office_of_chief_counsel internal_revenue_service memorandum number release date cc psi b06 jarecords postf-102328-16 uilc date date to borislava a semkova attorney manhattan group large business international from patrick s kirwan chief branch passthroughs special industries subject applicable high threshold of innovation test for taxable years ending prior to the issuance of the nprm this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend taxpayer date date issues ------------------------------------- ---------------------------- ---------------------------- is sec_41 of the internal_revenue_code self-executing for purposes of determining whether research with respect to computer_software developed primarily for internal use ius is qualified_research given that sec_41 is not self-executing for purposes of determining whether research with respect to ius is qualified_research what may taxpayer rely on to determine the three-part high threshold of innovation test for taxable years ending prior postf-102328-16 to the issuance of the proposed ius regulations nprm and for which there are no final regulations in effect if taxpayer chooses to apply the final ius regulations t d is the common knowledge of skilled professionals standard under sec_1_41-4 applicable to taxpayer conclusion sec_1 sec_41 is not self-executing for purposes of determining whether research with respect to ius is qualified_research in the absence of final regulations research with respect to ius is not qualified_research except for the limited exceptions provided in the statute that do not apply to taxpayer as provided in the advance notice of proposed rulemaking anprm and nprm taxpayer may choose to apply either all of the ius provision in t d or all of the ius provisions in the proposed ius regulations nprm for purposes of the three-part high threshold of innovation test with respect to taxable years ending prior to the issuance of the nprm and for which there are no final regulations in effect if taxpayer chooses to apply t d the common knowledge of skilled professionals standard under sec_1_41-4 in those final regulations is applicable facts taxpayer claimed research credits under sec_41 for the taxable years ended date and date which include qualified_research_expenses qres related to research with respect to ius taxpayer’s position is that if taxpayer chooses to apply the ius provisions of t d the common knowledge of skilled professionals standard in sec_1_41-4 of those regulations does not apply alternatively taxpayer argues that it may apply the legislative_history which does not reference the common knowledge of skilled professionals standard as part of the three-part high threshold of innovation test conversely your office asserts that taxpayer must either choose to apply either all of the ius provision of t d or all of the ius provisions of the nprm if taxpayer chooses to apply the ius provisions provided in t d it must apply all of those provisions including the common knowledge of skilled professionals standard you have asked whether we concur with your office’s conclusion law and legislative_history sec_41 provides that e xcept to the extent provided in regulations any research with respect to computer_software which is developed by or for the benefit of the taxpayer primarily for internal use by the taxpayer is excluded from the definition of qualified_research under sec_41 other than for use in -- i an activity which constitutes postf-102328-16 qualified_research determined with regard to this subparagraph or ii a production process with respect to which the requirements of sec_41 are met emphasis added generally research with respect to ius may be eligible for the research_credit under sec_41 only if it satisfies certain criteria provided in regulations including the requirements collectively referred to as the three-part high threshold of innovation test regulations under sec_41 on date the treasury_department and the service published a notice of proposed rulemaking nprm to provide guidance on ius under sec_41 t d fr finalized and substantially_modified the nprm and was published on date sec_1_41-4 of t d provides that software satisfies the high threshold of innovation test only if the taxpayer can establish that a the software is innovative in that the software is intended to result in a reduction in cost improvement in speed or other improvement that is substantial and economically significant b the software development involves significant economic risk in that the taxpayer commits substantial resources to the development and there is a substantial uncertainty because of technical risk that such resources would be recovered within a reasonable period and c the software is not commercially available for use by the taxpayer in that the software cannot be purchased leased or licensed and used for the intended purpose without modifications that would satisfy the requirements of a and b t d also includes as part of the three-part high threshold of innovation test a requirement to compare the intended result with software that is within the common knowledge of skilled professionals in the relevant field sec_1_41-4 of t d provides the determination of whether the software is intended to result in an improvement or cost reduction that is substantial and economically significant is based on a comparison of the intended result with software that is within the common knowledge of skilled professionals in the relevant field of science or engineering see sec_1_41-4 sec_1_41-4 of t d further provides the extent of uncertainty and technical risk is determined with respect to the common knowledge of skilled professionals in the relevant field of science or engineering in response to taxpayer concerns regarding t d the treasury_department and the service published notice_2001_19 2001_1_cb_784 announcing that the treasury postf-102328-16 department and the service would review t d and reconsider comments previously submitted notice_2001_19 also provides that upon the completion of this review the treasury_department and the service would announce changes to the regulations if any in the form of new proposed_regulations on date the treasury_department and the service published the nprm fr relating to ius with respect to the high threshold of innovation test the nprm clarifies the first requirement of the test and provides that ius is innovative if the software is intended to be unique or novel and is intended to differ in a significant and inventive way from prior software implementations or methods however the second and third requirements of the high threshold of innovation test are the same as under t d the nprm also removed explicit references to the common knowledge of skilled professional standard for application of the high threshold of innovation test on date the treasury_department and the service published final regulations t d t d fr finalized the nprm’s rules relating to the definition of qualified_research under sec_41 but removed the ius provisions and marked sec_1_41-4 as reserved t d applies to taxable years ending on or after date concurrently with t d the treasury_department and the service issued the anprm fr the anprm requested comments concerning the definition of ius recognizing that taxpayers needed guidance with respect to ius while the service worked on new regulations the anprm provides that for taxable years beginning after date and until further guidance is published in the federal_register taxpayers may continue to rely upon all provisions of the nprm or all provisions of t d with respect to their ius research activities the nprm similarly provides that for taxable years ending prior to publication of the nprm taxpayers may choose to follow either all of the ius provisions of sec_1_41-4 under t d or under the nprm however the nprm provides that the proposed rules when finalized will be prospective only legislative_history the legislative_history of the tax_reform_act_of_1986 public law stat legislative_history provides that a ny other research activities other than narrow activities provided in the statute with respect to internal-use software are ineligible for the credit except to the extent provided in treasury regulations accordingly the costs of developing software are not eligible for the credit where the software is used internally except to the extent permitted by treasury regulations h_r conf_rep no at ii-73 emphasis added congress intended that regulations would make the costs of new or improved ius eligible for the credit only if the research satisfies in addition to the general postf-102328-16 requirements for credit eligibility an additional three-part high threshold of innovation test the software must be innovative as where the software results in a reduction in cost or improvement in speed that is substantial and economically significant the software development involves significant economic risk as where the taxpayer commits substantial resources to the development of the software and there is substantial uncertainty because of technical risk that such resources would not be recovered in a reasonable period of time and the software is not commercially available for use by the taxpayer as where the software cannot be purchased leased or licensed and used for the intended purpose without modifications that would satisfy the first two requirements id the legislative_history also provided that these regulations are to apply as of the effective date of the new specific rule relating to internal-use software ie internal-use computer_software costs that qualify under the three-part test are eligible for the research_credit even if incurred prior to issuance of such final regulations id at ii-73- self-executing statute jurisprudence where the code grants the service regulatory authority courts have frequently determined whether the statutory provision is self-executing or in other words whether the statutory provision at issue is operative in the absence of regulations see eg 108_tc_579 106_tc_216 82_tc_819 in making this determination courts draw a distinction between a how statute and a whether statute see eg 104_fedclaims_1 neumann t c pincite a statute is self-executing when regulations are not necessary to determine whether