t c memo united_states tax_court pmt inc petitioner v commissioner of internal revenue respondent docket no filed date mitchell r miller for petitioner after the trial of this case in los angeles cal on mar and was concluded petitioner on date filed a petition in the u s bankruptcy court for the central district of california this court was notified of the filing of the petition in bankruptcy and was furnished a certified copy of the petition on date on date we issued an order staying all proceedings in this case on date respondent filed a status report in this case to which was attached a certified copy of an order of the u s bankruptcy court for the central district of california dated date in which the bankruptcy court stated that the automatic_stay is terminated for the purpose of allowing the continued donna f herbert for respondent - -2 memorandum findings_of_fact and opinion scott judge respondent determined a deficiency in petitioner's federal_income_tax in the amount of dollar_figure and an accuracy-related_penalty under sec_6662 a in the amount of dollar_figure for petitioner's taxable_year ended date some continued u s tax_court to continue its proceedings involving the debtor in the bankruptcy case and allowing the irs to assess any_tax liability determined by the u s tax_court in the case before it on date this court issued an order that the stay of proceedings in this case was lifted and allowed petitioner to and including date within which to file a brief in this case in a further order dated date granting mitchell r miller's motion to withdraw as counsel for petitioner which order was served on petitioner the court specifically stated that petitioner was not relieved of the obligation of filing a brief in this case by date because of withdrawal of its counsel no brief was received by the court as required by order of the court by order dated date we granted petitioner to and including date to file a reply to respondent's brief filed date which had been served on petitioner date and stated that if no brief were received from petitioner on or before date the court would proceed with consideration of this case the court has received no brief from petitioner and therefore it has been necessary to determine the issues in this case without a statement of petitioner's position with respect to the evidence in the case or petitioner's position with respect to respondent's requested findings_of_fact and arguments in her brief all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated of the issues raised by the pleadings have been disposed of by agreement of the parties leaving for decision the proper amount to be allowed as a deduction to petitioner for reasonable_compensation of officers to what extent if any the amount allowable to petitioner as a deduction for officers' compensation_for the year at issue should be allocated to mixed_service_costs and capitalized pursuant to sec_263a and whether petitioner is liable for an accuracy-related_penalty under sec_6662 for the year at issue findings_of_fact some of the facts have been stipulated and are found accordingly petitioner's principal_place_of_business at the time of the filing of the petition in this case was vernon california during the year at issue petitioner was engaged in the business of converting yarn to fabric pst inc pst was the predecessor company to petitioner and was formed by patti penalba mrs penalba and marcos penalba mr penalba pst was a textile converting operation which is an operation that purchases raw textile materials known as gray goods commissions out the materials to operators that produce the fabric and then has the fabric finished at dye houses after which the fabric is sold to clothing manufacturers petitioner was incorporated in mr and mrs penalba were married prior to and during the year at issue but had been - -4 divorced prior to the trial of this case each of the penalbas held percent of petitioner's stock during the years through the initial investment of the penalbas in petitioner's stock was a total of approximately dollar_figure when petitioner first began its operations its conversion was all done through commissioned knitting dyeing and finishing plants after petitioner stopped selling woven fabrics and started selling only knitted fabrics in petitioner was involved in some resales of both gray goods and finished goods mrs penalba was the chief financial officer and secretary of petitioner during its fiscal years through and mr penalba was its president during those years petitioner hired a bookkeeper in sometime after the bookkeeper was hired petitioner hired a receptionist who was trained in production in or petitioner began to hire outside salespeople petitioner designed its own fabrics and most of the fabrics it sold to customers were of petitioner's own designs both mr or mrs penalba would discuss development of a fabric which was being designed but mr penalba actually designed the fabric mr penalba would determine such aspects of the fabric as the type of thread to be used the construction needed for the fabric whether the fabric needed stretchability on the width or length or whether the fabric was to be top or bottom weighted mr penalba was responsible for selecting the proper yarns the proper equipment the knitting weights and the work requirements - -5 for production efficiency in the manufacture of the fabric mr penalba shared the responsibility for ensuring that the manufacture of the fabric was cost efficient since petitioner was a converter that contracted out its operations selecting efficient and capable factories to produce the fabrics was essential to petitioner's success mr penalba was responsible for selecting the fabrics to be contracted out to the various manufacturers of its fabrics jorge rubino mr rubino began working for petitioner in as its production manager mr rubino's duties as production manager included purchasing yarn taking the orders to the knitting plants controlling the production of the fabrics and delivering the fabrics to the finishing plants to be finished mr penalba supervised and worked directly with mr rubino mr penalba's duties as the top person in charge of production included deciding which fabric designs petitioner would produce mr penalba's duties included researching and developing fabrics meeting with customers in designing fabrics and negotiating with the commissioned knitting and dyeing plants mr penalba held meetings with the production staff at least once a week mr penalba worked very closely with mr rubino mr penalba was also responsible for petitioner's sales operation mr penalba would recruit and train salespeople to work with petitioner's customers as petitioner's sales manager - -6 mr penalba's duties included supervising the sales staff meeting with both salespeople and purchasers and handling product service mr penalba frequently worked to hours a day and mr penalba often worked weekends mr penalba worked approximately to hours per week during the year at issue mr penalba's duties and responsibilities did not change dramatically from year to year mrs penalba was responsible for the daily operations of petitioner mrs penalba secured credit to finance material purchases and operations mrs penalba was also responsible for recordkeeping and customer services mrs penalba was responsible for confirming orders and seeing that purchase orders were properly filled in general mrs penalba was second in authority in making policy decisions for petitioner including decisions with respect to production although mrs penalba's workload increased steadily from through the nature of her duties remained substantially the same mrs penalba worked approximately to hours per week during the year at issue in mr penalba developed several fabrics that became very desirable in the industry the most popular fabric that mr penalba developed was a cotton fabric with a spandex polyurethane or lycra synthetic filament the cotton lycra fabric the cotton lycra fabric was desirable because it gave an elastic - -7 quality to the cotton fabric which cotton did not have naturally mr penalba developed the cotton lycra fabric by wrapping the synthetic filament completely around the cotton fibers the cotton lycra fabric was used by clothing manufacturers for such products as athletic jerseys leotards dresses bicycling shorts ski shorts and leggings sales for the cotton lycra fabric caused petitioner's gross_receipts for its fiscal_year to increase dramatically the cause of petitioner's decrease in sales after was primarily market conditions after its fiscal_year other operators became able to manufacture fabrics similar to the cotton lycra fabric causing increased competition for petitioner in this product on its federal_income_tax returns for its years ending date through date petitioner reported the following gross_receipts year ending july gross_receipts dollar_figure big_number big_number big_number on its federal_income_tax returns for its years ending date through date petitioner reported the following taxable_income - -8 year ending july taxable_income dollar_figure big_number big_number big_number after its fiscal_year petitioner became an s_corporation and thereafter for each year filed a form_1120s u s income_tax return for an s_corporation on its federal_income_tax returns for its taxable years short_year of date through date and petitioner reported gross_receipts and ordinary_income as follows year gross_receipts ordinary_income dollar_figure big_number big_number dollar_figure big_number big_number petitioner paid no dividends from the date of its inception to the time of the trial in this case petitioner's return on equity for its fiscal years through and calendar years through computed by using as net_income after taxes amounts computed from petitioner's federal_income_tax returns and dividing that amount by shareholder equity at the beginning of the year is as follows tax_year ended formula return on equity date dollar_figure dollar_figure - -9 date big_number big_number date big_number big_number date1 big_number date big_number date big_number the year ended date was a short taxable_year for these years the ordinary_income figures that were reported on the forms 1120s were used since no tax was paid_by the corporation on its federal_income_tax returns for its years ending date through date petitioner deducted officers' compensation as follows year ending mr penalba's mrs penalba's total july compensation compensation compensation dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number for its fiscal_year petitioner adopted an incentive bonus plan the bonus plan under which petitioner's officers were to be paid an incentive bonus equal to percent of the gross increase in petitioner's sales for its fiscal_year - -10 over its gross_sales for its fiscal_year the bonus