department of the treasury employee identification_number contact person - 1d number contact telephone number uil internal_revenue_service p o box cincinnati oh release number release date date legend b name of organization c name of grant program d name of employer e geographical location date date x total grant amount available dear sir or madam we have considered the request of the applicant named b for advance approval of an employer-related grant-making program under sec_4945 g of the internal_revenue_code on date our records indicate that b was recognized as exempt from federal_income_tax under sec_501 of the code and that it is classified as a private_foundation as defined in sec_509 in addition our records indicate that b received advance approval of grant-making procedures from the internal_revenue_service on date for the current to undergraduate students which complied with the requirements scholarship program of sec_4945 according to procedures that would not be taxable_expenditures within the meaning of sec_4945 your letter indicates that b will operate an additional grant-making program called c the program provides funds for the children step-children or children under the legal d employees meeting enrollment criteria the scholarships will not be guardianship of tment tool or an inducement to continue work all participating children used as a recrui must be enrolled in the program to attain eligibility status an enrollment form must be completed and submitted to the scholarship program manager for each child entering the program it will be the responsibility of the employee who enrolled the child to submit undeniable proof that the child's academic performance has met the criteria for the scholarship award an individual scholarship account will be established for each child receiving the scholarship award the number of students qualifying academically for scholarship money will be divided into x there shall be no more than thirty scholarships awarded in any calendar_year this amount not to exceed of the total number of participants for the same year this being consistent with the percentage_test guidelines as set out in section dollar_figure of revproc_76_47 b shall maintain records of both total participants and the annual recipients for each reporting_period to substantiate these limits institution providing the home school curriculum must be submitted to determine qualification for the scholarship award a lesser amount dependent upon b's ability to pay for home schooled students a transcript of student grades from the this will be a continuous award of x annually or if upon successful completion of high school and enrollment in an accredited institution of advanced learning the scholarship program participant will provide proper documentation of enrollment and the funds will be paid to the educational institutions the enrolled participant in the scholarship program fails to successfully complete high school all scholarship funds awarded to the participant will be forfeited and transferred to another qualified_individual in the program if the grantee who has been awarded a scholarship does not use it within five years from graduation from high school excepting those individuals who cannot attend college because of military service - in those cases it would extend years beyond military service the scholarship for that individual will be transferred to another individual who qualifies under the grant program children entered in the scholarship program will still be eligible to apply for scholarships after their parent is no longer employed with d child while eligible will remain in the child’s account to be used after successful completion of high school any false information misinformation or deception on the part of any d employee in the enrollment process or the proof of qualification for scholarship funds will be grounds for disqualification of all children enrolled under the employee’s name rendering them ineligible for the program additionally all previous scholarship funds awarded to all children enrolled under the employee’s name will be forfeited members of both b and d agree to not recruit employees induce employees to continue employment or compel employees to follow any course of action based upon their children obtaining a scholarship all scholarship funds accrued by the strictly the selection committee shall be made up of independent professional educators from local schoo districts a key element of the scholarship program is participation across multiple grade levels the primary component of the selection process is objective the requirement of a grade point average of or the equivalent in the event of a tie between applicants two scenarios shall be implemented first if there is sufficient availability of awards within the limit as set out above the award shall be split between the tied applicants secondly if there is not available room under the cap an alternative criteria will be implemented that of comparative financial need to be assessed by the selection committee it is the responsibility of the employee who enrolled the child to submit undeniable proof that the child’s academic performance has met the criteria for the scholarship award the executive director of b will tabulate the the executive director will have no input into the grades for record keeping purposes decision making process or any control_over the selection of scholarship recipients and b’s cpa's will verify all calculations no disqualified persons as defined in the internal_revenue_code sec_4946 or their family members shall be allowed to participate in the scholarship program the process that makes up the awarding of the scholarships thereby takes any control out of the hands of b or d disqualified_person shall have input into the selection process for awarding scholarships students awarded the scholarships are enrolled in through grade of schools in the area students are awarded scholarships on a completely objective furthermore no such basis they either obtain the required grade-point-average or they do not there is no relation to the employment of the recipients or their parents or the employer's line_of_business once awarded the scholarship may not be terminated because of an employee leaving d no child or participant in the scholarship program will be denied future participation in the program due to the misconduct on the part of or termination of employment of the parent the children should not be punished for the deeds of the there are no restrictions on the courses of study the child may pursue parent however they will be required to meet the minimum admissions standards of an educational_institution as defined in sec_170 and to attend such an institution and a minimum period of employment by the employee is required for eligibility this period may not exceed three years no other employment-related criteria may affect eligibility the scholarships will only be paid upon enrollment by the an individual scholarship account will be participant in an accredited institution established for each qualifying_child the only disqualification is if the student does not complete high school otherwise the account is for their use even if college is delayed b agrees to maintain records that include i ii iii iv information used to evaluate the qualification of potential grantees identification of the grantees including any relationship of any grantee to b the amount and purpose of each grant and all grantee reports and other follow-up data obtained in administering b's scholarship program sec_4945 and b of the code impose certain excise_taxes on taxable_expenditures made by a private_foundation sec_4945 of the code provides that the term taxable_expenditure means any amount_paid or incurred by a private_foundation as a grant to an individual for travel study or other similar purposes by such individual unless such grant satisfies the requirements of subsection g sec_4945 of the code provides that sec_4945 shall not apply to individual grants awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance if it is demonstrated that the grant constitutes a scholarship or fellowship_grant which is subject_to the provisions of sec_117 and is to be used for study at an educational_organization described in sec_170 the grant constitutes a prize or award which is subject_to the provisions of sec_74 if the recipient of such prize or award is selected from the general_public or the purpose of the grant is to achieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar capacity skill or talent of the grantee sec_53_4945-4 of the regulations provides that to secure approval a private_foundation must demonstrate that i its grant procedure includes an objective and nondiscriminatory selection process ii such procedure is reasonably calculated to result in performance by grantees of the activities that the grants are intended to finance and iii the foundation plans to obtain reports to determine whether the grantees performed activities that the grants are intended to finance revproc_76_47 1976_2_cb_670 sets forth guidelines to be used in determining whether a grant made by a private_foundation under an employer-related program to a child of an employee of the particular employer to which the program relates is a scholarship grant that meets the provisions of sec_117 of the code as that