the promissory note payable to him for grande river upon the sale of grande river petitioner received a payoff of dollar_figure after the sale he asked l olson for the signed deficiency note for the remaining amount that had been owed under the original promissory note l olson requested that the deficiency note be discounted petitioner had numerous conversations with l olson about the deficiency that he believed he was owed for grande river in late l olson told him that prime would not pay to cover any of the deficiency petitioners’ net_loss for grande river was dollar_figure calculated as follows earnest money prepaid real_estate_taxes lot purchase_price landscaping expenses construction loan interest property taxes paid less landscaping reimbursements dollar_figure big_number big_number big_number big_number big_number big_number less payoff at sale net_loss c tallman lot sec_37 and sec_40 big_number big_number in late and early petitioner and l olson had agreed to acquire two lots in tallman gulch no homes were ever constructed on these lots tallman lot on date petitioners paid dollar_figure toward prime’s purchase of a lot pincite merryvale trail parker colorado which was designated lot in tallman gulch tallman lot petitioners had paid previously dollar_figure in earnest money for prime to purchase tallman lot and before closing they paid dollar_figure in real_estate_taxes on date prime purchased tallman lot and issued a promissory note payable to petitioner for dollar_figure the note had no interest rate was payable upon the sale of a home on tallman lot and stated that it was secured_by a deed_of_trust for the property on date prime executed a quitclaim_deed for tallman lot that transferred its interest in the lot to petitioners for consideration of dollar_figure petitioner canceled prime’s promissory note for tallman lot and released the deed_of_trust referenced in the note soon after petitioners acquired ownership of tallman lot bank of choice granted them a dollar_figure loan which was secured_by a deed_of_trust for the property in the bank’s name in date bank of choice failed the federal deposit insurance corporation acting as receiver for bank of choice sold the assets and liabilities of bank of choice to bank midwest n a bank midwest including petitioners’ note petitioners were notified that bank midwest would not agree to extend the maturity_date for their note in date bank midwest filed a lawsuit in the district_court douglas county state of colorado to obtain a judgment against petitioners for the full principal and unpaid interest due on the note petitioners did not contest this lawsuit bank midwest obtained a judgment for dollar_figure the bank foreclosed on tallman lot and took possession of the property and on date the property was sold at a foreclosure sale for dollar_figure after the foreclosure sale bank midwest notified the district_court that the judgment against petitioners was partially satisfied in petitioners executed a compromise settlement and mutual release agreement with an assignee of bank midwest which released all claims and satisfied the judgment against them for dollar_figure tallman lot on or about date petitioners paid dollar_figure in earnest money to reserve an option to purchase a lot pincite merryvale trail parker colorado which was lot in tallman gulch tallman lot petitioner reserved the option to purchase in his own name and not in prime’s name on date he executed an agreement to amend extend contract which stated that the deadline for exercising the purchase option was days after the date of sale of grande river or no later than date the agreement provided that the dollar_figure in earnest money would be credited against the purchase_price of tallman lot but would remain nonrefundable if the buyer did not close on the property petitioner never exercised his option to purchase tallman lot he attempted unsuccessfully to have the deadline for the option to purchase extended petitioner did not recover the dollar_figure in earnest money iv advances to szigeti and dhp holdings llc in and petitioners made advances to dhp holdings llc dhp an entity operated by szigeti and szigeti’s business partner harry markle and to szigeti individually these advances were not made pursuant to the jva on date petitioner paid a dollar_figure advance to dhp for this advance petitioner received a document entitled receipt of investment funds signed by markle which stated this document is for the purpose of acknowledging the receiving of funds for investment purposes the szigeti markle group has received funds from terry yaryan for the purpose of investing in various projects those projects and equity stakes to be determined in a separate agreement around date petitioners advanced an additional dollar_figure to szigeti a handwritten check stub for this advance describes the amount as a loan to arieh szigeti to be repaid by petitioners’ original filed income_tax returns for the years in issue did not report losses or claim any deductions in connection with the advances to dhp and szigeti v petitioners’ tax reporting petitioners prepared their original income_tax returns for years themselves a original returns for petitioners filed joint form sec_1040 for they paid their reported tax_liabilities on petitioners’ form_1040 for they deducted a capital_loss of dollar_figure for grande river on schedule d capital_gains_and_losses part ii long-term_capital_gains and losses they reported a basis in grande river of dollar_figure a sale price of dollar_figure and a net_long-term_capital_loss of dollar_figure b original return for theft_loss deduction for petitioners deducted dollar_figure for a fraudulent theft_loss on schedule a itemized_deductions of their form_1040 they detailed the loss on form_4684 casualties and thefts section b business and income-producing property on the form_4684 they reported losses for grande river tallman lot sec_37 and sec_40 together tallman lots and inwood place and they identified the losses collectively as the prime realty-olson fraud theft for each of the properties they reported their basis in the property as the amount of the loss the form_4684 included the following information regarding the reported losses item grande river tallman lots inwood place cost or adjusted_basis insurance or other reimbursement fair_market_value before theft fair_market_value after theft reported loss dollar_figure dollar_figure dollar_figure --- big_number --- big_number --- --- big_number big_number --- big_number --- big_number after filing their form_1040 petitioners filed tentative claims for net_operating_loss nol carrybacks for and for the reported theft_loss the internal_revenue_service irs processed and allowed the claims for nol carrybacks and as a result issued petitioners a refund for each of the years notice_of_deficiency for the irs examined petitioners’ return on date the irs issued a notice_of_deficiency disallowing the claimed theft_loss deduction on date petitioner sent a letter to the taxpayer_advocate expressing concerns about the notice_of_deficiency the letter stated for your record we have no business or business_expenses petitioners did not file a petition in this court to challenge the determinations in the notice_of_deficiency for and the irs assessed the proposed deficiency accuracy-related_penalty and accrued interest for on date c original return for on date petitioners filed their form_1040 for petitioners’ irs account transcript shows that they requested an extension of time to file their tax_return not later than date on the form_1040 they carried forward the nol from the theft_loss reported for they reported negative income on line of the form_1040 which offset all income from other sources additionally on petitioners’ form_1040 they deducted a