the statute applies in the first instance but congress leaves the mechanics or details affecting the application of the statute to the secretary see id in such case the promulgation of regulations only constitutes a means of arriving at how not whether the provision applies see id conversely a statute is not self-executing if the statue requires a whether regulation see eg neumann t c pincite that is the promulgation of regulations is a necessary condition_precedent to determining whether the statutory provision applies see id for example the statute at issue in alexander v commissioner is illustrative of postf-102328-16 a whether provision see 95_tc_467 affd without published opinion sub nom stell v commissioner 999_f2d_544 9th cir in alexander the tax_court analyzed the language in sec_465 that provided that sec_465 shall only apply to the extent provided in regulations prescribed by the secretary t c pincite the tax_court found that because regulations had not been prescribed sec_465 did not apply id pincite courts will look to the text of the regulations and the legislative_history to determine if regulations are a precondition to applying the statute see eg 409_fedappx_64 9th cir 119_tc_317 aff’d on other grounds 370_f3d_1228 n d c cir if a court finds a statue to be self-executing and the service has failed to provide guidance courts may nevertheless apply the statute as they determine reflects congressional intent see eg int’l multifoods t c pincite the absence of regulations is not an acceptable basis for refusing to apply the substantive provisions of a section occidental t c pincite determining that in the absence of regulations years after the issuance of sec_58 the court must do the best it can with the provision analysis like the statute at issue in alexander the issuance of regulations under sec_41 determines whether rather than how research with respect to ius qualifies for the research_credit both the statutory provision at issue in alexander and sec_41 contain language that provides that the provision will be operative only to the extent provided in regulations compare sec_41 providing that e xcept to the extent provided in regulations research with respect to ius is not qualified_research with alexander t c pincite considering sec_465 which provided that sec_465 shall only apply to the extent provided in regulations the delegation of authority from congress to the secretary to provide regulations under sec_41 involves a policy call to be made by the treasury_department concerning whether and under what circumstances ius should be eligible for the credit thus the issuance of regulations is a precondition to the determination of whether research with respect to ius is qualified_research in addition to the statutory text itself the legislative_history to sec_41 also supports the view that congress intended for the treasury_department and the service to issue regulations under sec_41 with respect to the three-part high threshold of innovation test to make the provision operative see h_r conf_rep no at ii- the costs of developing software are not eligible for the credit where the software is used internally except to the extent permitted by treasury regulations emphasis added regulations are therefore required to determine whether research with respect to ius qualifies for the research_credit postf-102328-16 although courts have been willing to exercise broad discretion to find statutes that grant authority to the treasury_department to issue regulations to be self-executing this exercise appears contrary to statutory construction principles these principles provide that the plain meaning of a statute must control see 489_us_235 242_us_470 if the statutory text is not ambiguous the rules which are to aid doubtful meanings need no discussion thus if the statutory text plainly requires the issuance of regulations to be operative courts are not free to ignore that language moreover courts have employed more restraint in other areas of the law relying on these principles see eg 818_f2d_776 11th cir the express language of the statute simply indicates that local housing authorities shall comply with such procedures and requirements as the secretary may prescribe internal quotations omitted see also 173_us_65 in a case involving alcohol_tax rebates decided prior to the administrative_procedure_act finding that the plain words of the statute required regulations and because none had been issued the claimant had no rights under the statute moreover unlike the statutory provisions at issue in cases like occidental and int’l multifoods the treasury_department and the service have not left taxpayers without guidance although t d reserved the ius regulations as of date the treasury_department and the service provided taxpayers with interim guidance to provide relief to taxpayers while the department of treasury and service worked to issue further guidance the service has consistently provided that taxpayers could choose to follow either all of the ius provisions of t d or all of the ius provisions of the nprm see the anprm and the nprm this guidance applies to taxable years ending prior to the issuance of the nprm and for which there are no final regulations in effect id however because sec_41 is not self-executing for purposes of determining whether research with respect to ius is qualified_research choosing to apply either all of the ius provisions of t d or all of the ius provisions of the nprm for purposes of the three-part high threshold of innovation test is the only way research with respect to ius can be qualified_research during this period thus in this case taxpayer can choose to apply either all of the ius provisions of t d or all of the ius provisions of the nprm for purposes of the three-part high threshold of innovation test but cannot apply the legislative_history to create rules in the absence of regulations accordingly if taxpayer chooses to apply t d it must apply all of t d for purposes of the three-part high threshold of innovation test including the common knowledge of skilled professionals standard case development hazards and other considerations postf-102328-16 postf-102328-16 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


government entities division number release date department of the treasury internal_revenue_service te_ge eo examination commerce ms dal dallas texas date oct employer_identification_number person to contact id number contact numbers voice fax uil last date for filing a petition with the tax_court certified mail - return receipt requested dear this is a final_determination regarding your foundation classification this modifies our letter dated november 20xx in which we determined that you were an organization described in sec_509 as described in sec_170 of the internal to that of a public charity revenue code code we have modified your foundation status described in sec_509 of the code effective for tax years beginning november 20xx your tax exempt status under sec_501 of the internal_revenue_code is not affected granters and contributors may rely on this determination unless the internal_revenue_service publishes a notice to the contrary because this letter could help resolve any questions about your private_foundation_status please keep it with your permanent records we previously provided you a report of examination explaining the proposed modification of your tax-exempt status at that time we informed you of your right to contact the taxpayer_advocate as well as your appeal rights on june 20xx you signed form_6018 consent to proposed action - sec_7428 inwhich you agreed to the modification classification to a of the code this is a final_determination letter of your foundation with regards to your federal tax-exempt status under sec_501 of the code you are required to file form_990 return of organization exempt from income_tax form_990 must be filed by the day of the fifth month after the end of your annual accounting periods a penalty of dollar_figure a day is charged when a return is filed late unless there is a reasonable_cause for the delay however the maximum penalty charged cannot exceed dollar_figure or percent of your gross_receipts for the year whichever is less in addition be charged a organizations with gross_receipts exceeding dollar_figure for any year will penalty of dollar_figure a day when a return is filed late however the maximum penalty charged cannot exceed dollar_figure these penalties may also be charged if a return is not complete so be sure your return is complete before you file it if you are subject_to the tax on unrelated_business_income under sec_511 of the code you must also file an income_tax return on form 990-t exempt_organization business income_tax return if you decide to contest this determination in court you must initiate a suit for a declaratory_judgment in the united_states tax_court the united_states claims_court or the district_court of the united_states for the district of columbia before the day after the date this final_determination letter was mailed to you contact the clerk of the appropriate court for rules for initiating suits for declaratory_judgment you may write to the tax_court at the following address united_states tax_court second street washington d c the taxpayer_advocate_service tas is an independent organization within the irs that can help protect your rights we can offer you help if your tax problem is causing a if hardship or you've tried but haven't been able to resolve your problem with the irs you qualify for our assistance which is always free we will do everything possible to help you visit taxpayeradvocate irs gov or call if you have any questions please call the contact person at the telephone number shown in the heading of this letter thank you for your cooperation sincerely publication maria hooke director exempt_organizations examinations department of the treasury internal_revenue_service tax_exempt_and_government_entities_division exempt_organizations examinations date date taxpayer_identification_number form tax_year s ended person to contact id number contact numbers toll free long distance fax certified mail- return receipt requested dear we have enclosed a copy of our report of examination explaining why we