section read before the tax_reform_act_of_1986 if a private foundation's program satisfies the seven conditions set forth in sections dollar_figure through dollar_figure of revproc_76_47 and meets the percentage_test described in sec_4 the service will assume the grants meet the provisions of sec_117 as that section read before the tax_reform_act_of_1986 d that procedures in awarding grants under your program will be in you have agree compliance with sections dollar_figure through dollar_figure of revproc_76_47 without regard to the in particular the amendments to sec_117 made by the tax_reform_act_of_1986 selection of individual grant recipients will be made by a selection committee the members of which are totally independent and separate from the private_foundation the foundation’s creator and the relevant employer the grants will not be used as a means of inducement to recruit employees nor will a grant be terminated if the employee leaves the employer the recipient will not be restricted in a course of study that would be of particular benefit to the relevant employer or to the foundation it states in the section dollar_figure of rev_proc provides a percentage_test guideline case of a program that awards grants to children of employees of a particular employee the program meets the percentage_test if either of the following tests are met the number of grants awarded under that program in any year to such children do not exceed percent of the number of employees’ children who were eligible were applicants for such grants and were considered by the selection committee in selecting the recipients of grants in that year or the number of grants awarded under the program in any year to such children does not exceed percent of the number of employees’ children who can be shown to be eligible for grants whether or not they submitted an application in that year you have agreed that your program will meet the requirements of either the percent or percent percentage_test of section dollar_figure applicable to a program that awards grants to children of employees of a particular employer records should be maintained to show that you meet the applicable_percentage test of sec_4 this determination is issued with the understanding that in applying the percent test applicable to employees’ children set forth in revproc_76_47 you will include as eligible only those children who meet the eligibility standards described in revproc_85_51 1985_2_cb_717 this determination will remain in effect as long as the procedures in awarding grants under your program remain in compliance with sections dollar_figure through dollar_figure of rev_proc without regard to the amendments to sec_117 made by the tax_reform_act_of_1986 if you enter into any other program covering the same individuals the percentage_test of revproc_76_47 must be met in the aggregate based on the information submitted and assuming your award programs will be conducted as proposed your procedures for granting the awards comply with the requirements contained in sec_4945 of the code and that awards granted in accordance with such procedures will not constitute taxable_expenditures within the meaning of sec_4945 in addition we have determined that awards made under your procedures are excludable from the gross_income of the recipients subject_to the limitations provided by sec_117 of the code this determination is conditioned on the understanding that there will be no material_change in the facts upon which it is based it is further conditioned on the premise that no grants will be awarded to foundation managers or members of the selection committee or for a purpose that is inconsistent with the purpose described in sec_170 of the code the approval of your employer-related grant-making program is a one-time approval this determination only covers the grant programs described above thus approval shall apply to subsequent grant programs only as long as the standards and procedures under which they are conducted do not differ materially from those described in your request any funds you distribute to individuals must be made on a true charitable basis in furtherance of the purposes for which you are organized therefore you should maintain adequate_records and histories so that any or all grant distributions can be substantiated upon request by the internal_revenue_service this determination is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as a precedent you must report any future changes in your grant making procedures please keep a copy of this letter in your permanent records we have sent a copy of this letter to your representative as indicated in your power_of_attorney if you have any questions please contact the person whose name and telephone number are shown above sincerely yours robert choi director exempt_organizations rulings and agreements


t c memo united_states tax_court rosanna ditaranto petitioner v commissioner of internal revenue respondent docket no filed date rosanna ditaranto pro_se robert francis saal and carroll de groff lansdell for respondent memorandum opinion laro judge this case was submitted to the court fully stipulated for decision without trial see rule respondent determined a dollar_figure 1unless otherwise indicated rule references are to the tax_court rules_of_practice and procedure and section references are to the internal_revenue_code in continued deficiency in petitioner’s federal_income_tax as well as additions to tax of dollar_figure for failure_to_file a return timely under sec_6651 dollar_figure for failure_to_pay_tax timely under sec_6651 and dollar_figure for failure to pay estimated_tax under sec_6654 following the parties’ stipulation that the tax required to be shown on petitioner’s federal_income_tax return return was dollar_figure and respondent’s concession of the sec_6654 addition_to_tax we decide whether petitioner’s failures to file timely and to pay timely were due to reasonable_cause and not to willful neglect we hold they were not background our background statement of this case is derived primarily from the parties’ stipulation of facts the accompanying exhibits and the pleadings the stipulated facts are incorporated herein by this reference and are so found petitioner resided in new jersey when she filed her petition petitioner has at all relevant times been an owner and executive of a textile design company she timely requested and was granted a six-month extension of time to file the return included with that extension request was a dollar_figure payment in partial satisfaction of her federal_income_tax liability continued effect for the year at issue some dollar amounts are rounded as of date petitioner had not filed the federal return and respondent prepared a substitute for return on her behalf under sec_6020 the substitute for return reflected the internal revenue service’s irs findings that on the basis of third-party information returns petitioner received dollar_figure during specifically the irs determined that petitioner received information returns reporting income as follows dollar_figure as reported on forms 1099-b proceeds from broker and barter_exchange transactions dollar_figure as reported on form 1099-int interest_income and dollar_figure as reported on form 1099-r distributions from pensions annuities retirement or profit-sharing_plans iras insurance contracts etc the substitute for return allowed petitioner to offset her income with one personal_exemption and the standard_deduction the substitute for return did not however credit petitioner with basis for securities reported as sold on the forms 1099-b though it was subsequently established that she had basis in excess of value ie the securities were in a net_loss position by letter dated date a compliance services field director with the irs notified petitioner that the agency had no record of receiving the return and that the irs had computed her tax penalties and interest on a gross basis ie net of allowable exemptions deductions and credits attached to the letter was a tax calculation summary reflecting the irs’ computation the letter cautioned that respondent would assess the tax penalties and interest shown on the summary unless petitioner filed within days a complete and signed federal_income_tax return or other specified information petitioner did not file the requested return or the alternative information within the 30-day period on date respondent issued to petitioner a notice_of_deficiency on the basis of the substitute for return attached to the notice_of_deficiency were copies of the letter dated date as well as the summary in response to the notice_of_deficiency on date petitioner petitioned the court subsequently on date petitioner filed with respondent the return reporting a total_tax liability of dollar_figure an extension request payment of dollar_figure and total_tax owing of dollar_figure attached to the return was schedule d capital_gains_and_losses claiming a total cost or other basis in securities sold of dollar_figure and a short term capital_loss of dollar_figure petitioner limited her loss from the sale of securities for to dollar_figure as required under sec_1211 petitioner also reported owing a additional tax for early distributions from a qualified_plan or similar account as required under sec_72 the court set this case for trial and the parties submitted