capital_loss of dollar_figure for tallman lot on schedule d part ii they reported a total long-term_capital_loss of dollar_figure in connection with the foreclosure of the property d original return for on petitioners’ form_1040 for they carried forward the remaining amount of the nol from the reported theft_loss the nol carryforward offset substantially their income for on schedule d part ii for petitioners carried forward the reported long-term_capital_loss for tallman lot they deducted a dollar_figure capital_loss for based on the carryforward from vi notice_of_deficiency for years in issue after disallowing any deduction for petitioners’ reported theft_loss for the irs conducted an examination of their nol carrybacks and carryforwards for the years in issue the irs determined petitioners were not entitled to deduct the nol carrybacks and carryforwards because they did not incur an ordinary theft_loss under sec_165 and their losses were capital losses respondent issued a notice_of_deficiency on date disallowing deductions for the nol carrybacks and carryforwards for the theft_loss for the years in issue the notice_of_deficiency allowed petitioners a dollar_figure long-term_capital_loss deduction for each of and the notice_of_deficiency determined an addition_to_tax under sec_6651 for and an accuracy- related penalty under sec_6662 for the record includes a completed civil penalty approval form dated date with a signature on the line provided for group manager approval to assess penalties identified above vii respondent’s amended answer on date respondent filed the first amendment to answer amended answer in the amended answer respondent asserted that petitioners are further liable for the sec_6662 accuracy-related_penalty for respondent’s counsel and associate area_counsel who was respondent’s counsel’s immediate supervisor signed the amended answer 4as explained infra pp we are reopening the record to admit the civil penalty approval form and declaration of irs group manager vera goggins insofar as it authenticates the civil penalty approval form for purposes of fed r evid viii amended returns in date petitioners with the assistance of a certified_public_accountant completed a form 1040x amended u s individual_income_tax_return for each year in issue and for on these returns petitioners conceded that they are not entitled to the theft_loss reported originally for pursuant to sec_165 and made changes to reflect that concession respondent did not process or otherwise accept these returns petitioners reported and claimed deductions for business bad_debts pursuant to sec_166 on their amended returns for they deducted a business_bad_debt of dollar_figure not related to petitioner’s arrangement with prime for they deducted business bad_debts of dollar_figure including the following items dollar_figure for grande river dollar_figure for tallman lot and dollar_figure for tallman lot for petitioners deducted a business_bad_debt of dollar_figure for inwood place petitioners prepared two amended returns for on one they deducted an nol carryforward from and on the other they deducted an nol_carryback from on the amended returns for and petitioners reported nol carryforwards to reflect business_bad_debt deductions on prior years’ returns opinion the parties agree that petitioners are not entitled to the theft_loss deduction they originally claimed for and the carryforwards and carrybacks related to it petitioners contend that they are entitled to deduct ordinary losses and nol carryforwards and carrybacks for business bad_debts pursuant to sec_166 respondent contends that petitioners’ advances to prime or others for the joint_venture properties and the advances to dhp and szigeti do not satisfy the requirements for deductible business bad_debts under sec_166 i business_bad_debt deductions deductions are a matter of legislative grace and taxpayers bear the burden of proving their entitlement to any deduction allowed by the code 503_us_79 petitioners have not claimed or shown that the burden_of_proof as to any relevant factual issue should shift to respondent under sec_7491 they bear the burden of establishing that they are entitled to any bad_debt deductions for the years in issue sec_166 generally allows a deduction for any debt which becomes worthless within the taxable_year for taxpayers other than corporations sec_166 provides that sec_166 does not apply with respect to any nonbusiness_debt a nonbusiness_debt is a debt other than one created or acquired in connection with a trade_or_business of the taxpayer or the loss from the worthlessness of which is incurred in the taxpayer’s trade_or_business sec_166 for a nonbusiness_bad_debt the taxpayer is allowed a short-term_capital_loss for the taxable_year in which the debt becomes completely worthless sec_166 sec_1_166-5 income_tax regs business bad_debts may be deducted against ordinary_income whether wholly or partially worthless during the taxable_year and may be carried back or forward as part of the net_operating_loss_deduction under sec_172 sec_1_166-3 income_tax regs sec_172 permits a deduction for the full amount of allowable nol carrybacks from subsequent years and carryovers from previous years as long as taxable_income for the current_year is not less than zero sec_172 b petitioners bear the burden of establishing both the existence of the nol and the amount of any nol that may be carried forward see rule a 349_us_232 115_tc_605 to deduct a loss as a business_bad_debt a taxpayer must show that he or she was engaged in a trade_or_business and that the purported bad_debt was proximately related to the trade_or_business 66_tc_652 aff’d 601_f2d_734 5th cir sec_1_166-5 income tax regs the taxpayer must establish that the amount claimed as a deduction represents a bona_fide debt sec_1_166-1 income_tax regs gifts or contributions to capital may not be deducted as bad_debts under sec_166 91_tc_575 sec_1_166-1 income_tax regs the taxpayer also must prove the worthlessness of the debt and the year in which it became worthless am offshore inc v commissioner 97_tc_579 respondent argues that petitioners have not met any of these criteria to deduct business bad_debts a trade_or_business the code does not define the term trade_or_business deciding whether the activities of a taxpayer constitute a trade_or_business requires an examination of the specific facts in each case 312_us_212 the taxpayer must participate in the activity with continuity and regularity and the primary purpose for engaging in the activity must be for income or profit 480_us_23 the management of one’s investments no matter how extensive is not considered a trade_or_business 373_us_193 higgins v commissioner u s pincite the taxpayer’s activities as an investor may produce income or profit but profit from investment is not taken as evidence that the taxpayer is engaged in a trade_or_business any profit so derived arises from the successful conduct of the trade_or_business of the corporation or other venture in which the taxpayer has taken a stake rather than from the taxpayer’s own activities whipple v commissioner u s pincite the objective facts surrounding a taxpayer’s advances rather than his or her subjective intent controls in determining whether the advances should be treated as trade_or_business or investment activity see 983_f2d_997 10th cir joint_venture properties petitioners contend that petitioner was in the trade_or_business of investing in vacant lots constructing single-family residences and selling residences to the public as stated in the jva they argue that the jva required that petitioner and prime have equal rights in the management of joint_venture business and that petitioner had the right and responsibility to participate in all aspects of the joint_venture they contend that