propose modifying your foundation status under sec_509 of the internal_revenue_code code your exempt status under sec_501 of the code is still in effect if you accept our findings take no further action we will issue a final letter modifying your foundation status if you do not agree with our proposed modification of your foundation status you may provide additional information that you would like to have considered or you may submit a written appeal the enclosed publication the examination process and publication exempt_organization appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process if you request a conference with appeals you must submit a written protest within days from the date of this letter an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly you may also request that we refer this matter for technical_advice as explained in publication we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice if if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final letter a letter rev catalog number 34811r you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at office_of_the_taxpayer_advocate if you have any questions please call the contact person at the telephone number shown in the heading of this letter to call if we need to contact you if you write please provide a telephone number and the most convenient time thank you for your cooperation sincerely maria hooke director exempt_organizations examinations enclosures publication publication signed form 4621-a report of examination 886-a letter rev catalog number 34811r form 886a department of the ‘treasury - internal_revenue_service explanation of items schedule no or exhibit name of taxpayer 20xx12 date of notice final report whether issues qualifies for exemption under sec_501 classification b a iv operated for the benefit of a college or university which is owned and operated by a governmental_unit per the internal_revenue_code organization is identified as incorporated under the laws of the state of as of november 20xx and is facts form 1023ez was filed on november 20xx asking for reinstatement under section of revproc_2014_11 effective the date of the filing of the form 1023ez on form 1023ez under structure of the organization they marked they were incorporated under foundation classification status part iv of the form 1023ez organization attested they were operated for the benefit of a college or university that is owned or operated by a governmental_unit sec_509 and sec_170 they were granted tax exemption under sec_170 organization called on december 20xx to reply to letter and idr that was sent on president of the organization stated she had just november 20xx received the letter and idr she said the letter originally went to the past president questioned the reason for the examination and why it was being conducted and what was needed from her of educators who conduct fundraising activities so they can give scholarships to students who are going into the education field identified the activities of the organization as a group she said it was an error when they marked foundation classification a and b a iv attesting they are operated for the benefit of a college or university that is owned or operated by a governmental_unit on form 1023ez organization replied on january 20xx with a 20xx tax_year organization held a scholarship luncheon and an old school dance scholarships were given in the amount of dollar_figurex xxx each and list of activities they held for the june for dollar_figurexxx for book awards organization is hosting the regional conference for the members payments the conference in 20xx said all money received for this activity was expensed out for and collected numerous requests were made for organization to send in articles of incorporation as part of examination organizing documents organization listed themselves as a corporation on 1023ez and with the state of replied they were using the by-laws for the form 886-a rev department of the treasury - internal_revenue_service page -1- form 886a name of taxpayer explanation of items 20xx12 department of the ‘l’reasury - internal_revenue_service schedule no or exhibit received call from filled out incorrectly and this organization is not incorporated this organization is an association she said when the organization attested to the organizing documents being completed on 1023ez they did so by thinking they were complete because they were using the president she said that the 1023ez was by-laws we have now received by-laws dated april 20xx by-laws are signed by two officers and contain the correct clauses and verbiage required for c law internal_revenue_code irc sec_170 exclusion-organizations for the benefit of certain state and municipal colleges and universities organizations described in sec_170 are excluded from private_foundation_status under sec_509 an organization is described in sec_170 if a b c it normally receives a substantial part of its support excluding exempt-function income from the united_states or any state or political_subdivision thereof or from direct or indirect_contributions from the general_public it is organized and operated exclusively to receive hold invest and administer property and to make expenditures to or for the benefit of an sec_170 college or university and the benefited college or university is an agency_or_instrumentality of a state or political_subdivision thereof or is owned or operated by a state or political_subdivision thereof or by an agency_or_instrumentality of one or more states or political subdivisions sec_501 requires tax exempt entities be organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes and to foster national and amateur sports competition sec_509 an organization which normally receives more than one-third of the support from gifts contributions grants or membership fees and gross_receipts from admissions sales of merchandise performance of services or furnishing of facilities in an activity which is not an unrelated_trade_or_business within the meaning of sec_513 not including such receipts from any person or from any bureau or similar agency of a governmental_unit as described in sec_170 in any taxable_year to the extent such receipts exceed the greater of dollar_figure or percent of the organization’s support in such taxable_year from persons other than disqualified persons as defined in sec_4946 with respect to the organization from governmental units described in sec_170 or from organizations described in sec_170 other than in clauses vii and viii and normally receives not more than one-third of its support in each taxable_year from the sum of gross_investment_income as defined in subsection e and the excess if any of the amount of the unrelated_business_taxable_income as defined in sec_512 over the amount of the tax imposed by sec_511 form 886-acrev department of the treasury - internal_revenue_service page -2- form 886a name of taxpayer explanation of items 20xx12 department of the sreasuy - internal_revenue_service schedule no or exhibit sec_1_501_c_3_-1 in order to be exempt under sec_501 the organization must be both organized and operated exclusively for one or more of the purposes specified in the section sec_1_501_c_3_-1 of the regulations provides that an organization will not be regarded as operated exclusively for exempt purposes if more than an insubstantial part of its activities is not in furtherance of exempt purposes sec_1_501_c_3_-1 of the regulations provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests revrul_71_97 1971_1_cb_151 states a national society for women organized to recognize scholastic achievements and to serve universities and colleges where chapters are established qualifies for exemption under sec_501 an organization organized to encourage and recognize outstanding achievements of citizens toward the progress and betterment of human endeavor is exempt under sec_501 c of the code see revrul_66_146 c b awarding scholarships to students based upon scholastic standing is advancing education see revrul_69_257 c b by recognizing and encouraging scholastic achievement and leadership ability and providing service to the schools the organization in this case furthers the overall educational programs of the universities and colleges the presence of a single substantial nonexempt purpose can destroy the exemption regardless of the number or importance of exempt purposes 326_us_279 90_led_67 66_sct_112 am campaign acad v commissioner 92_tc_1053 see also old dominion box co inc v united_states f2d 4th cir cert_denied 413_us_910 operating for the benefit of private parties who are not members of a charitable_class constitutes a substantial nonexempt purpose’ when an organization operates for the benefit of private interests such as designated individuals the creator or his family or persons directly or indirectly controlled by such private interests the organization by definition does not operate exclusively for exempt purposes am campaign acad v commissioner supra pincite6 organization sent back form_6018 signed agreeing to the reclassification of their foundation status to a organizations for the benefit of certain state and municipal colleges and universities does not qualify to be a b a iv department of the treasury - internal_revenue_service organizations position government’s position form 886-a rev page -3- department of the treasury - internal_revenue_service explanation of items schedule no or exhibit form 886a name of taxpayer 20xx12 however it was determined that you are described in internal_revenue_code sec_509 as one that receives combination of gifts grants contributions membership fees and gross_receipts from permitted sources from activities related to your exempt functions and normally receive not more than one-third of your support from investment_income and unrelated_business_taxable_income qualify for sec_509 conclusion organization does not meet c sec_170 but does meet c sec_509 organization needs to be reclassified to the correct sec_509 form 886-arev department of the treasury - internal_revenue_service page -4-