this case fully stipulated under rule the parties stipulated that the federal_income_tax due from petitioner for is dollar_figure before credits that she is entitled to a credit of dollar_figure for the payment remitted with her extension request and that she did not timely file the return the record does not indicate that petitioner is entitled to any credit beyond the dollar_figure credit for income_tax remitted with her extension request discussion the sole issue for decision is whether petitioner’s failures to file timely and pay timely were justified by reasonable_cause and not a result of willful neglect petitioner relying on 469_us_241 asserts that she should be held harmless for the additions to tax because her failures to file and pay timely were not the result of a deliberate disregard for her filing and payment obligations as petitioner sees it she exercised ordinary business care in respect of her federal_income_tax responsibilities but was unable to comply on account of circumstances beyond her control respondent maintains that petitioner filed the return late without paying the related tax and that the record does not support a finding that the failures to file and pay timely were due to reasonable_cause we agree with respondent sec_6651 imposes an addition_to_tax for failing to file a required return by its properly extended due_date the amount of the addition_to_tax for failure_to_file equal sec_5 of the tax required to be shown on the return for each complete or partial month the return is late not to exceed in the aggregate sec_6651 sec_6651 imposes a corresponding addition_to_tax for failing to pay timely the tax shown to be due on a federal_income_tax return the amount of the addition_to_tax for failure to pay equals for each complete or partial month a taxpayer fails to pay the tax not to exceed in the aggregate sec_6651 the additions to tax under sec_6651 and are imposed on the net amount due meaning that the amount of tax required to be shown on the return is reduced by the amount of tax paid on or before its due_date and allowed as a credit on the return sec_6651 and see also sec_301_6651-1 proced admin regs for any complete or partial month to which the additions to tax for failure_to_file and pay timely apply the amount of the failure_to_file addition_to_tax is reduced by the amount of the failure to pay addition_to_tax sec_6651 in effect the addition_to_tax for failure_to_file is reduced to for any month in which additions to tax under sec_6651 and apply equally florance v commissioner tcmemo_2009_154 97_tcm_1854 the additions to tax for failures to file timely and to pay timely do not apply where the failures were due to reasonable_cause and not to willful neglect sec_6651 and pursuant to sec_7491 the commissioner bears the initial burden of producing sufficient evidence that it is appropriate to impose the additions to tax under sec_6651 and see also 116_tc_438 where the commissioner meets this evidentiary burden the burden of persuasion is on the taxpayer to show the additions to tax do not apply because the failures to file or to pay timely were due to reasonable_cause and not to willful neglect see id pincite respondent carries his burden of production here by virtue of the parties’ stipulations that petitioner did not file the return timely and that she remitted only dollar_figure toward her dollar_figure tax_liability for that year consequently petitioner bears the burden of proving that such failures were due to reasonable_cause and not willful neglect see rule sec_122 sec_142 higbee v commissioner t c pincite petitioner if she is to prevail must prove that the failures to file and to pay did not result from willful neglect and were due to reasonable_cause see boyle u s pincite 92_tc_899 2the record does not disclose the date on which petitioner made the dollar_figure payment the parties stipulated that the extension request was timely and we conclude on the basis of that stipulation that the dollar_figure payment was also timely therefore the parties’ rule computation shall compute the additions to tax determined to be due from petitioner on the net amount due or dollar_figure see sec_6651 and sec_301_6651-1 proced admin regs willful neglect is present when the taxpayer has handled his or her federal tax obligations with conscious intentional failure or reckless indifference boyle u s pincite reasonable_cause on the other hand may be found where the taxpayer has exercised ordinary business care and prudence but was nevertheless unable to file the return or pay the tax within the dates prescribed by law id pincite the existence of willful neglect or reasonable_cause is a factual determination to be made in the light of well- established legal principles id pincite n we synthesize our discussion of reasonable_cause under sec_6651 and because the standard has been interpreted to be synonymous see e wind indus inc v united_states 196_f3d_499 n 3d cir russell v commissioner tcmemo_2011_81 101_tcm_1363 court cases and administrative regulations are replete with examples of circumstances considered to constitute reasonable_cause sufficient to avoid the additions to tax for failures to file and to pay see eg boyle u s pincite n listing examples then cited in the internal_revenue_manual 114_f3d_366 2d cir aff’g tcmemo_1995_547 ruggeri v commissioner tcmemo_2008_300 96_tcm_511 see also sec_301 c proced admin regs commonly cited examples of reasonable_cause for failures to file or to pay include unavoidable postal delays the death or serious illness of the taxpayer or a member of his or her immediate_family destruction by casualty of the taxpayer’s records or place of business the taxpayer’s reliance on the erroneous information of an irs officer_or_employee and the inability of an irs representative to meet with the taxpayer when the taxpayer makes a timely visit to an irs office for assistance see eg boyle u s pincite n e wind indus inc f 3d pincite reasonable_cause has been found to not exist where a taxpayer continues his or her business activities but nevertheless fails to satisfy his or her tax responsibilities jordan v commissioner tcmemo_2005_266 90_tcm_506 courts will consider all of the facts and circumstances of the taxpayer’s financial condition purportedly giving rise to the failures to file or to pay estate of hartsell v commissioner tcmemo_2004_211 88_tcm_267 petitioner claims that her failures to file timely and to pay timely were due to a confluence of personal professional and financial difficulties that she faced between late and late among the circumstances petitioner cites on brief are that her checkbook was stolen in that her former business partner denied her access to records during a protracted lawsuit that spanned to flood in or her mother’s illness and unfortunate death during and and her current financial difficulties petitioner contends that the cumulative effect of these circumstances constitutes reasonable_cause sufficient to negate the additions to tax we are not persuaded while we are sympathetic to petitioner’s difficulties we decline to conclude that her failures to file and to pay were justified by reasonable_cause and were not due to willful neglect the additions to tax with which we are concerned relate to the return which because the due_date for that return was properly extended was due to be filed no later than date see sec_6072 sec_6081 notwithstanding her extension request petitioner was required to pay the tax relating to the return no later than date see sec_6151 sec_6651 therefore we are primarily concerned with events that might have occurred or existed around date ie the payment_date and date ie the filing_date the chronology offered by petitioner conspicuously fail sec_3petitioner contends that she was generally denied access to these records from through but she goes on to state that in she received a copy of her financial information after she and her business partner settled the litigation that resulted from their dispute accordingly we understand petitioner to admit on brief that she had access to financial information relating to her business during the filing season to cite any events during that time which we construe as reasonable_cause to avoid the additions to tax petitioner’s chronology of events however affirms that during the filing season she engaged in ordinary business activities with apparent disregard for her federal_income_tax obligations petitioner an executive who has balanced the rigors of running her own business for years demonstrated capacity to file the return and pay the resulting tax by filing an extension request and remitting dollar_figure therewith throughout and she continued to manage her textile design company and she relocated her business to avoid bankruptcy even though petitioner was strained financially during and the record establishes she had adequate financial means to satisfy her federal_income_tax liability as petitioner reported on the return she owned securities worth dollar_figure and she received a distribution from her retirement account of dollar_figure these financial_assets were as far as the record suggests available to satisfy petitioner’s unpaid tax_liability for when taken as a whole these events suggest that petitioner acted with conscious disregard of her federal_income_tax obligations and not with ordinary business care and prudence because petitioner has not persuaded us that her failures to file and to pay were due to reasonable_cause and not due to willful neglect we hold she is liable for additions to tax under sec_6651 and we have considered all of petitioner’s arguments for a contrary holding and to the extent not discussed herein we conclude they are irrelevant moot or lacking in merit to reflect the foregoing and the parties’ concessions decision will be entered under rule