plan provided as follows resolved further that the board_of directors have evaluated various incentive compensation programs and have determined that the most appropriate method for determining and measuring the performance and contribution of its officers to this corporation during a fiscal_year is through the application of a fixed formula which calculates the incentive amount by multiplying a fixed percentage times the net increase in gross_sales volume of the corporation for its current fiscal_year over the immediately preceding fiscal_year resolved further that the board_of directors of the corporation have determined that the standard percentage within the industry in which the corporation engages is ten percent and that this amount represents a fair incentive as such the corporation shall make available for distribution to its officers a gross bonus pool amount equal to ten percent of the gross increase in sales of this corporation for its fiscal_year ending date over its gross_sales for its fiscal_year ending date resolved further that the gross bonus amount available for distribution shall be distributed to its officers not later than ninety days following the close of its fiscal_year each officer shall be entitled to receive a distribution from the bonus pool in an amount which equals the ratio of an officer's annual compensation without regard to the bonus to all officers' compensation multiplied against the gross bonus pool isaac blumberg mr blumberg was the outside accountant for petitioner during the year at issue and for some years prior and subsequent thereto mr blumberg performed a number of services for petitioner during the year at issue including preparing financial statements consulting on tax issues and performing other tax work mr blumberg also participated in designing the bonus plan for the fiscal_year for petitioner for the - -11 calendar years and petitioner paid mr blumberg fees for his services in the amounts of dollar_figure and dollar_figure respectively the bonus plan was not offered to employees other than mr and mrs penalba the bonus plan was terminated in date because it was no longer needed after petitioner became an s_corporation for its fiscal_year petitioner's production personnel earned the following compensation employee mr rubino elena cabrera gonzalo campos juan isidro beverly dominguez title converting supervisor- yarn purchasing production supervisor- dyeing and finishing coordinator production clerk- knitting production clerk- yarn production clerk- data entry salary dollar_figure big_number big_number big_number big_number in addition to the above listed compensation mr rubino received a company car and health insurance benefits for himself and his family mr blumberg also prepared a pension_plan for petitioner's employees sometime before the fiscal_year at issue the employee_pension_plan the plan was funded for approximately years and covered five employees at the request of some of the employees covered by the plan the employee_pension_plan was terminated in - -12 mr and mrs penalba along with mike macias mr macias owned a knitting plant u s fabrics corp u s fabrics in mr and mrs penalba together owned percent of u s fabric u s fabrics was an s_corporation during approximately to percent of u s fabrics' business was production for petitioner mrs penalba was involved in setting up u s fabrics in and provided some management to u s fabrics in that year mrs penalba spent approximately percent of her time working for u s fabrics mr penalba met with mr macias at least to times per week and sometimes once a day mrs penalba earned dollar_figure from u s fabrics during the calendar_year and mr penalba earned dollar_figure from u s fabrics during that year u s fabrics had its offices in the same building as petitioner long beach dyeing and finishing long beach was a dyeing and finishing plant owned by the penalbas with rodolfo saldias mr saldias who was a salesman for petitioner the penalbas owned the building in which petitioner and u s fabrics had offices and the penalbas leased building space to these companies petitioner paid dollar_figure in rent to the penalbas during the calendar_year the penalbas along with mr blumberg determined a fair rental for petitioner to pay the penalbas petitioner paid sales commissions of dollar_figure during its fiscal_year the rate of commission that petitioner paid - -13 its salespeople was between and percent of sales in the top salesperson for petitioner was mr saldias who earned dollar_figure in commissions for the calendar_year on date mr penalba loaned dollar_figure to petitioner and mrs penalba loaned dollar_figure to petitioner petitioner's income_tax return for its fiscal_year shows that at the beginning of the year its loans from stockholders were dollar_figure and at the end of the year were dollar_figure mrs penalba loaned substantial sums of money to petitioner over the years in order to establish more working_capital to enable petitioner to receive further credit from suppliers and vendors on its income_tax return for its fiscal_year petitioner claimed a deduction for compensation paid to mr penalba of dollar_figure and for compensation paid to mrs penalba of dollar_figure respondent in her notice_of_deficiency determined that reasonable_compensation for petitioner's officers during its fiscal_year was dollar_figure and disallowed as a deduction dollar_figure of the dollar_figure claimed by petitioner on its income_tax return for officers' compensation_for that year respondent determined that reasonable_compensation for mr penalba for petitioner's fiscal_year was dollar_figure and that reasonable_compensation for mrs penalba was dollar_figure respondent also determined that petitioner's closing_inventory for its fiscal_year was undervalued by dollar_figure at the trial counsel for respondent explained that part of the undervaluing of inventory - -14 was due to an increase in inventory value because of capitalizing a portion of officers' compensation_for petitioner's fiscal_year respondent further determined that petitioner was liable for an accuracy-related_penalty pursuant to sec_6662 opinion sec_162 provides for the deduction of all the ordinary and necessary expenses paid_or_incurred in the carrying on of a trade_or_business including a reasonable allowance for compensation_for_personal_services actually rendered whether the compensation is reasonable_compensation is a question of fact 95_tc_525 affd 965_f2d_1038 11th cir some of the factors to be considered in determining the reasonableness of compensation of an employee are the employee's role in the company a comparison of the employee's salary with salaries paid_by similar companies for similar services the character and condition of the company whether the relationship between the employee and the company is such as to permit the company to disguise nondeductible corporate_distributions of profits as deductible compensation and the internal inconsistency of a company's treatment of payments to employees 716_f2d_1241 9th cir revg and remanding tcmemo_1980_282 the employee's role in the company requires a consideration of the position held by the employee the number of hours worked - -15 by the employee the duties that the employee performed and the general importance of the employee to the success of the company 536_f2d_289 9th cir affg in part and revg in part 59_tc_231 it is clear from the testimony in this case that both mr and mrs penalba worked long hours for petitioner the evidence indicates that mr penalba frequently worked to 18-hour days while mrs penalba worked to hours per week it is also evident that petitioner would not have been in existence or have continued in existence without the efforts of employees or officers comparable to the penalbas the penalbas were both extremely dedicated to their work respondent contends that the dramatic increase in gross_receipts was not solely caused by the efforts of the penalbas but rather the fashion trends that had a great impact on petitioner's business in respondent argues that the increase in sales was for the most part a fortuitous circumstance we find that the dramatic increase in sales in while partly due to fortuitous market circumstances was due primarily to the insight of mr penalba in seeing the need for a cotton lycra fabric and developing such a material mr penalba saw the need in the manufacture of leggings and other garments of an expandable fabric and developed such a fabric before petitioner's competitors had such a fabric available this to an - -16 appreciable extent caused the increase in petitioner's sales in such a fabric was desirable not simply because of fortuitous fashion trends but because such a fabric was useful in a wide variety of garments respondent makes the argument that the large amount of commissions paid_by petitioner to its salespeople in creates an inference that the efforts of the salespeople had a direct influence on the increase in gross_receipts that year however the evidence indicates that petitioner's salesmen received no greater percentage commission that year than in previous years therefore this evidence does not indicate that the efforts of the salespeople were entirely responsible for the dramatic increase in sales the evidence indicates that the sales staff earned large commissions at least in part because of the desirability of the product petitioner produced during the year at issue the second factor listed above is salaries paid_by similar companies for similar services each party offered testimony of an expert with respect to this factor respondent's witness e james brennan iii mr brennan the president of a personnel and pay practice consulting firm testified that the salaries of the penalbas were unreasonable he relied on information from other firms the same size in sales as petitioner mr brennan concluded that the ceo function should be used to compare to mr penalba's salary while the top - -17 financial executive should be used to compare with mrs penalba's salary mr brennan described the ceo as the highest paid position found among survey data while the top financial executive was the officer responsible for the organization's overall financial plans and policies along with its accounting activities and the conduct of its relationship with lending institutions shareholders and the financial community mr brennan's calculations were based primarily on data from the executive compensation service ecs mr brennan's report stated that the total compensation figures were based on the highest amounts from the non-manufacturing and wholesale categories and included both salary and bonus amounts if the survey for non-manufacturing companies yielded a higher pay amount than the survey for the wholesale industry mr brennan used the higher number mr brennan determined