internal_revenue_service department of the treasury index no 468b 468b 468b washington dc cid number release date person to contact identifying number telephone number refer reply to cc dom it a - plr-105180-99 date date in re legend restricted trust account company subsidiary plan trust products court district courts date date date s plr-105180-99 t u v w x y z dear this is in response to a ruling_request submitted on behalf of company dated date and supplemental letters dated date date date and date you have requested the following rulings the trust will constitute a qualified_settlement_fund under sec_468b of the internal_revenue_code and sec_1_468b-1 of the income_tax regulations and company’s payments to the trust will be deductible by company under sec_162 and sec_461 when they are made facts company is a corporation using the accrual_method of accounting company previously manufactured and sold the products which led to the filing of numerous personal injury and product_liability lawsuits against company aced with mounting litigation company filed a bankruptcy petition on date in the court after lengthy plr-105180-99 negotiations the plan which provides for the reorganization of company was filed on date the plan provides two alternative claim resolution methods for those claimants with claims related to the manufacture and sale of the products claimants meeting specific criteria may resolve their claims by accepting one or more settlement payments provided under the plan claimants who wish to litigate their claims instead of settling may elect to do so as an integral part of the plan subsidiary is being established as a wholly owned subsidiary of company to assume liability for defend and resolve litigated claims this will accomplish a major objective of the plan by assuring claimants the opportunity to litigate claims related to the products and freeing company from the distraction of actually conducting the litigation subsidiary will not engage in any trade_or_business other than the resolution of litigated claims subsidiary will be managed exclusively for the benefit of company and company’s shareholders subsidiary will have a single officer and a board_of directors selected by company subject_to the approval of the court subsidiary will have nominal assets your letter of date includes a representation by company that its initial basis in its subsidiary’s shares under sec_351 and sec_358 will be equal to company’s basis in the assets it transfers to subsidiary at the time of its incorporation company also represented that for basis purposes any company liabilities resolved by subsidiary under the plan_of_reorganization will be ignored claimants who elect to litigate will either initiate suit against subsidiary or continue existing litigation against subsidiary instead of company settlements for litigated cases will be recommended by subsidiary and subject_to the approval of company company also retains the authority to approve defense costs over a certain amount one of the district courts will appoint an individual to assist it in the administration of the litigated claims and the individual’s assigned duties will include review of proposed settlements and defense costs if a litigated claim is settled or reduced to final judgment it will be presented for payment from the funds in the trust and payment will be made directly from the trust to the litigating claimant and generally his or her counsel similarly defense costs will be paid directly from the trust to the persons performing the defense work subsidiary will receive amounts from the trust only for the salary of subsidiary’s manager the salaries of approximately z employees who will monitor the defense work and maintain information on the lawsuits the leasing of office space and equipment for the employees and certain incidental costs such as postage utilities and office supplies in order to satisfy settling and litigated claims company will establish the trust an irrevocable_trust under state law the plan provides that company in full release satisfaction and discharge of all claims will execute and deliver the trust instrument and other documents the court will maintain continuing and exclusive jurisdiction over plr-105180-99 the trust and its assets the district courts do not have jurisdiction over the trust but will exercise jurisdiction or supervision over matters arising in the settlement and litigation of claims that affect the timing and amount of payments received by claimants under the plan company will be required to pay a maximum of dollar_figures to the trust in a series of payments company will be required to make an initial payment on the effective date of the plan or under certain circumstances at a time prior to the effective date even after the plan has been confirmed the effective date will not occur until certain conditions are satisfied or are waived by company and certain other parties one of these conditions concerns the resolution of any appeal filed from the court’s confirmation order that challenges the schedule of payments or releases from liability the plan provides that even if that specific type of appeal is filed and if the confirmation order is not stayed pending resolution of such an appeal company will be required to make an initial payment of dollar_figuret as well as subsequent payments of insurance proceeds shortly after company receives such amounts the plan provides that these funds are to be paid to the trust which will retain these payments in the restricted trust account pending the outcome of the appeal your letter of date provides that this restricted trust account will be a_trust account within the trust pursuant to the trust agreement rather than a separate_entity additionally the restricted trust account will be administered by the trustee of the trust rather than by a separate fiduciary you have represented that the trust agreement submitted with your letter dated date will be modified to incorporate the escrow arrangement contained in the plan through the use of the restricted trust account accrued interest is to be retained in the restricted trust account investment decisions will not be made by company during the pendency of the appeal funds may be withdrawn from the restricted trust account for certain administrative expenses that the trust incurs related to settling and litigating claims company will not control the withdrawal of funds to meet trust expenses expenditures of the restricted trust account funds will be overseen by the district courts through annual budgets during the pendency of any appeal if the appeal does not result in a reversal of the confirmation order the funds held in the restricted trust account will either be transferred to an unrestricted account within the trust or retained in the same account without any special restrictions and settlement and litigation of claims will commence if the appeal results in the reversal of the confirmation order the funds in the restricted trust account will be forwarded to company if company is required to make the initial payment on the effective date company will pay either dollar_figureu or dollar_figurev to the trust depending on when the effective date occurs after a specified time measured from the effective date company will be required to make subsequent payments to the trust on an as needed basis to pay claims and expenses as well as to maintain a specified amount for a reserve company will receive periodic notices concerning the subsequent payments it is required to make to the trust unless the court orders otherwise company must pay the amount stated in a notice shortly after the notice is received the subsequent payments are subject_to plr-105180-99 an annual liability limit of dollar_figurew and the first annual period begins on date in any year for which company’s payments are less than the annual liability limit the next succeeding annual liability limit is increased to reflect the difference a notice may not be submitted to company if it will cause company’s payments to exceed the applicable annual liability limit company will generally be required to transfer insurance proceeds to the trust shortly after company receives such amounts this requirement may result in the modification of the annual liability limits certain other limited circumstances may also result in the modification of the annual liability limits the plan specifies a dollar limit on the maximum amount payable from the trust for litigated claims and related expenses this limit is dollar_figurex similarly there is a limit on the maximum amount payable from the trust for settled claims and related expenses this limit is dollar_figurey plus trust earnings there are other dollar limits on the maximum amounts payable from the trust for particular types of settled claims no separate funds or accounts will be maintained within the trust for litigated claims settled claims or particular types of settled claims thus payments will be made to the trust rather than to separate funds or accounts upon termination of the trust any trust funds allocable to the settlement of claims will be distributed if cost effective to the holders of allowed claims if such a distribution would not be cost effective these funds will be distributed to a medical_research institute or university no amount in the trust allocable to the settlement of claims will revert to company upon termination of the trust any amounts allocable to litigation of claims will be distributed to company however company represents that upon termination it expects to receive no assets or nominal assets in this manner company maintains products liability insurance company’s insurers have to date paid substantial amounts pursuant to several insurance policies company expects to receive additional insurance proceeds from these insurers over time your letters of date and date include representations by company that it will include in gross_income all insurance proceeds received by it or paid_by an insurer to the trust on its behalf fund classification sec_468b of the code provides that nothing in any provision of law will be construed as providing that an escrow account settlement fund or similar fund is not subject_to current income_tax pursuant to the authority of sec_468b of the code the secretary has published sec_1_468b-1 through 468b-5 of the regulations regarding qualified settlement funds plr-105180-99 