internal_revenue_service number release date index number -------------------------------- ----------------------------------- ----------------------------------- ----------------------------------------- -------------------------- ------------------------------------- ---------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------------ telephone number ---------------------- refer reply to cc tege eoeg eo1 plr-125377-17 date february employer -------------------------------------------------------- trust trustee board plan -------------------------------------------------------- ---------------------------------------- ------------------------ -------------------------------- ----------------------------------------- ---------------------------------------------------------------- --------------------------------------------------- state -------------- a b c d e f -- -- -------------------------------------- -------------------------------- ------------------------------ ------------------------------ plr-125377-17 dear --------------- this letter responds to a letter from your authorized representative dated date as subsequently amended and supplemented submitted on behalf of the trustee requesting rulings that the trust’s income is excludable from gross_income under sec_115 of the internal_revenue_code and the trust is not required to file an annual federal_income_tax return under sec_6012 of the code the trustee represents the facts as follows facts the trust was established to invest and disburse funds irrevocably designated by the employer a political_subdivision of state to fund its obligations under the plan to provide retired employees and their eligible dependents and beneficiaries plan participants with post-employment life and health benefits life sickness hospitalization dental and long-term care under the trust agreement only the employer acting as plan_administrator or an authorized representative of the employer may direct the trustee to withdraw or otherwise disburse funds held in the trust for the benefit of plan participants except as provided by the trust agreement funds are to be used solely to pay for plan liabilities and related expenses the employer formed the board composed of a maximum of a members to serve perpetually and with staggered terms under the trust agreement b are to be officers of the employer b are to be representatives of the retirees and the remainder may be either officers or representatives in conjunction with this ruling_request the trustee amended provision c to clarify that the employer may remove and replace board members at any time by written resolution the board has the authority to make all decisions necessary for the operation of the trust on behalf of the employer except for decisions specifically reserved under the trust agreement for the employer acting as plan_administrator the board may remove the trustee at any time with or without cause and to appoint a new trustee the trust agreement may be amended at any time by the board as long as no such amendment provides for the diversion of trust assets for any purpose other than payment of fund liabilities for the exclusive benefits of plan participants the trust may be terminated at any time by the employer in conjunction with this ruling_request the trustee amended provision d and agreed to amend provisions e and f to provided that upon termination any assets in the trust remaining after all benefit obligations administrative fees and related liabilities have been satisfied shall revert to the employer in no event will trust assets be transferred to an entity that is not a state a plr-125377-17 political_subdivision of a state or an entity the income of which is excluded from gross_income under sec_115 the trustee represents that no private interests participate in or benefit from the operation of the trust other than as providers of goods or services issue - sec_115 law and analysis sec_115 provides that gross_income does not include income derived from any public_utility or the exercise of any essential government function and accruing to a state or any political_subdivision thereof revrul_77_261 1977_2_cb_45 held that the income generated by the subject investment fund which was established by the state to hold revenues in excess of the amounts needed to meet current expenses was excludable from gross_income under sec_115 because such investment constituted an essential_governmental_function the ruling stated that the statutory exclusion was intended to extend not to the income of a state or municipality resulting from its own participation in activities but rather to the income of an entity engaged in the operation of a public_utility or the performance of some governmental function that accrued to either a state or political_subdivision of a state according to the ruling it may be assumed that congress did not desire in any way to restrict a state's participation in enterprises that might be useful in carrying out projects that are desirable from the standpoint of a state government and that are within the ambit of a sovereign to conduct pursuant to sec_6012 and the underlying regulations the investment fund being classified as a corporation subject_to taxation under subtitle a of the code was required to file a federal_income_tax return each year revrul_90_74 1990_2_cb_34 held that the income of the subject organization which was formed funded and operated by political subdivisions to pool various risks arising from their obligations regarding public liability workers’ compensation or employees’ health was excludable from gross_income under sec_115 because the organization was performing an essential_governmental_function the revenue_ruling stated that the income of the organization was excludable from gross_income as long as private interests did not participate in or benefit more than incidentally from the organization the benefit to the employees of the insurance coverage obtained by the member political subdivisions was deemed incidental to the public benefit the trust provides life and health benefits to retired employees of the employer and their survivors and eligible dependents providing such benefits to former public employees constitutes the performance of an essential_governmental_function revrul_90_74 and revrul_77_261 plr-125377-17 the income of the trust accrues to the employer no private interests participate in or benefit from the operation of the trust other than as providers of goods or services the benefit to retired employees of the employer is incidental to the public benefit upon termination of the trust any remaining assets will be used to provide life and health benefits to retirees pursuant to the plan in no event will trust assets be distributed to any entity that is not a state a political_subdivision of a state or an entity the income of which is excluded from gross_income under sec_115 revrul_90_74 issue - sec_6012 law analysis sec_301_7701-1 of the procedure and administration regulations provides that the classification of organizations that are recognized as separate entities is determined under sec_301_7701-2 through -4 unless a provision of the code provides for special treatment of that organization sec_301_7701-4 provides in general that an arrangement will be treated as a_trust under the code if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and therefore are not associates in a joint enterprise for the conduct of business for profit the trust enables the employer to set_aside funds to provide post-employment life and health benefits for their employees the trustee is charged with the responsibility to protect and conserve trust assets for the benefit of trust beneficiaries the beneficiaries of the trust cannot share in the discharge of the trustees’ responsibility to protect and conserve the property of the trust and therefore are not associates in a joint enterprise for the conduct of business for profit thus the trust is treated as a_trust under sec_301_7701-4 sec_6012 provides that every trust having taxable_income for the tax_year or having gross_income of dollar_figure or more for that year regardless of the amount of taxable_income must file a return with respect to income taxes under subtitle a rulings based solely on the facts and representations submitted by the trustee we conclude that the income of the trust is derived from the exercise of an essential_governmental_function and will accrue to a state or a political_subdivision thereof for purposes of sec_115 consequently we rule that the trust’s income is excludable from gross_income under sec_115 plr-125377-17 we conclude that the trust is classified as a_trust within the meaning of sec_7701 and sec_301_7701-4 because the trust’s income is excludable from gross_income under sec_115 we rule that the trust is not required by sec_6012 to file an annual income_tax return except for the specific rulings above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code specifically no representation is made that contributions or premiums_paid on behalf of or benefits received by employees former employees retirees spouses dependents or others will be tax-free this ruling concerns only the federal tax treatment of the trust’s income and may not be cited or relied upon as to any matter relating to the taxation of accident or health contributions or benefits under a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative this ruling is directed only to the taxpayer who requested it according to sec_6110 this ruling may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant a taxpayer filing its return electronically may satisfy this requirement by including a statement providing the date and control number of this ruling letter all information and representations submitted in support of a request_for_ruling are subject_to verification upon examination sincerely james zelasko chief branch exempt_organizations office of associate chief_counsel tax exempt government entities enclosure copy for sec_6110 purposes cc