petitioner actively participated with continuity and regularity with the objective of making the joint_venture properties as profitable as possible the parties agree that petitioners were not in a trade_or_business of lending funds under the terms of the jva petitioner held certain rights to participate in the joint_venture those rights were to participate in the selection of vacant lots and in the management of activities to the extent not otherwise provided in the jva petitioner’s responsibility under the jva was to provide funds to prime for the purchase of the lots the jva provided that prime was solely and exclusively responsible for all aspects of development design construction marketing and sale of the properties prime was required to incur the risk associated with building and marketing the constructed residences by financing construction with its own funds or loans held solely in its name petitioner testified credibly that he did perform some work in connection with the joint_venture properties before and during the years in issue he worked with l olson in selecting the vacant lots that prime purchased he interacted with prime’s construction lender to extend prime’s loans and he performed some landscaping and marketing work in preparation for the parade generally petitioner’s work was directed towards helping prime sell the constructed homes at a profit but he was not required under the jva to perform these activities a common factor distinguishing the conduct_of_a_trade_or_business from investment is the receipt by the taxpayer of compensation other than the normal investor’s return whipple v commissioner u s pincite compensation other than the normal investor’s return generally means income received by the taxpayer directly for his or her services rather than indirectly from the success of the enterprise in which he or she has invested id pincite the income that petitioner received from the joint_venture properties was not compensation_for his services under the terms of the jva petitioner’s compensation_for the joint_venture properties was directly linked to his providing capital to prime for each property the principal_amount that he was owed under the promissory note represented a return of his investment plus an additional the income that he received did not depend on the amount of services that he provided but depended instead on prime’s successful activities as the builder and marketer of the properties the facts and circumstance indicate that petitioner’s role in the development and sale of the joint_venture properties was that of an investor rather than an individual engaged in a trade_or_business petitioners contend that they were engaged in one or multiple real_property trades_or_businesses sec_1221 defines a capital_asset as property held by the taxpayer but does not include property held by the taxpayer primarily_for_sale_to_customers in the ordinary_course_of_his_trade_or_business petitioners contend that prime held the constructed homes on the joint_venture properties for sale to customers in the ordinary course of business and that because of petitioner’s participation in the jva with prime they should be allowed to report losses for the properties as ordinary rather than capital losses the court_of_appeals for the tenth circuit has concluded that the following factors are relevant for determining whether real_property is held by the taxpayer in a trade_or_business the purpose for which the property was acquired the activities of the taxpayer and those acting on his or her behalf the continuity of sales and their frequency and any other fact relevant to the determination of whether a sale was a transaction of a trade_or_business 448_f2d_514 10th cir aff’g 54_tc_1475 petitioners did not own the properties that were developed and sold under the jva petitioner provided capital for prime’s purchases of vacant lots and received promissory notes which were tied to sales of homes to be constructed by prime on the lots pursuant to the terms of the jva petitioner never held properties for sale to customers and petitioners did not report income related to a purported trade_or_business on their tax returns petitioner in a letter to the taxpayer_advocate indicated that he did not have a business and had no business_expenses prime held developed and sold the joint_venture properties in its name even if we accepted petitioners’ contention that prime’s activities should be treated as part of petitioner’s trade_or_business for the years in issue only two properties inwood place and grande river could be considered part of the purported real_property_trade_or_business with prime construction of the home on inwood place was completed in and the grande river home was completed in petitioner and prime did not attempt to develop or sell any other real properties until grande river sold in and inwood place sold in sales of two properties for all of the years in issue cannot be called frequent petitioners owned tallman lot during the years in issue after petitioners acquired ownership of the lot from prime in date petitioner canceled prime’s note for tallman lot therefore the terms of the jva did not apply to this lot during the years in issue petitioner’s purpose for acquiring tallman lot from prime was to use it as collateral for a loan to replenish petitioners’ bank accounts until such time as he could recoup his investment in one or more of the other properties that prime had purchased he testified that he intended to resell the lot to prime so that prime could build a home on the lot and sell it to customers no development occurred while petitioners owned the lot they held tallman lot from until when it was repossessed for failure to repay their loan and during that time they did not acquire any other lots or make any sales of real_property the relevant factors do not support a conclusion that petitioners held tallman lot for sale to customers in the ordinary course of a trade_or_business there was never any development on tallman lot neither petitioner nor prime ever held an ownership_interest in tallman lot petitioner held an option to purchase this lot but he never advanced the funds to purchase it the terms of the jva did not apply to tallman lot and it cannot be considered part of the purported real_property_trade_or_business conducted by petitioner through the jva for the years in issue with respect to the joint_venture lots purchased and developed under the terms of the jva petitioners’ reliance on cases that determine a taxpayer’s principal purpose for owning real_property is misplaced because they did not own or sell these properties petitioner had no responsibility to develop or market the lots to customers he held an investment_interest although petitioners owned tallman lot they did not develop market or sell it we conclude that petitioners were not in engaged in a trade_or_business for the sale of real_property during the years in issue loss on their amended_return for petitioners claim for the first time a bad_debt deduction for advances made to szigeti and to dhp their dealings with szigeti and dhp were not conducted under the terms of the jva petitioners provided no evidence showing how the advanced funds were used the receipt that markle signed for the advance states that the funds were received for investment purposes and that equity stakes would be determined in further documentation petitioners provided no evidence about activities continuous or otherwise that they performed for a trade_or_business in connection with these advances we conclude that the dollar_figure was not advanced for a business_purpose because petitioners were not engaged in a trade_or_business in connection with these advances b bona_fide debts since we have concluded that petitioners were not engaged