what the average compensation_for each job was from the ecs survey and then took two standard deviations to arrive at his highest maximum amounts we find no evidence that mr brennan's conclusions are based on companies comparable to petitioner mr brennan's figures taken from ecs statistics are based on broad general categories of industries and not on businesses that are similar to the business of petitioner in this case mr brennan based his calculations on the wholesale industry and used the ecs statistics for companies with a standard industrial classification sic code for a trader in nondurables apparel - -18 piece goods and notions however mr brennan testified that he was unable to state the industry petitioner was in and was unsure whether petitioner was in fact in either the wholesale or the non-manufacturing industry mr brennan stated that he had little if any knowledge of petitioner's operations and that there was no evidence that his statistics included any other converting operations comparable to petitioner's in fact petitioner in this case was not a wholesale operation but rather a manufacturing operation with its work contracted out to other companies petitioner produced knitted fabric for garment manufacturers and was not included in the sic code that mr brennan relied on which specifically excluded knitted goods operations petitioner was properly included in the sic code for manufacturers the statistics that mr brennan used from the conference board data another survey he relied on in his report are based on companies all of which had annual sales of at least dollar_figure million while petitioner had sales of approximately dollar_figure million in the year here in issue the median average company in the ecs survey had sales of dollar_figure billion while only four companies in the survey had sales of less than dollar_figure million even though mr brennan categorized mr penalba as the chief_executive_officer and mrs penalba as the top financial executive he had no information as to what duties each of the penalbas actually performed for petitioner from the job descriptions in mr brennan's report it is clear that mr - -19 brennan's comparables are based on occupations for much larger companies that have more specialized officers the penalbas' duties were not accurately described by mr brennan's descriptions of chief_executive_officer and top financial executive in effect mr brennan's statistics merely determined who were the highest paid individuals for the wholesale trade industry for the top executive officer and the top financial officer nationwide without regard to the particular aspects of petitioner's industry we find no evidence that mr brennan's report includes any businesses comparable to petitioner petitioner had two witnesses testify as to reasonable_compensation for the penalbas edward dubner mr dubner testified on behalf of petitioner with regard to the penalbas' compensation mr dubner was a credit manager for two factoring companies during and that did business with petitioner in the garment industry a factoring company purchases receivables or lends money against those receivables a factor's interest in reviewing officers' compensation is to determine if the business is capable of functioning on a day-to- day basis and paying its bills on time in date mr blumberg consulted with mr dubner about the amount petitioner was proposing to pay as officers' compensation mr dubner did not object to the compensation because the penalbas loaned back a substantial portion of their compensation to petitioner and subordinated those loans to the loans of other - -20 creditors mr dubner's interest was not in the reasonableness of salaries paid to officers but rather the capital of the company mr dubner's testimony therefore is of little if any value on the issue of reasonable_compensation his interest was solely whether the officers' compensation paid_by petitioner would adversely affect petitioner's ability to pay its bills petitioner's accountant mr blumberg was called as a witness by petitioner to testify as to the reasonableness of the penalbas' compensation the court ruled that consideration of mr blumberg's testimony would be limited to the financial data he had prepared mr blumberg utilized the robert morris associates annual_statement studies rma the rma is heavily relied on by credit managers and officers at banks factors and trade creditors the rma lists comparables by their standard industrial classification sic code mr blumberg utilized the sic code which includes operations that are establishments primarily engaged in knitting weft circular fabrics or in dyeing or finishing weft circular knit fabrics this definition includes converting operations mr blumberg determined that it was inappropriate to classify petitioner as an apparel maker fabric producer or distributor because these operations produce woven fabrics that are rarely produced in the u s and are generally produced on a much greater scale than knit fabrics in comparison with woven fabric operations operations - -21 that manufacture knitted fabric require less capital_investment yet the personal vision and talent of management is more important mr blumberg concluded that the knit goods industry is dominated by small-scale entrepreneurs who are successful if they are able to anticipate fashion trends and quickly produce goods to meet emerging demands in comparison with the data provided by the rma mr blumberg determined that petitioner had greater gross_profit return on owner's equity based on profit before taxes by a factor of big_number percent and return on total assets by a factor of percent than the rma reported data mr blumberg also provided two comparables from clients from his accounting practice in the southern california area however when mr blumberg refused to supply the names or any information about the business of these clients the court stated that this evidence would not be considered since respondent had no way of verifying the data mr blumberg had few qualifications as an expert on reasonable salaries mr blumberg has had a close association with petitioner for a number of years mr blumberg served as petitioner's accountant during the year at issue and for a number of other years while mr blumberg had a few college courses that dealt with reasonable salaries for corporate officers he had no history of recognized expertise in compensation matters - -22 the rma study that mr blumberg relied on was a collection from lending institutions that came from bank and creditor loan records it was not designed to be used as a survey of compensation an important weakness of the rma study is that it supplies the amount of total officers' compensation but does not supply information regarding the number of officers or their duties the testimony of none of the witnesses in this case offered as experts is helpful in resolving the issue of the reasonableness of salaries paid_by petitioner while the record contains some evidence of the character and condition of petitioner during the year here in issue there is little in the record to show the complexities of petitioner's business as compared to other companies there is evidence that in the year here in issue petitioner's sales and profits increased dramatically but that this situation did not carry over to later years finally it is clear that petitioner's sole shareholders were in a position to determine the amount of their compensation without reference to the amount which would be paid for similar work in an arm's-length_transaction see 918_f2d_90 9th cir 503_f2d_359 9th cir affg tcmemo_1971_200 - -23 petitioner never paid dividends from the date of its inception through the years at issue mr blumberg testified that petitioner did not pay dividends because petitioner was a growth company according to mr blumberg growth companies generally do not pay dividends because they are not attempting to strengthen their stock values or attract new stockholders but rather growth companies are desirous of retaining capital in elliotts inc v commissioner f 2d pincite the court_of_appeals stated if the bulk of the corporation's earnings are being paid out in the form of compensation so that the corporate profits after payment of the compensation do not represent a reasonable return on the shareholder's equity in the corporation then an independent shareholder would probably not approve of the compensation arrangement if however that is not the case and the company's earnings on equity remain at a level that would satisfy an independent investor there is a strong indication that management is providing compensable services and that profits are not being siphoned out of the company disguised as salary fn ref omitted petitioner's return on equity calculated as net_income after taxes per petitioner's federal_income_tax returns divided by shareholder equity at the beginning of the year wa sec_150 percent for the year at issue while for the previous fiscal years petitioner's return on equity wa sec_45 and sec_50 percent respectively respondent does not dispute that the return on equity for was excellent but argues that the return on equity from the taxable_year ended date to the taxable_year ended date was not as impressive while the - -24 return on equity for years not at issue in this case is less relevant than the return on equity for the year that is before us the evidence in the record indicates that except for the short taxable_year where the return on equity would be skewed in favor of a low return the return on equity for the years shortly after the year at issue were very good as well we find that petitioner maintained a high return on equity however petitioner's capital also included borrowed capital this borrowed capital was from loans made to petitioner by the penalbas apparently from the large salaries they were paid in this situation the return on equity is of limited importance also the high return on equity does not mean that an unrelated stockholder would be willing to have nearly twice the amount_paid by petitioner as officers' salaries as its remaining total income if equally competent officers were available for more reasonable amounts of compensation one factor to be considered is whether the compensation at issue was paid pursuant to a structured formal and consistently applied program the record indicates that the bonuses paid to the penalbas were not based on the bonus plan entered for its fiscal_year since petitioner did not file a brief in this case we are not privy to its position on this issue petitioner's accountant testified that the bonuses that petitioner paid to the penalbas complied with the terms of the bonus plan this is contradictory - -25 to the direct terms of the bonus plan the bonus plan provided that the officers were to be paid a bonus equal to percent