t c memo united_states tax_court vitautas kazhukauskas and vilma kazhukauskas petitioners v commissioner of internal revenue respondent docket no filed date vitautas kazhukauskas and vilma kazhukauskas pro sese mindy y chou robert d heitmeyer alexandra e nicholaides and alissa vanderkooi specially recognized for respondent memorandum findings_of_fact and opinion laro judge petitioners while residing in michigan petitioned the court to redetermine deficiencies respondent determined in their and federal_income_tax of dollar_figure and dollar_figure respectively and accuracy-related_penalties of dollar_figure and dollar_figure respectively we are asked to decide the following issues whether petitioners underreported gross_receipts of dollar_figure and dollar_figure on their and schedules c profit or loss from business respectively we hold they did whether petitioners may deduct schedule c expenses and claim costs of goods sold in addition to those respondent allowed for and we hold they may not whether petitioners owe self-employment_tax for and net of deductions allowed under sec_164 in the amounts of dollar_figure and dollar_figure respectively we hold they do and whether petitioners are liable for accuracy-related_penalties for and under sec_6662 and b for substantial understatements of income_tax we hold they are findings_of_fact before trial respondent’s counsel sent to petitioners a proposed stipulation of facts which respondent proffered petitioners should agree to under rule a petitioners refused to execute the agreement and respondent moved the court to 1unless otherwise indicated section references are to the applicable version of the internal_revenue_code and rule references are to the tax_court rules_of_practice and procedure some dollar amounts are rounded 2respondent allowed petitioners all trade_or_business expense deductions claimed on their and federal_income_tax returns return and return respectively as well as offsets to their and gross_receipts for costs of goods sold of dollar_figure and dollar_figure respectively compel stipulation under rule f the court granted respondent’s motion and ordered petitioners to show cause why the proposed stipulation of facts as well as the accompanying exhibits should not be deemed established for purposes of this case see rule f petitioners failed to respond and we made our order to show cause absolute by deeming established for purposes of this case the facts and evidence in respondent’s proposed stipulation of facts see rule f our findings_of_fact are primarily derived from the facts and exhibits deemed stipulated the documents admitted at trial and the pleadings we find the facts and exhibits deemed stipulated accordingly vitautas kazhukauskas petitioner was born in lithuania to bronislovas kazhukauskas father and aldona kazhukauskene mother he moved to the united_states in vilma kazhukauskas ms kazhukauskas who is a petitioner in this case is an accountant with a bachelor’s degree in budgeting that she earned overseas petitioners have at all relevant times been u s citizens and they have two sons including m k petitioner’s mother has at all relevant times lived in lithuania and his father was deceased at the time of trial 3among the facts deemed stipulated were that petitioners underreported their respective gross_receipts for and by dollar_figure and dollar_figure and that petitioners lacked reasonable_cause for failing to report those gross_receipts during the years at issue petitioners owned v k auto sales vk u s and v k motors uab vk lithuania through those entities petitioners operated an import and export business in which vk u s purchased used automobiles mostly at auctions within the united_states and exported the vehicles to vk lithuania for resale primarily within lithuania petitioners also bought and sold used vehicles domestically through vk u s for the most part vk u s purchased vehicles with scrap certificates of title and certificates of title specifying the automobiles were to be used for salvage purposes only some certificates of title indicated the vehicles had been approved for export and as discussed below petitioners shipped numerous automobiles overseas the record is unclear the extent to which if at all vk u s repaired the vehicles it purchased before resale petitioners’ books_and_records concerning their import and export business consisted of an amalgamation of receipts certificates of title and bank statements with minimal if any logical arrangement as best we can tell from the disjointed record in this case vk u s purchased at least vehicles in and at least 4a scrap certificate of title signifies that the vehicle to which it relates is not to be titled or registered and is to be used for parts or scrap metal only see mich comp laws serv sec lexisnexi sec_2001 supp vehicles in with a cost per vehicle ranging between dollar_figure and dollar_figure the information relating to the vehicles which vk u s sold as well as the proceeds received therefrom is less clear in its domestic operations vk u s sold at least vehicles in and at least vehicles in in its international operations vk u s shipped at least vehicles to lithuania during and though the number of vehicles exported and sold abroad during each year is not readily discernible from the record vk lithuania employed petitioner’s mother as a manager or bookkeeper from date through at least date petitioners jointly individually or collectively with m k owned at least six bank accounts with jpmorgan chase bank n a the first was a premier savings account titled in petitioners’ names personal savings account with a balance that grew from dollar_figure on date to more than dollar_figure on date the second was a business checking account titled in the name of vk 5we examined the records submitted at trial and summarized vk u s ’ purchases using the associated vehicle identification_number vin 6two accounts named vilma kazhukauskene as a joint account_holder or a d b a owner of vk u s it is our understanding that vilma kazhukauskene and ms kazhukauskas are the same individual and we collectively refer to both as ms kazhukauskas we note that the parties’ redaction of all but the first three digits of financial_account numbers prevented us from more precisely describing petitioners’ accounts u s business checking account with a balance that fluctuated from dollar_figure on date to dollar_figure on date the third through sixth bank accounts were a blend of checking and savings accounts both personal and business which at all relevant times reflected a balance of dollar_figure to dollar_figure throughout and vk u s received regular advices of credit from various parties after which the related funds were wire-transferred into the business checking account many advices of credit bore the notation skola literally translated to mean debt in lithuanian though the word’s meaning may vary depending upon the context specifically petitioners received the following wire transfers during the year at issue_date amount from notation date date date date date date date date date date dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure mother father father petitioner petitioner father mother mother vk lithuania mother skola skola skola pervedimas pavedimas skola skola skola uz automobilius skola 7the record establishes that petitioners owned a bank account which earned interest_income of dollar_figure in our statement of petitioners’ accounts does not separately identify this account because the record is not clear that this account is not the same as the personal savings account dollar_figure date dollar_figure date dollar_figure date date dollar_figure total dollar_figure dollar_figure date dollar_figure date dollar_figure date dollar_figure date dollar_figure date dollar_figure date dollar_figure date dollar_figure date dollar_figure date dollar_figure date dollar_figure date dollar_figure date dollar_figure date dollar_figure date date dollar_figure date dollar_figure total dollar_figure father vk lithuania father father mother vk lithuania vk lithuania vk lithuania vk lithuania father father vk lithuania as sampo pank mother as sampo pank vk lithuania petitioner vk lithuania father mother skola uz automobilius skola skola skola uz