sec_1_468b-1 of the regulations provides that a qualified_settlement_fund is a fund account or trust that satisfies all three requirements of sec_1_468b-1 first sec_1_468b-1 requires that the fund account or trust is established pursuant to an order of or is approved by the united_states any state including the district of columbia territory possession or political_subdivision thereof or any agency_or_instrumentality including a court of law of any of the foregoing and is subject_to the continuing jurisdiction of that governmental authority second sec_1_468b-1 requires that the fund account or trust is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event or related series of events that has occurred and that has given rise to at least one claim asserting liability i under the comprehensive environmental response compensation and liability act of or ii arising out of a tort breach of contract or violation of law or iii designated by the commissioner in a revenue_ruling or revenue_procedure third sec_1_468b-1 provides that the fund account or trust must be a_trust under applicable state law or its assets must be otherwise segregated from other assets of the transferor or related_persons based on the facts represented the trust meets all three requirements of sec_1 468b- c of the regulations first the trust will be established pursuant to an order of the court and will be subject_to the court’s continuing jurisdiction second the trust was established to resolve or satisfy one or more claims that have resulted from an event or related series of events that has occurred and that has given rise to at least one claim asserting liability arising out of a tort breach of contract or violation of law third the trust will be a_trust under state law and the trust’s assets will be segregated from other assets of company and related_persons additionally we conclude that the restricted trust account is part of the trust deduction of payments sec_162 provides the general_rule that there shall be allowed as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business see also sec_1_162-1 sec_1_468b-3 provides that no deduction is allowed to a transferor for a transfer to a qualified_settlement_fund to the extent the transferred amounts represent amounts received from the settlement of an insurance claim and are excludable from gross_income if the settlement of an insurance claim occurs after a transferor makes a transfer to a qualified_settlement_fund for which a deduction has been taken the transferor must include in income the amounts received from the settlement of the insurance claim to the extent of the deduction sec_461 provides the general_rule that the amount of any deduction shall be taken for the taxable_year which is the proper taxable_year under the method_of_accounting used in computing taxable_income plr-105180-99 sec_461 provides the general_rule that in determining whether an amount has been incurred with respect to any item during any taxable_year the all_events_test shall not be treated as met any earlier than when economic_performance with respect to such item occurs sec_461 provides that the all_events_test is met with respect to any item if all events have occurred which determine the fact of the liability and the amount of such liability can be determined with reasonable accuracy sec_1_461-1 provides in part that under an accrual_method of accounting a liability is incurred and generally is taken into account for federal_income_tax purposes in the taxable_year in which all the events have occurred that establish the fact of the liability the amount of the liability can be determined with reasonable accuracy and economic_performance has occurred with respect to the liability sec_1_468b-3 provides the general_rule that for purposes of sec_461 economic_performance occurs with respect to a liability described in sec_1_468b-1 determined with regard to sec_1_468b-1 and g to the extent the transferor makes a transfer to a qualified_settlement_fund to resolve or satisfy the liability sec_1 468b- c and provide exceptions to the general_rule sec_461 provides in part that if the taxpayer contests an asserted_liability the taxpayer transfers money or other_property to provide for the satisfaction of the asserted_liability the contest with respect to the asserted_liability exists after the time of the transfer and but for the fact that the asserted_liability is contested a deduction would be allowed for the taxable_year of the transfer or for an earlier taxable_year determined after application of sec_461 then the deduction shall be allowed for the taxable_year of the transfer see also sec_1_461-2 sec_1_461-2 provides in part that the term asserted_liability means an item with respect to which but for the existence of any contest in respect of such item a deduction would be allowable under an accrual_method of accounting sec_1_461-2 provides in part that any contest which would prevent accrual of a liability under sec_461 shall be considered to be a contest in determining whether the taxpayer satisfies sec_461 a contest arises when there is a bona_fide dispute as to the proper evaluation of the law or the facts necessary to determine the existence or correctness of the amount of an asserted_liability sec_1_461-2 provides in part that a taxpayer may provide for the satisfaction of an asserted_liability by transferring money or other_property beyond his control i to the person who is asserting the liability ii to an escrowee or trustee pursuant to a written_agreement among the escrowee or trustee the taxpayer and the person who is asserting the liability that the money or other_property be delivered in accordance with the settlement of the contest or iii to an escrowee or trustee plr-105180-99 pursuant to an order of the united_states any state or political_subdivision thereof or any agency_or_instrumentality of the foregoing or a court that the money or other_property be delivered in accordance with the settlement of the contest a taxpayer may also provide for the satisfaction of an asserted_liability by transferring money or other_property beyond his control to a court with jurisdiction over the contest in order for money or other_property to be beyond the control of a taxpayer the taxpayer must relinquish all authority over such money or other_property sec_1_461-2 provides in part that in order for a contest with respect to an asserted_liability to exist after the time of transfer such contest must be pursued subsequent to that time thus the contest must have been neither settled nor abandoned at the time of the transfer a contest may be settled by a decision judgment decree or other order of any court of competent jurisdiction which has become final or by written or oral agreement between the parties initially we note that the analysis under sec_162 could be affected by the form of the plan because it uses subsidiary as a nominal defendant in the litigation and subsidiary will assume liability for the litigated claims and associated expenses it is a well established principle that a taxpayer may not deduct a voluntary payment of another person’s liability as an ordinary and necessary business_expense however the tort and product_liability lawsuits and potential lawsuits arise from company’s manufacture and sale of the products which was one of its principal business activities moreover company will make the payments to the trust to satisfy and discharge the claims related to the manufacture and sale of the products which includes both settling and litigated claims furthermore company will be legally obligated to make the payments to the trust the court will retain jurisdiction over company’s performance and the court may impose such remedies as it determines to be necessary and appropriate to remedy any breach of company’s obligation to make the payments and to deter or protect against any subsequent breach additionally subsidiary will have only nominal assets the litigated claims whether settled or reduced to final judgment will be presented for payment from the funds in the trust and payment will be made directly from the trust to the litigating claimants and generally their counsel accordingly based on the facts represented company’s payments to the trust will be for ordinary and necessary business_expenses under the plan there are two types of circumstances where company’s liability could remain contested in litigation at the time it makes payments the first set of circumstances concerns payments company makes to the trust on or after the effective date of the plan even after the plan has been confirmed the effective date will not occur until certain conditions are satisfied or are waived by company and certain other parties one of these conditions concerns the resolution of any appeal filed from the court’s confirmation order that challenges the schedule of payments or releases from liability consequently if this condition is waived and the remaining conditions are satisfied or waived company’s liability to make payments on and after plr-105180-99 the effective date could be contested in litigation when such payments are made during a pending appeal the second set of circumstances concerns a special provision in the plan that may require company to make payments before the effective date the plan provides that even if the specific type of appeal described above is filed and if the confirmation order is not stayed pending resolution of such an appeal company is still required to make an initial payment as well as subsequent payments of insurance proceeds shortly after company receives such amounts under these circumstances company will make the payments to the trust which will be required to retain these payments in the restricted trust account pending the outcome of the appeal the restricted trust account will be an account within the trust the trust agreement submitted with your letter dated date will be modified to incorporate the escrow arrangement contained in the plan through the use of the restricted trust account accrued interest is to be retained in the restricted trust account investment decisions will not be made by company during the pendency of the appeal funds may be withdrawn from the restricted trust account for certain