of the gross increase in sales of petitioner for the fiscal_year over its gross_sales for its fiscal_year under the bonus plan the total bonuses paid to all officers from the bonus pool would have been dollar_figure the bonus plan clearly provided that the bonuses were to be paid in an amount equal to the ratio of an officer's annual compensation to that of all officers applied to the gross bonus pool the record is unclear as to the amount the penalbas received in base salary for petitioner's fiscal_year however the evidence indicates that the penalbas' base salaries were approximately equal if not identical mrs penalba testified that her salary which was the same as mr penalba's for the year here in issue was approximately dollar_figure mr blumberg implied that the penalbas' base compensation in petitioner's fiscal_year was dollar_figure since under the bonus plan mr and mrs penalba were to have been paid in the same proportion as their base salary we conclude that the bonuses paid for the year at issue were not paid pursuant to a structured formal and consistently applied program also the total amount of the bonuses appears to have been improperly computed respondent contends that neither mr nor mrs penalba needed an incentive to work harder since they owned the business both mr and mrs penalba testified that they gave their full efforts - -26 to the business and that they did not need an incentive plan to perform well mr penalba testified that he assisted in development of the plan and thought that it was adequate to maintain the performance of the company mr penalba did not know how it was calculated nor did he know the specifics of the plan based on the record in this case it is clear that the plan was not the major incentive for the work output of either mr or mrs penalba during the year at issue it is also clear from the record that petitioner paid its other employees at least on par with if not slightly better than other companies in the industry mr rubino the production manager for petitioner during the year at issue and a salesman for petitioner at the time of trial and the only employee of petitioner other than the penalbas to testify in this case received a salary of dollar_figure along with a company car certain other bonuses and health care for his family mr rubino testified that he was better paid than others at the same level in the industry the record also indicates that petitioner paid its salesmen who served as either independent contractors or employees well during the year at issue the only evidence as to the compensation of the other employees of petitioner is their respective salaries petitioner did not provide a pension_plan for its employees during the year at issue but the evidence indicates that it was other employees of petitioner and not the - -27 penalbas who requested that the pension_plan be terminated because the employees desired control_over how to invest the proceeds although petitioner paid its employees other than the penalbas well the divergence in their pay and the pay of the penalbas is striking petitioner's highest paid salesman earned dollar_figure in petitioner's fiscal_year as compared to dollar_figure paid to mr penalba it should also be noted that each of the penalbas devoted some time to another corporation in which they were stockholders and were compensated for that work as employees based on all of these factors we conclude that although there has been no showing that the compensation allowed by respondent for mr penalba is not reasonable for mr penalba's normal duties as petitioner's ceo mr penalba in addition is entitled to substantial compensation during the year at issue for his development of the cotton lycra fabric that was largely responsible for petitioner's increased sales in that year respondent argues on brief that it is not appropriate to determine a reasonable salary for mr penalba's services to petitioner by separately considering all the various jobs he did and determining a reasonable amount for each however this court and other courts have in numerous cases considered the reasonableness of compensation based on the fact that the recipient performed more than one function for his employer even though it may not be the sum of the amounts which would be paid - -28 to a full-time_employee in each such position that determines a reasonable salary for one employee performing many functions mr penalba's duties as production manager and sales manager were comparable to the ceo position in other operations we find no information in this record as to companies comparable to petitioner and based on this record hold a reasonable salary for mr penalba as petitioner's ceo is dollar_figure as determined in the notice_of_deficiency this amount is comparable to the maximum amounts paid to ceos of other companies for which statistics are in this record we consider the dollar_figure as reasonable_compensation for mr penalba solely for his work as ceo of petitioner in its fiscal_year this record shows that mr penalba in addition to being petitioner's ceo was also the developer of the process for manufacturing the cotton lycra fabric which development was responsible in large part for petitioner's increase in sales for the year here in issue in our view in an arm's-length arrangement mr penalba would have been compensated for his work in the development of the cotton lycra fabric with a percent of the sales of the cotton lycra fabric in addition to his compensation as petitioner's ceo since the sales of cotton lycra fabric are not shown separately in the record we shall assume that the increase in petitioner's sales in its fiscal_year over its fiscal_year were due primarily to sales of cotton lycra fabric there - -29 is nothing in this record to show directly the percent of sales of the cotton lycra fabric that mr penalba would have received in an arm's-length_transaction because he was the developer of the fabric however some of petitioner's salesmen were paid a commission of percent for their selling activities based on this fact we conclude that in an arm's-length_transaction petitioner would have paid mr penalba approximately percent of the sales of cotton lycra fabric in its fiscal_year and hold that this amount would be dollar_figure we therefore hold that total reasonable_compensation to mr penalba by petitioner in its fiscal_year is dollar_figure the record shows that mrs penalba worked to hours a week but does not show any other extraordinary contribution she made to petitioner in fact from her testimony it appears that she was not knowledgeable with respect to some of petitioner's activities about which a chief financial officer would be expected to be knowledgeable there is nothing in this record to indicate that reasonable_compensation for mrs penalba would be in excess of the amount determined by respondent except the testimony of respondent's expert witness that reasonable_compensation for mrs penalba was dollar_figure for petitioner's fiscal_year for reasons heretofore stated we do not accept the opinion of respondent's expert because of its being based on noncomparable data however we shall accept the dollar_figure as reasonable_compensation for mrs penalba's services - -30 to petitioner in petitioner's fiscal_year as in effect a concession by respondent of this amount which is a little over dollar_figure in excess of the amount determined by respondent in the notice_of_deficiency the next issue is to what extent if any the officers' compensation paid_by petitioner for its fiscal_year should be allocated to mixed_service_costs and capitalized pursuant to sec_263a although the deficiency_notice merely determined an increase in petitioner's ending inventory respondent at trial explained that this was due in part to capitalization under sec_263a of officers' salaries paid for production activities in 97_tc_120 ndollar_figure which involved an inventory_valuation issue we pointed out that for tax years beginning after date the full absorption_rules were replaced by the uniform_capitalization_rules of sec_263a added to the code by the tax_reform_act_of_1986 supra which expanded the types of indirect_costs required to be treated as inventory costs see s rept 1986_3_cb_1 sec_263a4 generally requires the capitalization of - -31 sec_263a capitalization and inclusion of inventory costs of certain expenses a nondeductibility of certain direct and indirect_costs -- in general --in the case of any property to which this section applies any costs described in paragraph -- a in the case of property which is inven tory in the hands of the taxpa yer shall be inclu ded in inven tory costs and b in the case of any other_property shall be capitalized allocable_costs --the costs described in this paragraph with respect to any property are-- a the direct costs of such property and b such property's proper share of those indirect_costs including taxes part or all of which are allocable to such property any cost which but for this subsection could not be taken into account in computing taxable_income for any taxable_year shall not be treated as a cost described in this paragraph - -32 direct and indirect_costs including taxes properly allocable to real and tangible_property produced by a taxpayer produced property includes both property that is sold to customers inventory and property that is used in a taxpayer's trade_or_business self-constructed assets sec_263a sec_1_263a-1t b temporary income_tax regs fed reg date provides that direct material and labor costs must be capitalized with respect to production activities further all indirect_costs that directly benefit or are incurred by reason of the performance of a production activity must be capitalized sec_1_263a-1t b ii temporary income_tax regs fed reg date property produced for the taxpayer under a contract with another is treated as property produced_by_the_taxpayer to the extent that the taxpayer makes payments or otherwise incurs costs with respect to such property sec_1_263a-1t a ii temporary income_tax regs fed reg date direct_material_costs include the cost of those materials that become an integral part of the subject matter and the cost of those materials that are consumed in the ordinary course of the activity direct_labor_costs include the cost of labor which can be identified or associated with a particular activity sec_1_263a-1t b temporary income_tax regs fed reg date indirect_costs include those costs that directly benefit or are incurred by reason of the performance of - -33 a production activity sec_1_263a-1t b ii temporary income_tax regs fed reg date compensation paid to officers attributable to services performed in connection with particular production activities is an example of an indirect_cost that must be capitalized sec_1 263a- 1t b iii n temporary income_tax regs fed reg date marketing selling