automobilius uz automobilius uz automobilius skola uz automobilius skola skola uz automobilius payment for auto honda skola payment for hyundai uz automobilius uz automobilius uz automobilius skola skola petitioners filed joint federal_income_tax returns for and which ms kazhukauskas prepared the return reported interest_income of dollar_figure business income of dollar_figure and total income of dollar_figure attached to the return was a schedule c for vk u s reporting gross_receipts or sales of dollar_figure business_expenses of dollar_figure and zero cost_of_goods_sold the return reported interest_income of dollar_figure business income of dollar_figure and total income of dollar_figure attached to the return was a schedule c for vk u s reporting gross_receipts or sales of dollar_figure business_expenses of dollar_figure and zero cost_of_goods_sold the amounts reported as business income on the and returns were as petitioners admitted at trial and on brief falsified to hide vk u s ’ purported bankruptcy on audit of the and returns petitioners submitted to respondent bank statements advices of credit shipping container receipts and a copy of petitioners’ police book among other items these records as they related to the regularity of vk u s ’ international sales were inconsistent in certain material respects for example the police book indicated that petitioners shipped oversea sec_21 vehicles in vehicles in and vehicle in each of the years through the receipts on the other hand showed that vk u s paid at least dollar_figure during and dollar_figure during for at least nine shipping containers sent to lithuania--suggesting that more vehicles had been shipped than were reported in the police book respondent’s revenue_agent suzanne owen was assigned to examine petitioners’ returns for the years at issue during her investigation ms owen learned of vk lithuania a business which petitioner claimed during a meeting with her to have had no relationship to vk u s she analyzed bank statements 8a police book is defined under michigan law to mean a bought and sold registry for each vehicle a dealer handles mich comp laws serv sec 41a lexisnexi sec_2001 petitioners submitted and inventoried wire transfers deposited into the business checking account in a worksheet that was attached to the notice_of_deficiency the worksheet demonstrated that totals of dollar_figure and dollar_figure were deposited into the business checking account in and respectively ms owen noted in her supporting workpapers that bank statements and related advices of credit indicated that portions of the wire transfers were from sales of vehicles abroad and in some cases included the vehicle manufacturer and vin ms owen determined on the basis of the foregoing that petitioners had underreported their and schedule c gross_receipts by dollar_figure and dollar_figure respectively ie all amounts wire-transferred to petitioners as gross_receipts from sales of vehicles overseas were treated as income ms owen determined the most probable source of the income to be sales of vehicles overseas on the basis of details contained in the wire transfers the shipping container purchases and information about the vehicles shipped overseas as sometimes recorded in the police book respondent issued to petitioners a notice_of_deficiency determining various adjustments to their income for and first respondent determined that petitioners’ costs of goods sold were increased by dollar_figure for and dollar_figure for second respondent determined that petitioners underreported their gross_receipts for and by dollar_figure and dollar_figure respectively third respondent determined that petitioners’ self-employment taxes for and were increased by dollar_figure and dollar_figure respectively fourth respondent determined that petitioners were entitled to self-employment_tax deductions for and of dollar_figure and dollar_figure respectively fifth respondent determined that petitioners were liable for sec_6662 accuracy-related_penalties for and for substantial understatements of income_tax petitioners petitioned the court under sec_6213 for a redetermination of the deficiencies and accuracy-related_penalties i burden_of_proof opinion as a general_rule the commissioner’s determinations in a statutory_notice_of_deficiency are presumptively correct and taxpayers bear the burden of proving those determinations erroneous rule a 290_us_111 the u s court_of_appeals for the sixth circuit to which an appeal in this case would lie barring a written stipulation to the contrary has stated that the commissioner cannot rely on the presumption of correctness to support deficiency determinations of unreported income without a ‘minimal evidentiary foundation’ linking the taxpayers with the income-producing activity or to the receipt of funds 909_f2d_915 6th cir quoting 596_f2d_358 9th cir rev’g 67_tc_672 richardson v commissioner tcmemo_2006_69 91_tcm_981 aff’d 509_f3d_736 6th cir where as here the commissioner carries his burden of production with respect to unreported income the burden_of_proof shifts to the taxpayers to produce credible_evidence that they did not earn the taxable_income attributed to them or of presenting an argument that the irs deficiency calculations were not grounded on a minimal evidentiary foundation united_states v walton f 2d pincite taxpayers must prove their entitlement to deductions and losses as well as the amount of the benefit claimed see 754_f2d_921 11th cir aff’g tcmemo_1982_489 86_tc_298 jordan v commissioner tcmemo_2009_223 98_tcm_289 discussing the applicability of walton to the payment of expenses aff’d ___ fed appx ___ 6th cir date respondent introduced ample evidence linking petitioners with the import and export business the income-producing activity and respondent has shown that 9while the factual allegations deemed admitted under rule f establish that petitioners underreported their and gross_receipts respondent still must produce evidence linking petitioners with that income petitioners received unreported income during each year at issue the record includes advices of credit and bank statements showing that more than dollar_figure was transferred into vk u s ’ checking account from international sources the record likewise contains certificates of title bills of lading and receipts showing that petitioners shipped vehicles purchased at auctions within the united_states to vk lithuania at trial and on brief petitioners admitted that they received but did not report at least dollar_figure from sales of vehicles in lithuania in view of the foregoing we are satisfied that respondent has carried his burden of production as to the unreported schedule c gross_receipts accordingly the notice_of_deficiency is presumed correct and petitioners bear the burden of proving otherwisedollar_figure ii schedule c gross_receipts respondent determined that petitioners underreported their and schedule c gross_receipts by dollar_figure and dollar_figure respectively petitioners acknowledge on brief that they failed to report schedule c gross_receipts for and in the respective amounts of dollar_figure and dollar_figure but claim additional_amounts which respondent attributed to them are excludable from gross_income as gifts under sec_102 we will sustain respondent’s determinations 10petitioners do not allege and the record does not establish that the burden_of_proof as to factual matters should shift to respondent under sec_7491 taxpayers must keep sufficient records to enable the commissioner to determine their correct federal_income_tax liability sec_6001 92_tc_661 the commissioner is simultaneously authorized to examine books papers records or other data potentially relevant or material in determining the taxpayers’ federal_income_tax liability sec_7602 where taxpayers fail to keep such books_and_records the commissioner is authorized to reconstruct the taxpayers’ income under any method that in the commissioner’s opinion clearly reflects income sec_446 petzoldt v commissioner t c pincite courts have long recognized the bank_deposits method as a permissible indirect approach to reconstructing taxable_income see 96_tc_858 aff’d 959_f2d_16 2d cir 64_tc_651 and cases cited thereat aff’d 566_f2d_2 6th cir respondent’s revenue_agent ms owen testified credibly that petitioners’ books_and_records including their inventory system were not kept in organized fashion or in compliance with internal revenue laws the disarray of receipts and other documents that petitioners submitted to the court as their books_and_records reinforces that testimony accordingly we conclude that respondent was justified in recreating petitioners’ gross_receipts using the bank_deposits method bank_deposits are prima facie evidence of income 87_tc_74 estate of mason v commissioner t c pincite under the bank_deposits method the government assumes that all deposits into a bank account during any given taxable_year constitute taxable_income unless the taxpayers prove that the deposits originated from nontaxable sources dileo v commissioner t c pincite the commissioner may but need not show a likely source of unreported income determined through the bank_deposits method though he must take into account nontaxable items or deductible expenses which he knows about 335_f2d_671 5th cir dileo v commissioner t c pincite petitioners bear the burden of establishing that