in a trade_or_business during the years in issue we now consider whether there was nonbusiness_bad_debt petitioners are required to show that the losses associated with the joint_venture properties and the loss were due to the worthlessness of a bona_fide debt in order to claim a deduction under sec_166 see sec_1_166-1 income_tax regs a bona_fide debt is a debt which arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money id whether an advance gives rise to a bona_fide debt for federal tax purposes is determined from all the facts and circumstances 74_tc_476 where the facts indicate that no bona_fide debt was created an advance may properly be classified as a contribution_to_capital see 69_tc_814 rutter v commissioner tcmemo_2017_174 petitioners contend that the advances made to prime through the jva created bona_fide debts they argue that the payments cannot be considered equity payments because petitioner obtained promissory notes secured_by deeds of trust and because he held no ownership_interest in prime respondent contends that petitioners’ advances in this case did not create bona_fide debts and that the advances were more akin to equity than debt in resolving questions of debt versus equity courts have identified and considered various factors see 95_tc_257 those factors include the names given to the certificates evidencing the indebtedness the presence or absence of a fixed maturity_date the accrual and payment of interest the source of payments the right to enforce payments participation in management as a result of the advances the status of the advances in relation to regular corporate creditors the intent of the parties the identity of interest between creditor and shareholder thin or adequate capitalization the risk involved in making the advances the use to which the advances were put the ability of the borrower to obtain credit from other sources and the failure of the debtor to repay dixie dairies corp v commissioner t c pincite see also am offshore inc v commissioner t c pincite goldstein v commissioner tcmemo_1980_273 the above factors are only aids in evaluating whether the transferred funds should be regarded as risk capital or as bona_fide loans made pursuant to a debtor-creditor relationship 398_f2d_694 3d cir see calumet indus inc v commissioner t c pincite no single factor is determinative and not all factors are applicable in each case dixie dairies corp v commissioner t c pincite inwood place petitioners on their amended tax_return claim a bad_debt deduction of dollar_figure for inwood place the notice_of_deficiency on which this case is based does not cover petitioners had received previously a separate notice_of_deficiency for and had not filed a petition with this court on september respondent assessed the determined deficiency accuracy-related_penalty and accrued interest for that year the tax_court is a court of limited jurisdiction and we may exercise our jurisdiction only to the extent authorized by congress see sec_7442 85_tc_527 we do not have jurisdiction to determine whether the tax for any year not included in the notice_of_deficiency has been overpaid or underpaid sec_6214 therefore we cannot determine that petitioners are eligible for a bad_debt deduction for grande river petitioners claimed a bad_debt deduction on their amended_return of dollar_figure for grande river for grande river prime issued petitioner a promissory note which stated that it was secured_by a deed_of_trust a genuine debtor-creditor relationship must be accompanied by more than the existence of corporate paper encrusted with the appropriate nomenclature captions 414_f2d_844 5th cir the promissory note for grande river lacked a fixed maturity_date and stated that payment would be due upon the sale of a home on the property the note stated that petitioner was the beneficiary of a deed_of_trust for the property but no provision in the note stated a date upon which petitioner could unconditionally demand payment and after which prime would be in default the fact that the note provided an open-ended rather than fixed date for repayment indicates that petitioner’s advances were equity investments and not bona_fide debts the note that petitioner held for grande river did not require any periodic accrual or payment of interest it required only that prime pay a fixed amount at the time it sold the property a true lender is concerned with interest and petitioner’s failure to include a separate interest rate for the note indicates that he expected to take an equity stake in the development of grande river rather than act as a bona_fide creditor see am offshore inc v commissioner t c pincite the absence of a fixed maturity_date and a payment schedule indicates that repayment was tied to the fortunes of prime’s business a sign of an equity advance rather than a bona_fide debt 464_f2d_394 5th cir repayment of petitioner’s advance was contingent on prime’s sale of the home petitioner had no right to demand payment unless and until prime made a sale if repayment is possible only out of the borrower’s earnings the transaction appears to be a contribution_to_capital am offshore inc v commissioner t c pincite petitioner did not receive promissory notes from prime for the advances paid for grande river after its purchase including the payments advanced for landscaping expenses construction loan interest and property taxes petitioner testified that l olson promised to repay him if petitioner agreed to make the construction loan interest payments beginning in date petitioner also testified that at this time he began to suspect that prime was broke his failure to obtain or request formal promissory notes or other security under these circumstances indicates that these payments were not intended to be bona_fide debt after date petitioner believed that prime was struggling to pay expenses he testified that he continued to make the interest payments on prime’s construction loan for grande river because he feared that if he did not prime would default on the loan and lose the property before it could be sold and before he could recoup his already substantial investment advances made to an insolvent_debtor generally do not create debts for tax purposes but are characterized as capital contributions or gifts see dixie dairies corp v commissioner t c pincite the chance that petitioner’s continued advances would be repaid was far more speculative than any third-party creditor would accept see fin hay realty co f 2d pincite we conclude that petitioner’s transfers of funds to prime for grande river did not create bona_fide debt consequently we do not need to address whether the purported debts became wholly worthless in the years in issue loss petitioners did not claim a deduction for the loss on their original income_tax return filed for any of the years in issue at trial they provided evidence of payments made in and and they contend that they never received repayment from dhp or szigeti for these advances the receipt signed by markle records that petitioner advanced dollar_figure for the purpose of investing in various projects and specifically provides that the parties’ equity stakes in these projects will be determined in a separate agreement the only evidence that petitioners provided with respect to the advance to szigeti is a home equity line of credit activity record which shows a dollar_figure draw on petitioners’ account and a copy of a check stub which purportedly describes the purpose of the advance but was not attached to the actual check the check stub reporting petitioners’ advance to szigeti describes the payment as a loan but petitioners did not provide a note or any other documentation reflecting the parties’ mutual intent to create a debtor-creditor relationship the check stub does not describe any