advertising and distribution expenses including compensation of officers attributable to services performed in connection with the cost of selling are not required to be capitalized under sec_263a sec_1_263a-1t b iii n supra sec_1_263a-1t b v a temporary income_tax regs fed reg date the record is unclear as to mrs penalba's role in the production aspect of petitioner's operations however under sec_263a development of a product is included in the definition of production mrs penalba testified that both she and mr penalba were involved in purchasing raw materials for petitioner mrs penalba also testified that she worked a great deal with mr penalba in product development this testimony was somewhat inconsistent with the testimony of mr rubino petitioner's production manager during the year at issue who testified that he did not work with mrs penalba in production and that her role in the company was strictly dealing with finances while mrs penalba may have had authority over - -34 production in mr penalba's absence she was seldom involved in the day-to-day production operations it is clear from the record that mr penalba was very involved in production and that production was vital to petitioner's business mr penalba was responsible for both production and sales of the fabric mr penalba not only developed the fabrics petitioner produced but also supervised the production of the fabrics from the factories with which petitioner had contracts while mr penalba was intimately involved in production he was also responsible for sales including recruiting and training salesmen customer service and frequently meeting with customers and the salesmen respondent has submitted that percent of mr penalba's compensation is subject_to the capitalization requirement of sec_263a while percent of mrs penalba's compensation is subject_to sec_263a it appears from the record that mr penalba's compensation was due substantially to his production services for petitioner we have concluded that dollar_figure was reasonable_compensation to mr penalba in petitioner's fiscal_year for development of the cotton lycra fabric which is part of production sec_263a certainly petitioner has not shown that the compensation of mr penalba was not primarily for his production duties we hold that percent of mr penalba's compensation was for his production duties - -35 based on the record we find that the amount of mrs penalba's compensation attributable to production was de_minimis we therefore conclude that percent of the amount of reasonable_compensation we have determined for mr penalba is subject_to the provisions of sec_263a but that none of mrs penalba's compensation is subject_to the provisions of sec_263a the final issue is whether petitioner is liable for an accuracy-related_penalty pursuant to sec_6662 sec_6662 imposes an accuracy-related_penalty of percent on any portion of an underpayment_of_tax which is attributable to items set forth in sec_6662 respondent contends that either negligence or substantial_understatement of tax applies in the instant case under sec_6662 and negligence includes any careless reckless or intentional_disregard_of_rules_and_regulations any failure to make a reasonable attempt to comply with the provisions of the law and any failure to exercise ordinary and reasonable care in the preparation of a tax_return 731_f2d_1417 9th cir affg 79_tc_714 sec_6662 specifies as one of those items any substantial_understatement_of_income_tax an understatement is substantial if it exceeds the greater of percent of the tax required to be shown on the return or for a corporation dollar_figure - -36 sec_6662 states that the amount of the understatement shall be reduced by the portion of the understatement which is attributable to the tax treatment of any item if there is or was substantial_authority for such treatment or if the relevant facts affecting the item's tax treatment are adequately disclosed on the return or in a statement attached to the return and there is a reasonable basis for the tax treatment of such item to determine whether the treatment of any portion of an understatement is supported by substantial_authority the weight of authorities in support of the taxpayer's position must be substantial in relation to the weight of authorities supporting contrary positions 91_tc_686 affd 893_f2d_656 4th cir sec_6664 provides that the penalty should not be imposed on any portion of an underpayment if the taxpayer shows reasonable_cause for such portion of the underpayment and that the taxpayer acted in good_faith with respect to such portion reliance on the advice of a professional such as an accountant may constitute a showing of reasonable_cause if under all the circumstances such reliance is reasonable and the taxpayer acted in good_faith sec_1 b income_tax regs we hold that petitioner acted with reasonable_cause mr and mrs penalba relied on the advice of their accountant mr blumberg both in determining the salaries for the year at issue and establishing the bonus plan mr blumberg was under the - -37 impression that the salaries conformed with the bonus plan as evidenced by his testimony in this case petitioner undoubtedly reasonably relied on mr blumberg's advice when it determined the appropriate compensation_for the penalbas and therefore acted with reasonable_cause and with good_faith decision will be entered under rule


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division apr uniform issue list er ke kk eek legend taxpayer a plan b ira c e investment firm d investment firm ex financial advisor f ke company g e dear this is in response to a request submitted on your behalf by your authorized representative by letter dated date for a ruling to waive the 60-day rollover requirement contained in sec_402 of the internal_revenue_code code the following facts and representation have been submitted under penalties of perjury to support the ruling_request ' company g notified taxpayer a that her qualified on domestic_relations_order awarding hera code sec_401 account in plan b maintained by company g had been approved and a separate_account in plan b has been established in her name at - interest in her former husband's we of investment firm d at that time taxpayer a understood that she was required to remove the funds from plan b within 60-days of the notice taxpayer a then immediately notified financial advisor f with all the information necessary to complete a tax-free_rollover to ira c maintained with investment firm e financial advisor f was to send the required tax-free_rollover request to plan b taxpayer a continued to receive periodic statements for her account in plan b from financial advisor f taxpayer a inquired of financial advisor f each time she received a statement as to why the funds had not been rolled over on each occasion financial advisor f advised her that everything was being processed on financial advisor f told her that he had contacted investment firm d and that investment firm d considered her account separate from company g and that taxpayer a could leave her money in plan b financial advisor f then advised that she leave the money in plan b as of taxpayer a's funds remained in plan b - upon financial advisor f's receipt of the quarterly for taxpayer a's account in plan b he on statement of informed her that investment firm d had liquidated her account on allegedly a check payable to her had been issued for dollar_figure federal tax withholding of dollar_figure attention at investment firm e investment firm e denies ever receiving or processing this check and it was never cashed according to the records of investment firm d and had been sent to financial advisor f’s less taxpayer a contacted the company g participant service_center and she was informed that her account under plan b had indeed been liquidated and that the transaction could not be reversed because a form 1099r-distibutions from pensions annuities retirement or profit-sharing_plans iras insurance contracts etc had been generated however investment firm d agreed to issue a replacement check to replace the lost check issued on replacement check was issued or the on to taxpayer a the replacement check was deposited into ira c taxpayer a utilized other funds for the tax-withholding amount within days of the issuance of the replacement check based on the facts and representations you request that the service waive the 60-day rollover requirement with respect to the distribution of dollar_figure from plan b because the failure to waive such requirement would be against equity or good conscience under the provisions of sec_402 of the code sec_402 of the code provides that except as otherwise provided in this section any amount distributed to any distributee by an employees’ trust described in sec_401 which is exempt from tax under sec_501 shall ee of be taxable to the distributee in the taxable_year of the distributee in which distributed sec_72 of the code relating to annuities sec_402 of the code concerning rules applicable to rollovers from exempt trusts provides in part that if any portion of the balance_to_the_credit of an employee is paid to the employee in an eligible_rollover_distribution and the distributee transfers any portion of the property received in such distribution to an eligible_retirement_plan then such distribution to the extent so transferred shall not be includible in gross_income for the taxable_year in which paid sec_402 of the code provides that a qualified_trust means an employees’ trust described in sec_401 which is exempt from tax under sec_501 sec_402 of the code provides that an eligible_retirement_plan includes an individual_retirement_account described in sec_408 sec_402 of the code provides that the transfer must be made within days of receipt in general sec_402 provides that except as provided in subparagraph b paragraph shall not apply to any transfer of a distribution made after the day following the day on which the distributee received the property distributed subparagraph b of sec_402 provides that the secretary may waive the 60-day requirement under subparagraph a where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only eligible rollover distributions that occurred after date are eligible for the waiver under sec_402 of the code revproc_2003_16 r b date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_402 or sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented indicates taxpayer a did not receive the plan b distribution check until after it was re-issued on on taxpayer a deposited this amount along with other funds to make up for the federal tax withholding into ira c therefore since taxpayer a’s rollover was timely within the meaning of sec_402 of the code taxpayer a does not require a waiver of the 60-day requiremen which was within days of wee of therefore pursuant to sec_402 of the code the service need not waive the 60-day rollover requirement with respect to the distribution of dollar_figure from plan b no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this ruling is directed only to the taxpayer that requested it sec_61 k of the code provides that it may not be used or cited by others as precedent a copy of this letter is being sent to your authorized representative in accordance with a power_of_attorney on file in this office if you wish to inquire about this ruling please contact at please address all correspondence to se t -ep ra t3 sincerely yours gann vi frances v sloan mandger employee_plans technical group enclosures deleted copy of this letter notice of intention to disclose notice ce kk kak ke kee