the bank_deposits originated from nontaxable sources see price f 2d pincite it is deemed stipulated that petitioners underreported their gross_receipts by dollar_figure for and dollar_figure for a stipulation is treated to the extent of its terms as a conclusive admission by the parties unless otherwise permitted by the court or agreed upon by the parties rule e the court may permit a party to qualify change or contradict a stipulation upon a showing that the stipulation is contrary to facts disclosed by the record see 66_tc_312 or where justice so requires see rule e petitioners have not asked to be relieved of the deemed stipulations and we decline to grant such relief on our own the stipulation concerning gross_receipts is not contrary to the record and as we find justice would be ill served were the stipulation not enforced petitioners acknowledged at trial and on brief that they underreported their and gross_receipts by dollar_figure and dollar_figure respectively we treat those statements as conclusive and binding admissions on petitioners see 109_fedappx_52 6th cir statements made on brief may be considered judicial admissions we thus conclude petitioners’ gross_receipts are increased by dollar_figure for and dollar_figure for as for the remaining gross_receipts in controversy ie dollar_figure for and dollar_figure for sometimes collectively referred to as the disputed gross_receipts we will give effect to the stipulation treating those amounts as gross_receipts 11to calculate the disputed gross_receipts we subtracted the amount conceded by petitioners on brief or dollar_figure from the unreported gross_receipts as determined in the notice_of_deficiency or dollar_figure we calculated the challenged gross_receipts in the same way that is we subtracted the amount petitioners conceded on brief or dollar_figure from the unreported gross_receipts as determined in the notice_of_deficiency or dollar_figure petitioners claim that the disputed gross_receipts were nontaxable gifts from petitioner’s parentsdollar_figure we are unpersuaded respondent asserts and we agree that petitioners have not submitted corroborating evidence to support their claims that any portion of the disputed gross_receipts was a gift as we find the disputed gross_receipts reflect the proceeds of business transactions entered into by vk lithuania and subsequently remitted to petitioners by reason of petitioners’ failure to prove that the disputed gross_receipts were gifts and not proceeds from vk lithuania we conclude that justice disfavors allowing petitioners to contradict the stipulations sec_102 allows taxpayers to exclude from gross_income the value of property acquired by gift bequest devise or inheritance the supreme court has defined a gift_for statutory purposes as a transfer of property that proceeds from a detached and disinterested generosity out of affection respect admiration charity or like impulses 363_us_278 internal citations and quotation marks omitted the donor’s intent is of critical import in deciding whether the property transferred was a gift id pincite such intent is often outcome determinative because a gift is not recognized as complete until the 12notwithstanding the literal translation of skola to mean debt petitioner testified on direct at trial that there was not a loan between him and his mother donor has evinced a clear and unmistakable intention to transfer sufficient dominion and control of the property irrevocably and absolutely 77_tc_9 quoting 31_bta_899 aff’d 82_f2d_561 5th cir applying those considerations to this case we decline to recognize any of the disputed gross_receipts as nontaxable gifts with respect to wire transfers from petitioner’s mother all of which bore the notation skola petitioner testified that his mother used the word skola to intimate that she expected to be repaid if she needed the funds and only if no such need arose would the transfer be considered a giftdollar_figure by petitioner’s own admission therefore his mother did not relinquish dominion and control of the funds rather she conditioned petitioner’s enjoyment of the funds on her not asking to be repaid--a condition uncertain to be met until the sooner of her death or the removal of the condition that condition precludes our recognizing transfers from petitioner’s mother as gifts for federal_income_tax purposes because the gift was not certain to be completed with regard to wire transfers from petitioner’s father all of which were similarly designated skola 13petitioner’s specific testimony was the money was given to me and because of that she felt--in case if she need those monies back she put the word skola meaning that i be owing to her in case if she needs it if not this will be as a gift petitioners presented no evidence to suggest his father’s use of the word did not connote an expectation of repayment should the need arise in this regard we are not persuaded that wire transfers from petitioner’s father were completed gifts in or dollar_figure we are skeptical for additional reasons that amounts wire-transferred to petitioners were gifts petitioners each testified that petitioner’s parents wire- transferred the disputed gross_receipts to them for the support care and education of petitioners’ children although petitioner’s father was unavailable to testify on the matter we have no reason to believe that petitioner’s mother was unavailable to be called as a witness insofar as petitioner’s mother was not called to testify to her intent at the time of each transfer and her use of the word skola we conclude such testimony would be damaging to petitioners see 89_tc_1063 witness’ failure to testify to facts peculiarly within his knowledge suggests the testimony would be unfavorable aff’d 886_f2d_1237 9th cir nor did petitioners explain why moneys transferred allegedly to support their children were deposited into the business checking account and not for 14although the record establishes that petitioner’s father was deceased at the time of trial the record does not specify whether he died in on this subject we are unable to discern whether purported gifts from the father were completed in in which case these amounts may have been nontaxable to petitioners or at some point thereafter this failure of proof is borne by petitioners example one of petitioners’ personal accounts in the same regard petitioners did not explain why their claimed need for support was not met by the more than dollar_figure of savings which they had collected over the years given that many of the transfers originated with petitioner’s mother who was also vk lithuania’s bookkeeper we question the donative nature of the transfers see 337_us_733 t he family relationship often makes it possible for one to shift tax incidence by surface changes of ownership without disturbing in the least his dominion and control_over the subject of the gift or the purposes for which the income from the property is used accordingly we conclude the disputed wire transfers were not gifts when viewed in the light of the fact that petitioners owned and operated vk lithuania within europe that they routinely purchased shipping containers to export vehicles and that they received transfers from the business checking almost monthly we agree with respondent that the most probable source of that income is sales of vehicles abroad petitioners conceded at trial and on brief that they underreported vk u s ’ gross_receipts by dollar_figure for and dollar_figure for petitioners have failed to establish a nontaxable source for the disputed gross_receipts and consequently we conclude that justice does not favor relieving them of the stipulation treating such amounts as gross_receipts thus we hold that petitioners’ and gross_receipts are increased by dollar_figure and dollar_figure respectively iii schedule c deductions petitioners reported on their and schedules c that in connection with vk u s ’ trade_or_business they incurred expenses of dollar_figure and dollar_figure respectively respondent allowed those deductions in full and credited petitioners with cost_of_goods_sold for and in the respective amounts of dollar_figure and dollar_figure as explained on brief petitioners claim entitlement to additional trade_or_business expense deductions for and in the respective amounts of dollar_figure and dollar_figure respondent replies that petitioners are not entitled to the additional deductions claimed because they have not proven that such expenses have not already been deducted on the and returns we agree with respondent deductions are a matter of legislative grace and taxpayers bear the burden of proving their entitlement to any deduction claimed rule a indopco inc v 15we calculated the additional deductions which petitioners claim they are entitled to for by subtracting the amount allowed as a deduction and claimed on the schedule c or dollar_figure from the amount petitioners claim on brief they are entitled to or dollar_figure we calculated the additional deductions to which petitioners claim entitlement for the same way that is we subtracted the amount allowed as a deduction and claimed on the schedule c or dollar_figure from the amount petitioners claim on brief they are entitled to deduct or dollar_figure commissioner 503_us_79 taxpayers are allowed a deduction for ordinary and necessary business_expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business