loan terms except that the amount was to be repaid in one month with respect to both the and advances there is no evidence that interest was charged and no indication as to how petitioners’ funds would be used or what the expected source of their repayment would be petitioners’ evidence is insufficient to establish that there was a debtor-creditor relationship for the and advances they are not entitled to a deduction under sec_166 for the loss because there was no bona_fide debt see sec_1_166-1 income_tax regs tallman lot on their amended_return for petitioners claimed a bad_debt deduction of dollar_figure for tallman lot prime issued a promissory note payable to petitioner for dollar_figure in connection with the initial purchase of this lot on date prime executed a quitclaim_deed for tallman lot that transferred its interest in the lot to petitioners petitioner canceled prime’s promissory note for the lot and released the deed_of_trust at the beginning of prime was no longer a debtor and petitioner was no longer a creditor since there was no bona_fide debt petitioners are not entitled to a bad_debt deduction see id tallman lot on their amended_return for petitioners claimed a bad_debt deduction of dollar_figure for tallman lot petitioner reserved the option to purchase tallman lot in his own name and not in prime’s name he did not purchase tallman lot and did not recover the dollar_figure in earnest money petitioners did not lend anyone any money with respect to tallman lot and therefore they cannot claim a bad_debt deduction see id conclusion we conclude that petitioners did not have any bona_fide debts during the years in issue they are not entitled to the nol_carryback and carryforwards related to bad_debt deductions that they claimed on their amended returns for the years in issue ii sec_6651 addition_to_tax sec_6651 imposes an addition_to_tax if the taxpayer fails to file his or her income_tax return by the required due_date including any extension of time for filing a taxpayer has the burden of proving that failure to timely file was due to reasonable_cause and not willful neglect see sec_6651 116_tc_438 5petitioner purchased an option to purchase which expired under sec_7491 the commissioner bears the burden of producing evidence with respect to the liability of the taxpayer for any additions to tax see higbee v commissioner t c pincite petitioners’ irs account transcript reflects their request for an extension of time to file their income_tax return not later than date they filed their return on date respondent has met the burden of production petitioners provided no explanation as to why their tax_return was filed late for we sustain respondent’s determination of the addition_to_tax under sec_6651 iii sec_6662 penalties respondent determined that for and petitioners are liable for accuracy-related_penalties pursuant to sec_6662 sec_6662 and b and imposes a penalty on any portion of an underpayment of federal_income_tax that is attributable to negligence or disregard of rules or regulations or a substantial_understatement_of_income_tax an understatement of income_tax is substantial if it exceeds the greater of of the tax required to be shown on the return for the taxable_year or dollar_figure sec_6662 petitioners reported no tax_liability for or as determined in the notice_of_deficiency petitioners’ understatements of income_tax for these years were substantial the commissioner bears the burden of production with respect to penalties sec_7491 once the commissioner meets this burden the taxpayer must come forward with persuasive evidence that the commissioner’s determination is incorrect see rule a higbee v commissioner t c pincite sec_6751 provides that n o penalty under this title shall be assessed unless the initial determination of such assessment is personally approved in writing by the immediate supervisor of the individual making such determination or such higher level official as the secretary may designate in graev v commissioner graev iii t c __ date supplementing and overruling in part graev v commissioner graev ii 147_tc_460 we held that the commissioner’s burden of production under sec_7491 includes establishing compliance with the supervisory approval requirement of sec_6751 trial of this case was held and the record was closed before we vacated our decision in graev ii and issued graev iii in the light of the court’s decision in graev iii we ordered respondent to file a response addressing the effect of sec_6751 on this case and directing the court to any evidence of supervisory approval of the penalties in the record of this case on date respondent filed a seriatim answering brief addressing for the first time the issue of compliance with sec_6751 as it relates to the penalties determined in this case respondent asserted the penalty against petitioners for in the amended answer in roth v commissioner tcmemo_2017_248 at citing 851_f3d_190 ndollar_figure 2d cir aff’g in part rev’g in part t c memo this court observed that the commissioner routinely asserts sec_6662 penalties in answers and that we have jurisdiction over them pursuant to sec_6214 we held that the commissioner may consistent with both chai and graev iii assert additional penalties in the answer and that a delegate of the chief_counsel for the irs who represents the commissioner is the proper individual to do so in this court roth v commissioner at we held in roth v commissioner at that irs counsel serving as the chief counsel’s delegate had complied with sec_6751 by obtaining the approval and signature of the associate area_counsel who was her immediate supervisor in this case the associate area_counsel acting as respondent’s counsel’s immediate supervisor signed the amended answer therefore respondent has met the burden of production for respondent also bears the burden_of_proof with respect to the penalty because it was asserted for the first time in respondent’s answer see rule a the evidence establishes that petitioners’ understatement of income_tax for was substantial within the meaning of sec_6662 and therefore respondent has met the burden_of_proof respondent determined the accuracy-related_penalty for in the notice_of_deficiency and did not provide at trial evidence of supervisory approval of the penalty pursuant to sec_6751 in response to the court’s order dated date respondent moved to reopen the record to offer into evidence the declaration of ms goggins the group manager6 of the irs examiner that conducted the examination of petitioners’ returns for the years in issue and a civil penalty approval form signed by the supervisor and dated before the issuance of the notice reopening the record for the submission of additional evidence lies within the court’s discretion zenith radio corp v hazeltine research inc u s 6ms goggins signed the form as group manager however the internal_revenue_manual irm as then in effect see irm pt date specified that the approval must be by the immediate supervisor as the statute requires the presumption of regularity see walker v commissioner tcmemo_2018_22 at n warrants the presumption that ms goggins was the immediate supervisor 114_tc_276 we will grant a motion to reopen the record only if the evidence relied on is not merely cumulative or impeaching is material to the issues involved and probably would change some aspect of the outcome of the case butler v commissioner t c pincite the evidence that is the subject of respondent’s motion would not be cumulative of any evidence in the record and it would not be impeaching material respondent bears the burden of production with respect to penalties and would offer the evidence as proof that the requirements of sec_6751 have been met the subject evidence is material to the issues involved in the case and we conclude that the