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-136616-09 date september legend x ------------------------------------ country ---------------- date date ----------------- ----------------------- dear ----------------------------------------- this responds to a letter dated date submitted on behalf of x requesting that the service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect to be treated as a partnership under sec_301_7701-3 the information submitted states that x was formed on date under the laws of country x represents that x is a foreign_entity eligible to elect to be treated as a partnership for u s income_tax purposes however x inadvertently failed to timely file a form_8832 entity classification election electing to treat x as a partnership effective date sec_301_7701-3 provides guidance on the classification of a foreign_entity for federal_income_tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if the foreign eligible_entity has two plr-136616-09 owners it may elect to be treated as a partnership pursuant to the rules in sec_301 c sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date on which the form is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center to elect to be treated as a partnership for u s income_tax purposes effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose 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 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-136616-09 pursuant to a power_of_attorney on file with this office copies of this letter are being sent to x’s authorized representative sincerely curt g wilson associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number 468a 468a washington dc person to contact telephone number refer reply to cc psi plr-100461-00 date date re request for a revised schedule of ruling amounts taxpayer parent1 parent2 plant location date act state commission a commission b district fund dear this letter responds to the request of taxpayer dated date for a revised schedule of ruling amounts in accordance with sec_1_468a-3 of the income_tax regulations taxpayer was previously granted a revised schedule of ruling amounts for commission a on date information for the schedule of ruling amounts was submitted on behalf of the taxpayer pursuant to sec_1_468a-3 taxpayer represents the facts and information relating to its request for a revised schedule of ruling amounts as follows taxpayer is percent owned by parent1 who is percent owned by parent2 and files a consolidated federal_income_tax return with both parent1 and parent2 taxpayer has a direct ownership_interest of percent as a tenant-in-common with other electric utility companies in plant which is situated at location taxpayer is under the audit jurisdiction of the district_director of district plant’s plr-100461-00 operating license expires in taxpayer is subject_to the jurisdiction of commission a which covers percent of the taxpayer’s total electric sales and commission b which covers percent for a total of percent these percentages may vary slightly from year to year the estimated base cost for decommissioning the plant is based on an independent study and is premised on the safstor method on date act became effective in state act provides for a transition to competition in state with respect to the generation and sale of electricity act allows electric utilities including taxpayer to recover their stranded costs through a competitive transition charge ctc imposed upon consumers of electricity in the utility’s service area the ctc provides for the recovery_of stranded costs including nuclear decommissioning costs for plant commission a in docket no effective authorized nuclear decommissioning costs to be included in the taxpayer’s cost of service for ratemaking purposes for the plant in the amount of and estimated an after-tax rate of return on assets of percent the commission also determined the total estimated cost of decommissioning to be this base cost escalated using an estimated inflation rate of percent results in an estimated future decommissioning cost of these rates were estimated after taking into consideration the tax and investment changes made to sec_468a of the internal_revenue_code by section of the energy policy act of there are no proceedings pending before commission a that may result in an increase or decrease in the amount of decommissioning costs for the plant to be included in taxpayer’s cost of service for ratemaking purposes ruling amounts previously issued for commission b in have expired ruling amounts for commission b were not requested and are not specifically reviewed herein a revised schedule of ruling amounts for commission b will be requested by taxpayer in a subsequent ruling_request the funding_period for the plant extends from and the level_funding limitation period for the plant extends from the estimated period for which the fund will be in effect is the estimated_useful_life of the plant is thus the taxpayer has calculated its qualifying percentage to be percent sec_468a of the internal_revenue_code provides that a taxpayer may elect to deduct the amount of payments made to a qualified nuclear decommissioning fund however sec_468a limits the amount_paid into the fund for any taxable_year to the lesser_of the amount of nuclear decommissioning costs allocable to the fund that is included in the taxpayer’s cost of service for ratemaking purposes for the taxable_year or the ruling_amount applicable to that year sec_468a of the code provides that no deduction shall be allowed for plr-100461-00 any payment to the nuclear decommissioning fund unless the taxpayer requests and receives from the secretary a schedule of ruling amounts the ruling_amount for any taxable_year is defined under sec_468a as the amount which the secretary determines to be necessary to fund that portion of nuclear decommissioning costs which bears the same ratio to the nuclear power plant as the period for which the fund is in effect bears to the estimated_useful_life of the plant this term is further defined to include the amount necessary to prevent excessive funding of nuclear decommissioning costs or funding of these costs at a rate more rapid than level_funding taking into account such discount rates as the secretary deems appropriate sec_468a of the code provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of the taxable_year if the payment is made on account of the taxable_year within 2½ months after the close of the taxable_year sec_1_468a-1 of the regulations provides that an eligible_taxpayer may elect to deduct nuclear decommissioning costs under sec_468a of the code an eligible_taxpayer as defined under sec_1_468a-1 is a taxpayer that has a qualifying interest in a nuclear power plant as defined under sec_1_468a-1 a qualifying interest is among other things a direct ownership_interest including an interest held as a tenant in common or joint tenant sec_1_468a-2 of the regulations provides that the maximum amount of cash payments made or deemed made to a nuclear decommissioning fund during any taxable_year shall not exceed the lesser_of i the cost of service amount applicable to the nuclear decommissioning fund for such taxable_year or ii the ruling_amount applicable to the nuclear decommissioning fund for such taxable_year sec_1_468a-3 of the regulations provides that in general a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that over the taxable years remaining in the funding_period as of the date the schedule first applies will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding_period equal to and in no event more than the amount of decommissioning costs allocable to the fund sec_1_468a-3 of the regulations provides that each schedule of ruling amounts shall be based on the reasonable assumptions and determinations used by the applicable public_utility commission s in establishing or approving the amount of decommissioning costs to be included in the cost of service for ratemaking purposes taking into account amounts that are otherwise required to be included in the taxpayer's income under sec_88 of the code and the regulations thereunder each schedule of ruling amounts shall be based on the public_utility commission's reasonable assumptions concerning i the after-tax rate of return to be earned by the amounts collected for decommissioning ii the total estimated cost of decommissioning the nuclear power plant and iii the frequency of contributions to the nuclear plr-100461-00 decommissioning fund for a taxable_year sec_1_468a-3 of the regulations requires the internal_revenue_service to provide a schedule of ruling amounts that is identical to the schedule proposed by the taxpayer but no such schedule shall be provided by the service unless the taxpayer’s proposed schedule is consistent with the principles and provisions of this section sec_1_468a-3 of the regulations provides that the ruling_amount specified in a schedule of ruling amounts for any taxable_year in the level_funding limitation period shall not be less than the ruling_amount specified in such schedule for any earlier taxable_year under sec_1_468a-3 the level_funding limitation period begins on the first day of the first taxable_year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day of the taxable_year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes sec_1_468a-3 of the regulations provides that the funding_period for a nuclear decommissioning fund is the period that begins on the first day of the first taxable_year for which a deductible payment is made or deemed to be made to such nuclear decommissioning fund and ends the later of i the last day of the taxable_year that includes the estimated date on which decommissioning costs of the nuclear power plant to which the nuclear decommissioning fund relates will no longer be included in the taxpayer’s cost of service for ratemaking purposes or ii the last day of the taxable_year that includes the estimated date on which the nuclear power plant to which the nuclear decommissioning fund relates will no longer be included in the taxpayer’s rate