administrative expenses that the trust incurs related to settling and litigating claims company will not control the withdrawal of funds to meet trust expenses expenditures of the restricted trust account funds will be overseen by the district courts through annual budgets during the pendency of any appeal if the appeal does not result in a reversal of the confirmation order the funds held in the restricted trust account will either be transferred to an unrestricted account within the trust or retained in the same account without any special restrictions and settlement and litigation of claims will commence if the appeal results in the reversal of the confirmation order the funds in the restricted trust account will be forwarded to company under these two types of circumstances all the events that establish the fact of the liability may not have occurred at the time company will make certain payments because company’s liability will remain contested in litigation in the case of claims contested in litigation the fact of the liability and the amount do not become fixed until the judgment of the court becomes final and nonappealable see 366_us_380 motion for leave to file petition for reh’g as amicus curiae denied 368_us_884 however sec_461 provides a narrow exception to the general_rule that the amount of a contested liability cannot be taken into account by an accrual_method taxpayer based on the facts represented the requirements of sec_461 will be met with respect to both sets of circumstances described above the possible appeal concerning the schedule of payments and releases from liability will be a bona_fide dispute as to the proper evaluation of the law or the facts necessary to determine the existence or correctness of the amount of an asserted_liability also under the first set of circumstances described above company will transfer money beyond its control to the trust under the second set of circumstances described above the money will be plr-105180-99 transferred beyond company’s control to the restricted trust account which is part of the trust moreover the court will approve both the plan and the trust agreement which will be executed by company the trustee of the trust and authorized representatives of the claimants additionally the contest with respect to the asserted_liability will exist after the time of the transfer finally but for this contest a deduction would be allowed for the taxable_year of the transfer because company will make the transfer to the trust to resolve or satisfy a liability described in sec_1_468b-1 and the amount of the liability can be determined with reasonable accuracy no later than the time each payment will be made based on the facts represented including that company will include in gross_income all insurance proceeds received by it or paid_by an insurer to the trust on its behalf we conclude that if company is required to make the initial payment prior to the effective date such payment is deductible under sec_162 at the time such payment is made to the trust if prior to the effective date company is required to make subsequent payments that are attributable solely to insurance proceeds received during a pending appeal such payments are deductible under sec_162 at the time such payments are made to the trust if company is required to make the initial payment on the effective date such payment is deductible under sec_162 at the time such payment is made to the trust and company’s subsequent payments to the trust after the effective date on an as needed basis in response to the notices which are not permitted to cause payments to exceed the annual liability limits as modified are deductible under sec_162 at the time such payments are made to the trust a copy of this letter must be attached to any income_tax return to which it is relevant except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-105180-99 enclosures copy of this letter copy for sec_6110 purposes cc cc sincerely assistant chief_counsel income_tax accounting by michael l gompertz jr assistant to branch chief branch


t c memo united_states tax_court michael t hawkins and janine m hansen petitioners v commissioner of internal revenue respondent docket no filed date michael t hawkins and janine m hansen pro sese alan j tomsic for respondent memorandum opinion wolfe special_trial_judge this matter is before the court on petitioners’ motion to dismiss for lack of jurisdiction respondent’s motion for summary_judgment and respondent’s motion to impose a penalty under sec_6673 unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure background petitioners failed to file federal_income_tax returns for and on date respondent issued to each petitioner a notice_of_deficiency for those years relying on forms w-2 wage and tax statement and forms information respondent determined deficiencies in petitioners’ federal income taxes as follows michael t hawkins year deficiency sec_6651 sec_6654 dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure janine m hansen year deficiency sec_6651 sec_6654 dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure -- -- -- dollar_figure petitioners resided in sparks nevada on date when they timely filed their petition on date respondent filed an answer on date respondent then filed a motion for summary_judgment summary_judgment motion on date petitioners filed a response to motion for summary_judgment response to summary_judgment motion and a motion to dismiss for lack of jurisdiction jurisdiction motion the court heard the motions together and at the conclusion of the hearing respondent made an oral motion to impose a penalty under sec_6673 penalty motion the parties did not enter into a stipulation of facts discussion i jurisdiction motion we consider the jurisdiction motion first because our jurisdiction is prerequisite to any other action we may take the jurisdiction of this court is governed by statute sec_7442 for a taxpayer to maintain an action in this court there must be a valid notice_of_deficiency and a timely filed petition rule a c 93_tc_22 91_tc_1019 in the jurisdiction motion petitioners do not dispute that respondent issued a notice_of_deficiency to each of them for each of the years in issue and they do not dispute that the petition they filed was timely instead petitioners contend that rule sec_24 and governing appearance and practice of counsel before the court violate the religious freedom restoration act of rfra publaw_103_141 107_stat_1488 currently codified pincite u s c secs 2000bb to 2000bb-4 that petitioners are not taxpayers subject_to the jurisdiction of this court and that the issues raised in the jurisdiction motion including petitioners’ claim of constitutional entitlement to a jury trial can be decided only by an article iii court a rule sec_24 and do not violate rfra sec_7453 provides generally that the proceedings of the tax_court shall be conducted in accordance with such rules_of_practice and procedure other than rules of evidence as the tax_court may prescribe accordingly this court has over many years developed a comprehensive set of rules which are designed and calculated to increase our efficiency in adjudicating genuine tax disputes 86_tc_1128 rule a provides no entry of appearance by counsel not admitted to practice before this court will be effective until counsel shall have been admitted but counsel may be recognized as counsel in a pending case to the extent permitted by the court and then only where it appears that counsel can and will be promptly admitted for the procedure for admission to practice before the court see rule rule restricts admission to practice before the tax_court to two classes of persons attorneys in good standing of the bar of the supreme court of the united_states or of the highest or appropriate court of any state or of the district of columbia or any commonwealth territory or possession_of_the_united_states and applicants not attorneys at law who pass a written examination given by the tax_court as well as an additional oral examination if required by the court this court has stated the requirement that only qualified persons are permitted to represent litigants before this court is for the protection of litigants by insuring that only persons able to properly represent a party appear for him cupp v sec_7452 specifically provides that the taxpayer shall be represented in accordance with the rules_of_practice and procedure prescribed by this court see sec_301_7452-1 proced admin regs sec_7452 further provides that no qualified_person shall be denied admission to practice before the tax_court because of his failure to be a member of any profession or calling commissioner 65_tc_68 affd without published opinion 559_f2d_1207 3d cir petitioners argue that the requirements of rule a and rule conflict with their religious rights under rfra that these rules are invalid and that therefore this court lacks jurisdiction congress enacted rfra in response to 494_us_872 in smith the supreme court held that valid neutral laws of general applicability do not violate a person’s religious rights even when the law is not supported by a compelling governmental interest see id 110_tc_137 affd 170_f3d_173 3d cir prior to smith the government had to demonstrate that the application of such laws to religious practices was essential to accomplish an overriding governmental interest or represented the least restrictive means of achieving some compelling state interest employment div v smith supra pincite o’connor j concurring in judgment see also adams v commissioner supra pincite rfra restores the compelling interest test used prior to smith by prohibiting the government from imposing a substantial burden on the free exercise of religion unless it demonstrate sec_2 in 521_us_507 the supreme court held that the religious freedom restoration act of rfra publaw_103_141 107_stat_1488 currently codified pincite u s c secs 2000bb to 2000bb-4 was unconstitutional as applied to state and local laws although neither party has raised the issue we note that rfra has since been upheld as constitutional as applied in the federal realm see 290_f3d_1210 9th cir that application of the burden is the least restrictive means of achieving a compelling governmental interest see u s c sec 2000bb-1 b adams v commissioner supra in evaluating whether the government has met the compelling interest test cases decided prior to smith are applicable and the test should not be construed more stringently or more leniently than it was prior to smith adams v commissioner supra pincite substantial burden to establish a violation under rfra a claimant must first show that the government substantially burdened his or her free exercise of religion u s c sec 2000bb-1 a a statute burdens the free exercise of religion if it puts substantial pressure on an adherent to modify his behavior and to violate his beliefs 450_us_707 a substantial burden must be more than an in addition to the compelling interest test provided for by rfra petitioners rely on 176_f3d_1202 9th cir to assert a hybrid-rights claim and apply a strict scrutiny analysis in 494_us_872 the supreme court excepted a hybrid-rights claim from its rational basis analysis and thus recognized the applicability of the strict scrutiny analysis where a law involves not the free exercise clause alone but the free exercise clause in conjunction with other constitutional protections petitioners’ argument for strict scrutiny analysis here amounts to a request for application of the compelling interest test set forth by rfra see eg 530_us_703 scalia j dissenting referring to that stringent mode of constitutional analysis our cases refer to as ‘strict scrutiny ’ which requires that the restriction be narrowly tailored to serve a compelling state interest see also 87_tc_1285 affd 838_f2d_1215 6th cir inconvenience 290_f3d_1210 9th cir citing 227_f3d_1110 9th cir petitioners present mere summary assertions that rule sec_24 and substantially burden their right to free exercise of religion and fail to identify any aspect of their religion that has been violated at the hearing petitioners sought to have a religious adviser enter an appearance as their counsel this person was not an attorney nor had he established his qualifications by passing a written examination given by the tax_court and the court would not accept his formal appearance nevertheless the court allowed petitioners’ religious adviser to confer with petitioners at regular intervals throughout the proceedings and to sit at petitioners’ counsel desk petitioners stated that they had spoken with an attorney regarding this matter that the attorney was a member of the bar of the state of nevada but that the attorney would have refused to pay the fee rfra originally defined the term exercise of religion as the exercise of religion under the first amendment to the constitution u s c sec 2000bb-2 the religious land use and institutionalized persons act of rluipa publaw_106_274 stat currently codified pincite u s c secs 2000cc to 2000cc-5 amended certain provisions of rfra including the definition of exercise of religion rluipa secs a a rluipa amends rfra so that exercise of religion now means religious exercise as defined in section 2000cc-5 of this title u s c sec 2000bb-2 religious exercise for purposes of rfra is defined to include any exercise of religion whether or not compelled by or central to a system of religious belief rluipa u s c sec 2000cc-5 a required to appear before the court nevertheless the attorney was not present at the hearing on this record we find that rule sec_24 and did not place a substantial burden on petitioners’ exercise of religion those rules did not put substantial pressure on petitioners to modify their behavior and to violate their beliefs at most petitioners claim only that they may have been inconvenienced in their search for an attorney who shares their religious beliefs rule sec_24 and did not at any time interfere with petitioners’ observance of their religion moreover none of petitioners’ constitutional rights have been violated petitioners represented themselves pro sese before the court they had the benefit of the advice of their religious adviser and they had ample opportunity to have their case heard see cupp v commissioner supra 78_tc_979 rule sec_24 and do not violate rfra’s substantial burden test nevertheless even if we were to determine that rule sec_24 and did substantially burden petitioners’ free exercise of petitioners are members of both the church of jesus christ of latter day saints and the first christian fellowship of eternal sovereignty petitioners have presented no evidence suggesting that members of the church of jesus christ of latter day saints a large and prominent religious denomination are not represented in the bar of this court petitioners have introduced into evidence the testament of sovereignty with respect to beliefs of the first christian fellowship of eternal sovereignty but have failed to show how rule sec_24 and interfere with their exercise of religion as described therein religion respondent has satisfied the compelling interest test compelling governmental interest test in cases where the claimants’ rights have been substantially burdened the government may impose a substantial burden on the free exercise of religion if it demonstrates that the application of the burden i is in furtherance of a compelling governmental interest and ii is the least restrictive means of furthering that compelling interest u s c sec 2000bb-1 b see 114_tc_511 in addition to holding that rule sec_24 and do not violate the substantial burden test of the rfra we conclude that respondent satisfies the compelling interest and least restrictive means test respondent’s interest in administering the tax system properly is a compelling governmental interest see eg 490_us_680 e ven a substantial burden would be justified by the ‘broad public interest in maintaining a sound tax system ’ free of ‘myriad exceptions flowing from a wide variety of religious beliefs ’ quoting 455_us_252 this court has stated the supreme court has established that uniform mandatory participation in the federal_income_tax system irrespective of religious belief is a compelling governmental interest as a result requiring petitioner’s participation in the federal_income_tax system is the only and thus the least restrictive means of furthering the government’s interest citations omitted adams v commissioner supra pincite see hernandez v commissioner supra united_states v lee supra rule sec_24 and exist for the protection of the litigants practicing before the court and contribute to the fair and orderly trial of tax matters since the tax_court is an integral part of the federal_income_tax system the government has a compelling interest in the administration of the whole tax system including its trials see 888_f2d_636 9th cir holding that the government’s compelling interest in a fair and orderly trial in criminal proceedings relating to a failure to pay federal income taxes outweighed the taxpayer’s wish contrary to the rules of the court to be represented by a lay person who shared his religious beliefs we hold that the government has a compelling interest in the fair and orderly trials of this court which are important to the maintenance and the administration of a sound tax system rule sec_24 and are an integral part of the least restrictive means of achieving that interest accordingly rule sec_24 and do not violate rfra b remaining contentions concerning jurisdiction the remaining contentions with respect to jurisdiction raised by petitioners are shopworn frivolous assertions that we perceive no need to refute with somber reasoning and copious citation of precedent to do so might suggest that these arguments have some colorable merit 737_f2d_1417 5th cir nevertheless we briefly address at least some of petitioners’ contentions and dispose_of them expeditiously first petitioners are taxpayers subject_to the federal_income_tax see sec_1 a 783_f2d_934 9th cir their income from labor or services as reported on their form_w-2 statements and forms constitutes income subject_to federal_income_tax see sec_1 a 119_tc_252 second the united_states tax_court is a legislative court established under article i of the united_states constitution sec_7441 it has jurisdiction to determine the correct amount of a deficiency sec_6214 the constitutionality of the tax_court repeatedly has been upheld on the basis of congressional authority to create specialized courts under article i of the constitution 501_us_868 80_tc_1111 57_tc_392 petitioners contend that only a court established under article iii of the constitution rather than a legislative court established under article i of the constitution can adjudicate the issues they have raised petitioners’ arguments have no petitioners’ reliance on the statutory language of rfra is erroneous rfra provides a person whose religious exercise has been burdened in violation of this section may assert that violation as a claim or defense in a judicial proceeding and obtain appropriate relief against a government standing to assert a claim or defense under this section shall be governed by the general rules of standing under article iii of the constitution u s c sec 2000bb-1 c emphasis added rfra merely applies the constitutional parameters of standing to any alleged continued merit third it is well established that there is no constitutional right to a jury trial in a suit concerning federal tax_liability in the tax_court 675_f2d_1077 9th cir affg tcmemo_1979_479 rowlee v commissioner supra cupp v commissioner t c pincite where a taxpayer takes advantage of the procedure of filing a petition in the tax_court without payment of the tax any deprivation of a jury trial is due to his own act for the foregoing reasons petitioners’ jurisdiction motion will be denied ii summary_judgment motion summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials 104_tc_574 rule a provides that either party may move with or without supporting affidavits for summary_judgment upon all or any part of the legal issues in controversy under rule b decision shall thereafter be rendered if the pleadings answers to interrogatories depositions admissions and any other acceptable materials together with the affidavits if any show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law see o'neal v continued violation of the statute the tax_court clearly has jurisdiction to hear an rfra challenge see eg 110_tc_137 affd 