outcome of the case will be changed if we grant respondent’s motion in petitioners’ response to respondent’s motion they argue that i t would not be in the best interests of justice to reopen the record when the law was clear at the time the record closed when this case was submitted and the record closed graev iii had not been issued and petitioners had not raised sec_6751 as an issue respondent was justified in concluding that introduction of the civil penalty approval form was not necessary we agree with respondent that the civil penalty approval form is not cumulative and is material to the penalty issue in this case we also agree with respondent that the civil penalty approval form is a record kept in the ordinary course of a business activity and is authenticated by the declaration of the immediate supervisor see fed r evid petitioners do not challenge the evidence as unreliable we will admit the civil penalty approval form into evidence and the declaration for the purpose of authentication under rule of the federal rules of evidence see 119_tc_183 respondent has met the burden of production for the penalty for once the commissioner meets the applicable burden the taxpayers must come forward with persuasive evidence that the penalty is inappropriate because for example they acted with reasonable_cause and in good_faith sec_6664 higbee v commissioner t c pincite petitioners have not shown reasonable_cause for the underpayments of tax for and at the time that petitioners filed their and income_tax returns respondent had already issued the notice the notice disallowed in full the reported theft_loss to which petitioners’ claimed nol carryforwards for and related petitioners contend that petitioner consulted a lawyer a tax preparer and irs publications concerning theft_loss deductions before filing the form_1040 petitioners claimed both ordinary_loss and capital_loss deductions for several properties they did not act with reasonable_cause and in good_faith when they continued to claim nol carryforwards for a purported theft_loss for which they knew that deductions had been fully disallowed we hold that petitioners are liable for the accuracy-related_penalties under sec_6662 for and to reflect the foregoing decision will be entered under rule


t c memo united_states tax_court scott e charnas petitioner v commissioner of internal revenue respondent docket no 9095-13l filed date scott e charnas pro_se michael j de matos for respondent memorandum findings_of_fact and opinion wells judge petitioner seeks review pursuant to sec_6330 and sec_6320 of respondent’s determination to proceed with collection of petitioner’s unpaid income_tax liabilities for and we must decide whether unless otherwise indicated section references are to the internal revenue continued respondent abused his discretion in refusing petitioner’s request for a collection alternative and in sustaining the proposed collection action findings_of_fact some of the facts and certain exhibits have been stipulated the parties’ stipulated facts and exhibits are incorporated in this opinion by reference and are found accordingly at the time of filing his petition petitioner resided in new york petitioner is an attorney who has more than three decades of experience practicing law petitioner’s main source_of_income is contingency fees from his representation of plaintiffs in personal injury actions petitioner timely filed his individual income_tax returns for and but did not fully pay his income_tax liabilities to collect petitioner’s outstanding balances respondent issued a final notice_of_intent_to_levy and notice of your right to a hearing on date it was followed by a notice_of_federal_tax_lien issued date in response petitioner who was represented at the time submitted form request for a collection_due_process or equivalent_hearing via facsimile continued code of as amended and in effect at all relevant times copy on date the form shows checked boxes for all three collection alternatives petitioner’s collection_due_process_hearing cdp hearing was assigned to settlement officer marilyn matthews so matthews who sent petitioner a letter on date scheduling a telephone cdp hearing for date the letter stated that so matthews could not consider a collection alternative without first receiving a copy of petitioner’ sec_2011 tax_return proof of estimated_tax payments and a form 433-a collection information statement for wage earners and self-employed individuals after the parties rescheduled it twice the telephone hearing was set for date pincite a m petitioner failed to submit the requested documents one week before the hearing instead petitioner and his representative arrived with documents in hand at the internal_revenue_service irs office pincite a m on the day for which the hearing was scheduled petitioner testified that he went to the irs office with the intention of telling the irs officer of his true circumstances and that the form 433-a was in fact misleading as it applied to him on date the day of the scheduled cdp hearing so matthews was on sick leave and unavailable to meet with petitioner and his representative petitioner and his representative were told that so matthews would contact them with a new hearing date before leaving petitioner and his representative left the documents with an irs employee the documents included a copy of petitioner’ sec_2011 form_1040 u s individual_income_tax_return a form 433-a a form 433-b collection information statement for businesses and substantiation of the contents of the two forms petitioner’ sec_2011 form_1040 showed total income of dollar_figure for the year or dollar_figure per month in contrast the estimated gross_income for on petitioner’s form 433-a was dollar_figure or dollar_figure per month the form 433-a also showed no significant assets owned by petitioner the differing figures resulted from the fact that petitioner’s main income source his contingency fees varies widely year to year for through petitioner reported adjusted_gross_income of dollar_figure dollar_figure dollar_figure and dollar_figure respectively during the days before he completed the form 433-a petitioner’s law firm income totaled only dollar_figure petitioner also noted the variable nature of his income on the form 433-b next to annual salary draw petitioner wrote dollar_figure highly variable and in response to the question any increase decrease in income anticipated petitioner checked the yes box and wrote income varies significantly from year to year petitioner did not specify when or by how much his income would change instead writing unknown in the answer box requesting these details he also did not take advantage of the instruction to use attachment if needed after calling the office to retrieve her messages so matthews notified petitioner’s representative that when she returned to work she would review the documents and call him to discuss the case but it is unclear from the record how or when so matthews so notified petitioner’s representative so matthews reviewed the documents on date her notes for that day are in two parts the first part describes so matthews’ review of petitioner’s documents the paragraph begins by discussing petitioner’ sec_2011 return including that it reported dollar_figure in tax due on dollar_figure in nonpassive_income from schedule_k-1 partner’s share of income credits deductions etc and dollar_figure in income from his legal practice so matthews’ notes then state that neither petitioner nor his legal practice a corporation was fully in compliance with tax filing and payment obligations the notes finish with the following paragraph tp does not qualify for an ia nor an oic tp reported on form 433-a that the net difference between monthly income and expenses is a positive dollar_figure tp information indicates that he has the ability to pay none of the requested collection alternatives can be considered so matthews’ notes do not address the discrepancy between the and income figures the second part of so matthews’ date notes describes her discussion of the documents with petitioner’s representative so matthews’ notes state that the representative could not explain how petitioner’s income was reported so matthews told petitioner’s representative that petitioner did not meet the requirements for an installment_agreement or an offer-in-compromise because he was not current with estimated_tax payments and that petitioner’s claim that he could not pay the tax_liabilities would not be considered because the form 433-a reflected that he had the ability to make monthly payments the determination_letter issued date memorializes so matthews’ analysis you requested an installment_agreement an offer_in_compromise and cannot pay balance as collection alternatives however you are not in compliance with estimated_tax requirements therefore an installment_agreement and offer_in_compromise could not be considered your 433a indicates that you have the ability to make payments therefore a cannot pay balance as a collection alternative could not be considered in addition the taxpayer's law firm is not in compliance with filing paying requirements opinion sec_6330 grants this court jurisdiction to review the administrative determination made by the irs appeals_office if a taxpayer’s underlying tax_liability is properly in dispute the court will review the determination de novo 114_tc_176 where the underlying tax_liability is not in issue we review the determination for abuse_of_discretion id pincite see also 114_tc_604 the underlying liabilities are not in issue in this case so we review the appeals office’s determination for abuse_of_discretion we will reject the determination of the appeals_office only if the determination was arbitrary capricious or without sound basis in fact or law 125_tc_301 aff’d 469_f3d_27 1st cir goza v commissioner t c pincite 112_tc_19 we do not substitute our judgment for that of the appeals_office meaning we do not decide independently whether we believe that the levy or lien should be sustained see eg murphy v commissioner t c pincite woodral v commissioner t c pincite instead we consider whether in the course of making its determination the appeals_office complied with the legal requirements of an administrative hearing at the hearing the appeals officer must verify that the requirements of applicable law and administrative procedure have been met consider any relevant issues raised by the taxpayer and consider whether any proposed collection action balances the need for efficient collection_of_taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary sec_6330 in making her determination so matthews did not consider the relevant issue raised by petitioner of his fluctuating income petitioner noted several times on the form 433-b that the law firm’s future income was unknown because it varied significantly and was highly variable petitioner’s form_1040 for showed only of the estimated income listed for on the form 433-a so matthews did not weigh petitioner’s fluctuating income in either the notice_of_determination or the case activity report when assessing his ability to pay respondent contends that petitioner should have attached a letter explaining the nature of his income however we conclude that petitioner raised the issue when he made the entries on form 433-b explaining the variability of his income and that he was not required to elaborate in writing if he intended to discuss the details at his hearing respondent contends petitioner did not sufficiently participate in the hearing however we conclude that petitioner did not have a fair opportunity to participate in the hearing petitioner completed and submitted the financial documents requested and he traveled to the irs office on the date hearing date specifically to discuss the issue of his fluctuating income petitioner thought that so matthews would contact his representative to reschedule the hearing however after so matthews was unavailable to hold the cdp hearing on date she did not schedule a specific time for the rescheduled hearing so petitioner could not plan to participate although petitioner’s representative could not explain how petitioner’s income was reported so matthews did not provide him time to obtain an explanation from petitioner she made her determination without waiting for any explanation indeed the record suggests so matthews had made her determination before she even spoke with petitioner’s representative respondent contends that even if so matthews made her determination before speaking with petitioner’s representative it would not constitute an abuse_of_discretion because hearings can be conducted via correspondence instead of over the telephone or face to face respondent cites 718_f3d_89 2d cir however williams is distinguishable in williams petitioner’s attempt to appear at the hearing in person may have been misguided since petitioner concedes that his hearing was scheduled to be by telephone not face-to-face however it does not detract from the validity of petitioner’s contention that he had a relevant nonfrivolous argument he intended to raise at his hearing the taxpayers were denied a face-to-face hearing because they did not comply with a document request however so matthews did not deny petitioner’s request for a hearing and petitioner did comply with the document request albeit late petitioner also never demanded and concedes that he is not entitled to a face-to-face hearing petitioner merely asks for the opportunity to explain the nature of his income to the settlement officer who is deciding whether to grant a collection alternative respondent also cites the regulations in support of his contention that a correspondence-only hearing is legally sufficient q-d6 how are cdp hearings conducted a-d6 the formal hearing procedures required under the administrative_procedure_act u s c et seq do not apply to cdp hearings cdp hearings are much like collection appeal program cap hearings in that they are informal in nature and do not require the appeals officer_or_employee and the taxpayer or the taxpayer’s representative to hold a face-to-face meeting a cdp hearing may but is not required to consist of a face-to-face meeting one or more written or oral communications between an appeals officer_or_employee and the taxpayer or the taxpayer’s representative or some combination thereof a transcript or recording of any face-to-face meeting or conversation between an appeals officer_or_employee and the taxpayer or the taxpayer’s representative is not required the taxpayer or the taxpayer’s representative does not have the right to subpoena and examine witnesses at a cdp hearing q-d7 if a taxpayer wants a face-to-face cdp hearing where will it be held a-d7 except as provided in a-d8 of this paragraph d a taxpayer who presents in the cdp hearing request relevant non-frivolous reasons for disagreement with the proposed levy will ordinarily be offered an opportunity for a face-to-face conference at the appeals_office closest to taxpayer’s residence a business taxpayer will ordinarily be offered an opportunity for a face-to-face conference at the appeals_office closest to the taxpayer’s principal_place_of_business if that is not satisfactory to the taxpayer the taxpayer will be given an opportunity for a hearing by telephone or by correspondence in all cases the appeals officer_or_employee will review the case file as described in a-f4 of paragraph f if no face-to-face or telephonic conference is held or other oral communication takes place review of the documents in the case file as described in a-f4 of paragraph f will constitute the cdp hearing for purposes of sec_6330 sec_301_6330-1 proced admin regs the question is not whether a correspondence-only hearing is generally legally sufficient rather the question is whether a correspondence-only hearing was sufficient to provide petitioner the fair hearing to which he is entitled pursuant to sec_6330 and sec_6320 we note that the regulations provide that if the taxpayer presents relevant non-frivolous reasons for disagreement with the proposed collection action the taxpayer will ordinarily be offered an opportunity for a face-to-face conference id it is only if the offer is unsatisfactory to the taxpayer that the taxpayer will be given an opportunity for a hearing by telephone or by correspondence id cdp hearings are designed to be a forum for considering taxpayers’ legitimate disagreement with collection actions the regulations’ emphasis on the taxpayers’ preference among face-to-face telephone or correspondence hearings reflects the traditionally informal nature of the cdp hearings see 115_tc_35 the references in sec_6330 to a hearing by appeals indicate that congress contemplated the type of informal administrative appeals hearing that has been historically conducted by appeals and prescribed by sec_601_106 statement of procedural rules it is therefore important to question whether a taxpayer’s concerns have been properly addressed in the cdp hearing for example in lewis v commissioner tcmemo_2012_138 wl at the taxpayer requested a face-to-face cdp hearing in response to a levy notice because of the complex nature of his case after submitting his financial documents the taxpayer was assigned a nearby settlement officer for a face-to-face hearing id wl at during the one and only minute telephone conversation the assigned settlement officer held with the taxpayer the officer requested more documents id the taxpayer testified that he mailed an assortment of financial documents to the settlement officer id at the settlement officer never received them id when after days the settlement officer had still not received the additional documents he issued a notice_of_determination sustaining the proposed levy id in concluding in lewis that the minute phone conversation was insufficient to support issuing the notice_of_determination the court listed several errors that the settlement officer made he failed to review any of the issues the taxpayer had raised with respect to the complicated nature of his case he failed to indicate that the phone call would constitute the taxpayer’s cdp hearing he failed to follow up with the taxpayer before issuing the notice and the determinations were made without the benefit of a scheduled cdp hearing in any format id at the court recognized that each individual defect standing alone might be insufficient to find an abuse_of_discretion but that the cumulative effect of such defects demonstrate d that the settlement officer acted both arbitrarily and capriciously in rendering his determination id we similarly conclude that the cumulative effect of so matthews’ handling of petitioner’s cdp hearing demonstrates that she acted arbitrarily and capriciously in rendering her determination so matthews failed to review the issue of petitioner’s fluctuating income which he traveled to the irs office to highlight at the hearing scheduled for date noted on the form 433-b that he submitted to so matthews and supported with hi sec_2011 income_tax return so matthews failed to indicate that the review of documents would constitute petitioner’s hearing she failed to follow up with petitioner and schedule a new cdp hearing in which he could plan to participate as requested the cumulative effect was to limit petitioner’s hearing to a review of one set of documents and an unscheduled telephone conversation with petitioner’s representative in another context review of documents and one telephone conference may be sufficient to address a taxpayer’s concerns however so matthews made her determination without considering petitioner’s relevant nonfrivolous reason for disagreeing with the collection action his fluctuating annual income on the basis of the foregoing we conclude that so matthews deprived petitioner of the fair hearing to which he is entitled pursuant to sec_6330 and sec_6320 accordingly we will remand the instant case to the irs appeals_office so that petitioner may have a fair hearing at the hearing petitioner shall present all information that the appeals_office reasonably requests and that petitioner wishes to have considered and analyzed in deciding his collection alternative request to reflect the foregoing an appropriate order will be issued


internal_revenue_service department of the treasury number release date index nos washington dc person to contact telephone number refer reply to cc ita plr-118603-03 date date dear this is in reference to a form_1128 application to adopt change or retain a tax_year submitted on behalf of the above-named taxpayer tin requesting permission to change its accounting_period for federal_income_tax purposes from a taxable_year ending december to a taxable_year ending june effective the taxpayer has requested that the form_1128 be considered timely filed under the authority contained in sec_301_9100-3 of the procedure and administration regulations the taxpayer's form_1128 requesting a change in accounting_period to a tax_year ending june was due on or before the information furnished indicates that the application_for the change in accounting_period was filed late because of an error or misunderstanding however a letter informing the service of the taxpayer’s desire to change to a taxable_year end of june was filed within days of the due_date sec_1_442-1 of the income_tax regulations provides that in order to secure the commissioner's consent to a change in accounting_period the taxpayer must file an application on form_1128 with the commissioner on or before the 15th day of the second calendar month following the close of the short_period sec_301_9100-3 provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions such as the instant case must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government based on the facts and information submitted and the representations made it is held that the taxpayer has acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government accordingly the requirements of the regulations for the granting of relief have been satisfied in this case and the taxpayer's late filed form_1128 requesting permission to change to a tax_year ending june effective for the short_period of is considered timely filed plr-118603-03 pursuant to appendix a of revproc_2003_1 2003_1_irb_1 an additional user_fee is required in order to process the form_1128 the user_fee will be requested in a separate correspondence we will begin processing the taxpayer's application after the user_fee is received the ruling contained in this letter is based upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as part of an examination process this ruling addresses the granting of sec_301_9100-3 relief only no opinion is expressed regarding the tax treatment of the instant transaction under the provisions of any other sections of the code or regulations that may be applicable thereto or regarding the tax treatment of any conditions existing at the time of or effects resulting from the instant transaction specifically no opinion is expressed as to whether the taxpayer is permitted under the code and applicable regulations to change to the tax_year requested in the subject form_1128 this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent sincerely yours robert berkovsky branch chief branch associate chief_counsel income_tax accounting enclosures copy of this letter copy for sec_6110 purposes