base for ratemaking purposes sec_1_468a-3 of the regulations provides that the amount of decommissioning costs allocable to a nuclear decommissioning fund is the taxpayer’s share of the total estimated cost of decommissioning the nuclear power plant multiplied by the qualifying percentage sec_1_468a-3 of the regulations provides that in general the total estimated cost of decommissioning a nuclear power plant is the reasonably estimated cost of decommissioning used by the applicable public_utility commission in establishing or approving the amount of these costs to be included in cost of service for ratemaking purposes sec_1_468a-3 of the regulations provides that a taxpayer’s share of the total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning the plant multiplied by the taxpayer’s qualifying interest in the plant plr-100461-00 sec_1_468a-3 of the regulations provides that the qualifying percentage for any nuclear decommissioning fund is equal to the fraction the numerator of which is the number of taxable years in the estimated period for which the nuclear decommissioning fund is to be in effect and the denominator of which is the number of taxable years in the estimated_useful_life of the applicable nuclear power plant sec_1_468a-3 of the regulations provides that the estimated period for which a nuclear decommissioning fund is to be in effect begins on the later of the first day of the first taxable_year for which a deductible payment is made to the nuclear decommissioning fund or deemed made or the first day of the taxable_year that includes the date that the nuclear power plant begins commercial operations as determined by the applicable public_utility commission at the time the plant was first included in the taxpayer’s rate base and ends on the last day of the taxable_year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes according to sec_1_468a-3 the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes is determined under the ratemaking assumptions used by the applicable public_utility commission in establishing or approving rates during the first ratemaking proceeding in which the nuclear power plant was included in the taxpayer’s rate base sec_1_468a-3 of the regulations provides that the estimated_useful_life of a nuclear power plant begins on the first day of the taxable_year that includes the date that the plant begins commercial operations as determined by the applicable public_utility commission at the time the plant was first included in the taxpayer’s rate base and ends on the last day of the taxable_year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes according to sec_1_468a-3 the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes is determined under the ratemaking assumptions used by the applicable public_utility commission in establishing or approving rates during the first ratemaking proceeding in which the nuclear power plant was included in the taxpayer’s rate base sec_1_468a-3 of the regulations provides that if two or more public_utility commissions establish or approve rates for electric energy generated by a single nuclear power plant then the schedule of ruling amounts shall be separately determined pursuant to the rules of sec_1_468a-3 through e for each public_utility commission that has determined the amount of decommissioning costs to be included in the cost of service for ratemaking purposes for this plant under sec_1_468a-3 this separate determination shall be based on the reasonable assumptions and determinations used by the relevant public_utility commission and shall take into account only that portion of the total estimated cost of decommissioning plr-100461-00 that is properly allocable to the ratepayer whose rates are established or approved by the public_utility commission according to sec_1_468a-3 the ruling amounts for any taxable_year is the sum of the ruling amounts for such taxable_year determined under the separate schedules of ruling amounts sec_1_468a-3 of the regulations provides that the internal_revenue_service shall not provide a taxpayer with a schedule of ruling amounts for any nuclear decommissioning fund unless the public_utility commission that establishes or approves the rates for electric energy generated by the plant to which the nuclear decommissioning fund relates has determined the amount of decommissioning costs to be included in the taxpayer’s cost of service for ratemaking purposes and has disclosed the after-tax rate of return and any other assumptions and determinations used in establishing or approving the amount sec_1_468a-3 of the regulations enumerates the information required to be contained in a request for a schedule of ruling amounts filed by a taxpayer in order to receive a ruling_amount for any taxable_year sec_1_468a-3 of the regulations provides that a taxpayer is required to request a revised schedule of ruling amounts for a nuclear decommissioning fund if a any public_utility commission that establishes or approves rates for the furnishing or sale of electric energy generated by a nuclear power plant to which the nuclear decommissioning fund relates increases the proposed period over which decommissioning costs of the nuclear power plant will be included in cost of service for ratemaking purposes adjusts the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes or reduces the amount of decommissioning costs to be included in cost of service for any taxable_year and b the taxpayer’s most recent request for a schedule of ruling amounts did not provide notice to the service of such action by the public_utility commission sec_1_468a-3 of the regulations provides that any taxpayer that has previously obtained a schedule of ruling amounts can request a revised schedule of ruling amounts such a request must be made in accordance with the rules of sec_1_468a-3 the internal_revenue_service shall not provide a revised schedule of ruling amounts applicable to a taxable_year in response to a request for a schedule of ruling amounts that is filed after the deemed payment deadline date for such taxable_year we have examined the representations and information submitted by the taxpayer in relation to the requirements set forth in the sec_468a of the code and the regulations thereunder based solely on these representations of the facts we reach the following conclusions plr-100461-00 taxpayer has a qualifying interest in the plant and is therefore an eligible_taxpayer under sec_1_468a-1 of the regulations commission a has determined the amount of decommissioning costs to be included in the taxpayer’s cost of service for ratemaking purposes as required by sec_1_468a-3 of the regulations taxpayer as owner of the plant has calculated its share of the total decommissioning costs under sec_1_468a-3 of the regulations taxpayer has determined that pursuant to sec_1_468a-3 of the regulations the qualifying percentage is percent taxpayer has proposed a schedule of ruling amounts which meets the requirements of sec_1_468a-3 and of the regulations the annual payments specified in the proposed schedule of ruling amounts are based on the reasonable assumptions and determinations used by commission a and will result in a projected fund balance at the end of the funding_period equal to or less than the amount of decommissioning costs allocable to the fund the maximum amount of cash payments made or deemed made to the fund during any taxable_year is restricted to the lesser amount of the decommissioning costs applicable to the fund or the ruling_amount applicable to the fund as set forth under sec_1_468a-2 of the regulations taxpayer subject_to the jurisdiction of two public_utility commissions for ratemaking purposes has calculated its share of the total decommissioning costs allocable to commissions a and b as required by sec_1_468a-3 of the regulations based on the above determinations we conclude that the taxpayer’s proposed schedule of ruling amounts satisfies the requirements of sec_468a of the code approved schedule of ruling amounts taxable years commission a year comm a total plr-100461-00 approval of the schedule of ruling amounts is contingent on there being no change in the facts and circumstances known or assumed at the time this ruling is issued if any of the events described in sec_1_468a-3 of the regulations occur in future years the taxpayer must request a review and revision of the schedule of ruling amounts generally the taxpayer is required to file such a request on or before the deemed payment deadline date for the first taxable_year in which the rates reflecting such action became effective when no such event occurs the taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline of the tenth taxable_year following the close of the tax_year in which the most recent schedule of ruling amounts was received the approved schedule of ruling amounts is relevant only to those payments made to the fund payments allocable to any funds other than the fund cannot qualify for purposes of the deduction under the provisions of sec_468a of the code as stated above payments made to the fund can qualify only to the extent that they do not exceed the lesser_of the decommissioning costs applicable to the fund or the ruling amounts applicable to the fund in the taxable_year this letter_ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that this ruling may not be used or cited as precedent pursuant to sec_1_468a-7 of the regulations a copy of this letter must be attached with the required election statement to the taxpayer’s federal_income_tax return for each taxable_year in which the taxpayer claims a deduction for payments made to the fund in accordance with the power_of_attorney a copy of this letter_ruling is being sent to your authorized representatives a copy of this letter_ruling also is being sent to the district_director of district sincerely yours peter c friedman assistant to the branch chief branch office of the associate chief_counsel passthroughs and special industries