sec_162 taxpayers must substantiate amounts claimed as deductions by keeping the records necessary to establish that they are entitled to the deductions sec_6001 sec_1_6001-1 income_tax regs petitioners have failed to factually or legally establish that they are entitled to deductions over and above those respondent allowed first petitioners have failed to establish that the expense deductions to which they claim entitlement were not already claimed on the and returns see avery v commissioner tcmemo_1993_344 66_tcm_305 no deduction for real_estate_taxes paid when taxpayers failed to prove the expenses were not already allowed as deductions second portions of the expense deductions petitioners claim entitlement to in their petition including shipping fees shipyard fees taxes and duties are not deductible because the supporting receipts suggest the expenses were ordinary and necessary business_expenses of vk lithuania and not vk u s see welch v helvering u s pincite taxpayers may not deduct expenses of another entity petitioners introduced no evidence concerning which counterparty bore the duties fees and taxes due upon arrival in lithuania third taxpayers are required to keep records sufficient to establish the amounts of the deductions they claim sec_6001 sec_1_6001-1 income_tax regs even though we may estimate the amount of an expense where taxpayers introduce evidence demonstrating that they paid_or_incurred a deductible expense but cannot substantiate the precise amount see 39_f2d_540 2d cir we decline to do so here because petitioners have not persuaded us that such expenses were not already deducted on their or return fourth petitioners have not persuaded us that receipts for postage utilities and other similar items are not nondeductible personal expenses see sec_262 deductions for personal_living_and_family_expenses are not allowed fifth petitioners did not explain how if at all the expenses claimed as deductions were ordinary and necessary to their import and export business see sec_162 on the basis of the foregoing we conclude that petitioners have failed to establish that they are entitled to trade_or_business expense deductions in addition to those respondent has already allowed accordingly we hold petitioners may not deduct trade_or_business_expenses in addition to those respondent has already allowed iv cost_of_goods_sold notwithstanding the fact that petitioners reported zero cost_of_goods_sold for each year at issue respondent credited petitioners with costs of goods sold for and of dollar_figure and dollar_figure respectively petitioners allege in the petition they are entitled to costs of goods sold above and beyond those allowed in the notice_of_deficiency we will sustain respondent’s determinations gross_income is defined in sec_61 to include g ross income derived from business sec_61 a manufacturing or merchandising business such as vk u s calculates gross_income by subtracting cost_of_goods_sold from gross_receipts and adding investment_income and proceeds from ancillary operations or sources sec_1_61-3 income_tax regs the cost_of_goods_sold is determined under the taxpayer’s regular_method of accounting see id and includes the items acquired for resale and the cost_of_producing items for resale adjusted for opening and closing inventories see hultquist v commissioner tcmemo_2011_17 101_tcm_1054 sec_1_162-1 income_tax regsdollar_figure in contrast sec_162 allows taxpayers a deduction for all ordinary and necessary business 16certain small_business owners with average annual receipts of dollar_figure million or less as vk u s was during the years at issue need not take inventories at the beginning and end of each taxable_year see revproc_2001_10 sec_4 2001_1_cb_272 expenses_incurred or paid during the taxable_year sec_162 thus cost_of_goods_sold is an offset to gross_receipts for purposes of computing gross_income and deductions are subtracted from gross_income in arriving at taxable_income see 65_tc_422 aff’d 584_f3d_53 5th cir petitioners have not proved they are entitled to costs of goods sold above and beyond those allowed by respondent taxpayers bear the burden of substantiating the amount claimed as cost_of_goods_sold see rodriguez v commissioner tcmemo_2009_22 97_tcm_1090 petitioners do not specify the amounts of costs of goods sold being claimed nor do their records permit us to differentiate between costs generally incurred and costs relating to vehicles sold such that we might calculate costs of goods sold on our own initiative although we may estimate charges to gross_income for items such as cost_of_goods_sold see cohan v commissioner f 2d pincite jackson v commissioner tcmemo_2008_70 95_tcm_1258 we decline to do so petitioners’ records do not allow us to differentiate between the costs of goods sold they incurred and those respondent has already credited them for moreover ms kazhukauskas testified that she reported costs of goods sold as supplies on the and schedules c amounts which respondent allowed as deductions in arriving at taxable_income thus petitioners have been credited for costs of goods sold they substantiated on audit as well as additional_amounts in the form of a tax- effected deduction accordingly we hold that petitioners are not entitled to claim cost_of_goods_sold for or in addition to that allowed in the notice_of_deficiency v self-employment_tax respondent determined that petitioners are liable for self-employment_tax under sec_1401 for each year at issue sec_1401 imposes a tax on the self- employment income of individuals see sec_1401 and b self-employment_income generally means the gross_income derived by an individual from carrying_on_a_trade_or_business less the allowable deductions attributable to that trade_or_business sec_1402 and b sec_1_1402_a_-1 income_tax regs petitioners presented no evidence to suggest that the schedule c gross_income earned from vk u s less the allowable deductions is not self-employment_income therefore petitioners are liable for self-employment_tax for and of dollar_figure and dollar_figure respectively and they are entitled to deductions for one-half of the self- employment_tax paid in the respective amounts of dollar_figure and dollar_figure as determined by respondent see sec_164 vi accuracy-related_penalties respondent determined for each year at issue that petitioners are liable for a accuracy-related_penalty for a substantial_understatement_of_income_tax under sec_6662 and b there is a substantial_understatement_of_income_tax for any year in which the amount of the understatement exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 under sec_7491 respondent bears the burden of producing sufficient evidence that imposition of the penalty is appropriate see 116_tc_438 once respondent carries his burden of production petitioners bear the burden of proving that the penalties are inappropriate because of reasonable_cause substantial_authority or other affirmative defenses id pincite the single most important factor to be considered when determining whether to excuse taxpayers from the accuracy-related_penalty on account of reasonable_cause is the extent to which the taxpayers sought to compute their proper tax_liability sec_1_6664-4 income_tax regs respondent has met his burden of production because petitioners’ failure to report funds wire-transferred to them resulted in an understatement of income_tax for each year in an amount of more than dollar_figure and more than of the tax required to be shown on the return see park v commissioner 136_tc_569 the commissioner met his burden of production by showing that failure to report income resulted in an understatement of income_tax for each year at issue of more than dollar_figure and more than of the tax required to be shown on the return thus petitioners bear the burden to prove that the accuracy-related_penalty should not be imposed on account of reasonable_cause or substantial_authority we will sustain respondent’s determinations with respect to the accuracy-related_penalties among the deemed stipulated facts were that petitioners underreported their respective gross_receipts for vk u s for and by dollar_figure and dollar_figure and that they lacked reasonable_cause for failing to report those gross_receipts those stipulations are treated as a binding and conclusive admission that may be qualified changed or contradicted only where justice requires it see rule e petitioners have not asked to be relieved of the deemed stipulations and we decline to grant such relief on our own petitioners conceded that vk u s ’ and gross_receipts were underreported by more than dollar_figure and they also admitted to falsely reporting vk u s ’ profits because as they claimed on brief they did not want to show that the business was facing bankruptcy on the basis of these facts we are convinced that justice requires that the deemed stipulation be binding upon petitioners and that they made no effort to accurately report their or federal_income_tax liability accordingly we hold petitioners are liable for accuracy-related_penalties in the amounts respondent determined the court has considered all of petitioners’ arguments for a contrary result and to the extent not discussed herein we conclude those arguments are irrelevant moot or without merit to give effect to the foregoing decision will be entered for respondent