170_f3d_173 3d cir commissi102_tc_666 quoting 98_tc_383 the moving party bears the burden of proving that there is no genuine issue of material fact and factual inferences will be made in a manner most favorable to the party opposing summary_judgment 85_tc_812 the nonmoving party however must do more than merely allege or deny facts in its pleadings and must set forth specific facts showing that there is a genuine issue for trial if the adverse_party does not so respond then a decision if appropriate may be entered against such party rule d 115_tc_554 petitioners assert in their response to the summary_judgment motion that respondent has acted in an invidious and or covert manner to reduce restrict and eventually eliminate all god given rights guaranteed by the constitution and also privileges granted by the constitution specifically or even generally so the governments could establish a civil socialist secular irreligion religion and government that are diametrically opposed to christianity and christian liberty as originally established in the constitution and bill of rights which are both integral parts of the religions of the petitioners and for all these reasons and more the petitioners challenge the appropriateness of collection actions and or existence of amount of the tax petitioners through the petition response to summary_judgment motion and oral argument assert the following general issues whether respondent’s adjustments are barred whether the alleged deficiencies are in violation of rfra whether petitioners have been denied due process whether respondent filed the summary_judgment motion timely and whether the representative of respondent has legal authority to act on behalf of respondent petitioners though do not present the court with any specific facts showing any genuine issue for trial despite this court’s express requirement for such a showing see rule d petitioners’ repeated assertions of the existence of questions of fact are insufficient and without foundation and we conclude that this case is appropriate for summary_judgment a respondent’s adjustments are sustained deficiencies gross_income includes all income from whatever source derived sec_61 respondent’s determinations in a notice_of_deficiency are presumed correct 290_us_111 petitioners merely allege that respondent’s determination of deficiencies in and additions to tax are incorrect the arguments they put forward are frivolous and without merit petitioners contend that the individual_master_file imf for each petitioner has incorrect information and that they have no tax_liability petitioners’ contentions however are blanket statements and they provide no support for their bare allegations that there are genuine issues for trial moreover petitioners have not produced any information or set forth any specific facts to contradict the gross_income reflected on petitioners’ w-2 statements and forms we hold that there is no genuine issue as to any material fact additions to tax under sec_6651 and sec_6654 sec_6651 imposes an addition_to_tax for failure_to_file an income_tax return the addition_to_tax may be avoided if the failure_to_file is due to reasonable_cause and not willful neglect sec_6651 reasonable_cause contemplates that the taxpayer exercised ordinary business care and prudence and was nonetheless unable to file a return within the prescribed time 469_us_241 sec_301 c proced admin regs and willful neglect means a conscious intentional failure or reckless indifference united_states v boyle supra sec_6654 imposes an addition_to_tax for failure to pay estimated_tax the imposition of the addition_to_tax under sec_6654 as to the years in question is mandatory when an individual fails to make the required estimated_tax payments unless the petitioner falls within one of the exceptions set forth in the statute see sec_6654 e 75_tc_1 petitioners do not offer any explanation that their failure_to_file was due to reasonable_cause and not willful neglect the record demonstrates rather that petitioners chose not to file any returns in pursuit of what can only be regarded as a religious rights protest against the federal_income_tax petitioner hawkins did not pay any estimated_tax during the years at issue and did not show the applicability of any statutory exception under sec_6654 petitioners have not assigned error or provided any statement of fact to dispute respondent’s determinations with respect to the additions to tax accordingly respondent is entitled to summary adjudication as to the additions to tax in question rule b 118_tc_358 see also 116_tc_438 b the federal_income_tax does not violate rfra the gist of petitioners’ response to the summary_judgment motion like the arguments made by petitioners in the jurisdiction motion is that the federal_income_tax violates rfra as previously discussed with respect to the jurisdiction motion supra p the uniform mandatory participation in the federal_income_tax system irrespective of religious belief is a compelling governmental interest 110_tc_137 citing 455_us_252 requiring petitioners’ participation in the federal_income_tax system is the only and thus the least restrictive means of furthering the government’s compelling interest adams v commissioner supra holding that rfra does not exempt a taxpayer from federal income taxes regardless of whether the specifically petitioners assert that the government of the united_states via respondent has acted in an invidious and or covert manner to establish a religion and or restrain the exercise of our petitioners’ religion petitioners also assert that the alleged taxes are an attempt to support religious activities or institutions and to compel petitioners to engage in conduct and or to refrain from religiously motivated activities we petitioners find objectionable petitioners’ religious beliefs are substantially burdened the federal_income_tax system does not violate rfra c remaining contentions in response to summary_judgment motion the remaining contentions raised by petitioners in the response to summary_judgment motion are shopworn and frivolous assertions that do not deserve careful analysis see 737_f2d_1417 5th cir first as previously discussed petitioners’ contention that rfra provides for this matter to be heard by an article iii court and their argument about their right to a jury trial with respect to this case are without merit see supra pp second petitioners have not been denied due process the provision of an administrative hearing before the appeals_division is not essential to the validity of a notice_of_deficiency and would have been futile since petitioners did not dispute the computation or amount of the tax see 60_tc_522 affd per curiam 499_f2d_550 2d cir see also corcoran v commissioner t c memo petitioners contend that the least restrictive means of furthering the government’s compelling interest is to simply waive the determined deficiencies in and additions to tax in support of their argument petitioners rely on the unsubstantiated argument that during the previous years and respondent allegedly did not pursue any adjustments petitioners’ argument however must fail because it is well settled that each taxable_year stands on its own and must be separately considered respondent is not bound in any given year to allow the same treatment permitted in a previous year 113_tc_158 the circumstances of prior years are not relevant and we consider only the taxable years at issue before this court rejecting taxpayer’s due process claims that the notice_of_deficiency was invalid and finding that an adminstrative hearing would have been futile because the taxpayers never disputed the actual amounts of the tax affd 54_fedappx_254 9th cir the applicable provisions of the statute and regulations are clear and petitioners have no basis to assert that they have been deprived of due process because their inquiries about requirements that they keep books and file tax returns allegedly have gone unanswered by the internal_revenue_service see sec_6001 sec_6011 sec_1_6001-1 sec_1_6011-1 income_tax regs petitioners are not denied due process simply because they are not in an article iii court see supra p third respondent timely filed the summary_judgment motion rule a states that a motion for summary_judgment may be made at any time commencing days after the pleadings are closed respondent filed the answer on date and the summary_judgment motion more than months later on date the pleadings in this case were closed long before respondent filed the summary_judgment motion see rule sec_34 sec_36 sec_37 sec_38 sec_121 fourth petitioners’ contentions at the hearing that respondent’s representative who prepared and issued the notices of deficiency lacked the legal authority to act in the name of respondent and petitioners’ requiring proof of the delegation of authority from respondent are frivolous and without merit see 118_tc_162 in the absence of any valid issue for review and for the foregoing reasons we conclude that respondent is entitled to judgment as a matter of law sustaining each notice_of_deficiency issued to petitioners iii penalty motion sec_6673 authorizes this court to require a taxpayer to pay to the united_states a penalty not in excess of dollar_figure whenever it appears that proceedings have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer’s position in such proceeding is frivolous or groundless a position maintained by the taxpayer is frivolous where it is contrary to established law and unsupported by a reasoned colorable argument for change in the law 114_tc_136 quoting 791_f2d_68 7th cir this proceeding was petitioners’ first appearance before this court respondent first raised the penalty motion at the hearing in view of the circumstances of this case and the nature of petitioners’ rfra arguments we shall deny respondent’s motion and we shall not impose the penalty nevertheless we place petitioners on notice that if petitioners institute or maintain a proceeding with frivolous arguments in the future this court may impose such a penalty we have considered all of petitioners’ arguments and contentions and to the extent not discussed above conclude they are irrelevant and or without merit to reflect the foregoing an appropriate order and decision will be entered