department of the treasury internal_revenue_service washington d c 913090g5 tax_exempt_and_government_entities_division dec dollar_figure uniform issue list xxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxx xxxxxxxaxxxxxxxaxxx legend taxpayer a taxpayer b ira x xxxxxxxxxxxaxxaxxxxx xxxxxxxxxxxxxxxxxx xxxxxxxaxxxxxxxxxxx ira y xxxxxxxxxxxaxxxxxxx amount c amount d credit unione date date year xxxxxxxxxxxaxxaxxxxx xxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxaxxxxx xxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxkx xxxxxxxxxxxxxxxxx dear xxxxxxxxxxxxxxx this is in response to your request dated april as supplemented by correspondence dated may november _ in which you request a waiver of the 60-day rollover july august and xxxxxxrxxxxxxxaxxxax page q o requirement contained in sec_408 of the internal_revenue_code the code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a represents that he received a distribution from ira x totaling amount c taxpayer a’s spouse taxpayer b represents that she received a distribution from ira y totaling amount d taxpayer a and taxpayer b hereinafter collectively referred to as taxpayers assert that their failure to accomplish a rollover within the 60-day period prescribed by sec_408 was because credit_union e did not inform them of the 60-day rollover requirement the taxpayers each executed a credit_union e withdrawal request form on date which stated in bold lettering that if you plan to rollover these funds you are allowed one rollover in a month period and the funds must be reinvested within calendar days the funds from iras x and y were distributed on date the taxpayers share joint checking and savings accounts and also file their taxes jointly amount c was deposited into the taxpayers’ joint savings account at credit_union e amount d was deposited into taxpayers’ joint checking account at credit_union e during the months following the distributions amounts were transferred from the savings account to the checking account as needed in order to pay various expenses including but not limited to miscellaneous living_expenses home equity loan payments insurance premiums medical_expenses and federal and state_income_tax liabilities while completing the taxpayers’ joint tax_return for year taxpayer a discovered that the tax_liability associated with the distributions from iras x and y were much greater than he and taxpayer b had anticipated consequently taxpayer a and taxpayer b each filed a request for a waiver of the 60-day period contained in sec_408 of the code based on the facts and representations you request a ruling that the internal_revenue_service service waive the day rollover requirement contained in sec_408 of the code with respect to the distributions of amount c and amount d sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code xxxaxxkxxxaxaxxxak page sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers section 4089d e of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the axxxxxxkaxxxaxxxxxkx page use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the service has the authority to waive the 60-day rollover requirement for a distribution from an ira where the individual failed to complete a rollover to another ira within the 60-day rollover period but was prevented from doing so because of one of the factors enumerated in revproc_2003_16 for example errors committed by a financial_institution death hospitalization postal error incarceration and or disability the taxpayers have asserted that credit_union e did not inform them of the 60-day rollover requirement however the taxpayers also acknowledge that credit_union e had them complete withdrawal forms that stated the 60-day rollover requirement accordingly we find that the taxpayers have not alleged that any of the factors enumerated in revproc_2003_16 prevented them from timely completing the rollover therefore pursuant to sec_408 of the code the service hereby declines to waive the 60-day rollover requirement with respect to the distribution of amount c from ira x and amount d from ira y no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayers who requested it sec_6110 of the code provides that it may not be used or cited as precedent if you wish to inquire about this ruling please contact 00xxxxxxxxxx 1d xxxxxxxxxx at xxx xxx-xxxx please address all correspondence to se t ep ra t sincerely yours ee laura b warshawsky manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose


office_of_chief_counsel internal_revenue_service memorandum number release date cc pa emishory postn-109328-15 uilc date date to mark pfeffer acting area_counsel - gulf coast area tax exempt government entities division counsel from ashton p trice chief branch procedure and administration subject questions regarding aiding_and_abetting penalties under sec_6701 this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent issue sec_1 when a person submits a false document to the service in support of a retirement plan’s application_for qualified status may the service assess a sec_6701 penalty for aiding_and_abetting understatement_of_tax liability against the person for each taxpayer for example the plan’s sponsor and each of the plan’s participants who relied on the erroneous qualified status to claim improper deductions can the service assess a separate sec_6701 penalty for each false document the person submitted to the service as part of a plan’s application for which year should a sec_6701 penalty be assessed conclusion sec_1 no the service can assess only one sec_6701 penalty against the person for submitting a false document even if the document results in multiple taxpayers understating their tax_liability under sec_6701 the service can assess only one penalty for all false documents that relate to a single plan’s application_for qualified status postn-109328-15 sec_6701 does not require the service to assess the penalty for a particular taxable_year the service’s internal procedures identify the assessment with a specific year to satisfy computer programing requirements and the service has a general practice of identifying an assessment of the sec_6701 penalty with the year that the false document was submitted to the service facts for certain sponsored retirement plans to obtain qualified status the plan’s sponsor must apply for qualified status with the service for certain plans the application may be made on a form_5307 application_for determination for adopters of modified volume submitter vs plans under various circumstances these applications including supplemental documents have to be filed with the service by a specific date a plan sponsor’s representative may make the required submissions on behalf of the plan’s sponsor a plan’s qualified status gives tax advantages to the plan’s sponsor and beneficiaries in conjunction with a promoter examination the service identified an employee plan professional who submitted a series of false documents to the service in the course of his representation of multiple plans the false documents included forms that were used to apply for qualified status and in many instances also included documents that were submitted to supplement the applications as the applications were false the plans were not actually qualified the plans’ sponsors and beneficiaries treated the plans as qualified and as a result they understated their tax_liabilities the service wishes to assess penalties under sec_6701 against the employee plan professional who filed the false documents law and analysis sec_6701 imposes a penalty for each false document that a person helps prepare or present if the person knows or has reason to believe that the document will be used in connection with any material matter arising under the internal revenue laws and the person knows that use of the document would result in an understatement of the tax_liability of another person filing false forms and related documents can support liability for a sec_6701 penalty see 87_f3d_60 2d cir holding that filing a false form_5300 application_for determination for employee_benefit_plan can support liability for a sec_6701 penalty the sec_6701 penalty applies with respect to each false document a person helps prepare or present sec_6701 shall pay a penalty with respect to each document as such the service may assess only one sec_6701 penalty per false document even if one false document results in multiple taxpayers understating income see 679_fsupp_764 n d ill upholding the assessment of sec_6701 penalties only because plaintiff prepared a transmittal letter attached to and referencing false schedule c’s not because postn-109328-15 taxpayers understated their tax_liability in berger the service assessed a sec_6701 penalty for each tax_year that was affected by a false form_5300 berger v united_states a f t r 2d at date the court held that sec_6701 only imposes a penalty per false document not per tax_year affected id at similarly sec_6701 penalties are not imposed per taxpayer affected in this case the number of sec_6701 penalties cannot exceed the number of false documents that the person prepared even though each false application resulted in multiple taxpayers understating their tax_liability in some cases the number of penalties the service can assess may be less than the number of false documents a person helped prepare or present under sec_6701 only one penalty can be assessed against a person for all of the false documents that relate to the same taxpayer and the same taxable_period or event even if the documents were prepared or presented in different years the service may assess separate sec_6701 penalties against a person for helping prepare or present false documents relating to different taxpayers even though the documents relate to the same period or event 924_f2d_785 8th cir in berger the service determined that an employee plan professional submitted multiple false forms forms and other document as part of twenty-three employee plans’ applications for qualified status f 3d pincite the service assessed sec_6701 penalties based on the application not for each false document submitted and the court noted that the number of sec_6701 penalties could not exceed the number of forms submitted berger a f t r 2d similarly here all the documents were prepared with respect to the forms and it was the false forms that resulted in the understatements of tax therefore in this case the service may assess one sec_6701 penalty for all false documents that relate to a particular plan’s application_for qualified status sec_301_6203-1 states that records supporting an assessment shall identify the taxable_period if applicable as the court in kuchan noted sec_6701 contains no provision fixing the year for which the penalty must be assessed f_supp pincite while the court in kuchan noted that it was logical for the sec_6701 penalty assessment to be associated with the year in which the prohibited_conduct occurs it did so in the context of rejecting kuchan’s argument that the service erred in not assessing the penalty for the year to which the underlying documents related and kuchan does not require that the penalty be assessed for a particular year f_supp pincite further there is no statute of limitation on the assessment of sec_6701 penalties and the penalty can be assessed at any time see eg 952_f2d_920 6th cir kuchan f_supp pincite to the extent that the service’s internal procedures require assessing the penalty for a particular year to satisfy computer programming requirements the service’s practice is to use the year that the false documents were prepared or presented postn-109328-15 this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions