internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b1-plr-156879-01 date jan legend x d1 d2 y1 y2 property property property dollar_figurea dollar_figureb dollar_figurec dollar_figured dear this responds to your letter dated date together with subsequent correspondence in which you requested a ruling that x’s rental income from certain properties is not passive_investment_income within the meaning of sec_1362 of the internal_revenue_code facts x a c_corporation was incorporated on d1 and anticipates making an election to be treated as an s_corporation for its taxable_year beginning d2 x has c_corporation earnings_and_profits cc psi b1-plr-156879-01 x owns property property and property the properties which are all commercial facilities and receives income from the rental of the properties x’s duties with respect to the properties includes securing tenants preparing and administering lease agreements maintaining common spaces maintaining the structural portions of the property landscaping and grounds maintenance and repairing casualty damage tenants pay certain amounts as additional rent to reimburse x for expenses_incurred in performing some of its duties x employs a full-time vice-president treasurer a full- time contract manager a part-time accountant and two part-time property coordinators for the properties x’s income from the properties during y1 totaled dollar_figurea and its nonreimbursed expenses related to the properties totaled dollar_figureb x’s income from the properties during y2 totaled dollar_figurec and its nonreimbursed expenses related to the properties totaled dollar_figured x expects to have similar income and expenses during subsequent years law and analysis except as provided in sec_1362 sec_1362 provides that a small_business_corporation may elect to be an s_corporation under the provisions of sec_1362 sec_1362 provides that an election under sec_1362 shall be terminated whenever the corporation i has accumulated_earnings_and_profits at the close of each of three consecutive tax years and ii has gross_receipts for each of such tax years more than percent of which are passive_investment_income sec_1362 provides that except as otherwise provided the term passive_investment_income means gross_receipts derived from royalties rents dividends interest annuities and sale or exchanges of stock_or_securities sec_1_1362-2 of the income_tax regulations provides that rents means amounts received for_the_use_of or the right to use property whether real or personal of a corporation sec_1_1362-2 provides that the term rents does not include rents derived in the active trade_or_business of renting property rents received by a corporation are derived in active trade_or_business of renting property only if based on all the facts and circumstances the corporation provides significant services or incurs substantial costs in the rental business generally significant services are not rendered and substantial costs are not incurred in connection with net leases whether significant services are performed or substantial costs are incurred in the rental business is determined based upon all the facts and circumstances including but not limited to the number of personnel employed to provide the services and the types and amounts of costs and expenses_incurred other than depreciation sec_1375 of the internal_revenue_code provides that if for the taxable_year an s_corporation has accumulated_earnings_and_profits at the close of the taxable_year and gross_receipts more than percent of which are passive_investment_income then a tax is imposed on the income of the corporation for such cc psi b1-plr-156879-01 taxable_year such tax shall be computed by multiplying the excess_net_passive_income by the highest_rate of tax specified in sec_11 conclusion based solely on the representations made and the information submitted we conclude that x’s rental income from the properties received during y1 and y2 is not passive_income under sec_1362 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 specifically no opinion is expressed regarding x’s eligibility under sec_1361 to be an s_corporation or regarding whether x’s rental income is passive_income under sec_469 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely david r haglund senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


t c no united_states tax_court frank sawyer trust of may transferee carol s parks commissioner of internal revenue respondent trustee petitioner v docket no filed date p owned the stock of four corporations tt ct st botolph and sixty-five bedford the four corporations held assets with high fair market values and low adjusted bases during and the corporations sold their assets leaving the corporations with large cash reserves and facing large contingent tax_liabilities shortly after the respective asset sales p sold its stock in the corporations to f f after purchasing the stock transferred assets with inflated bases to the corporations the corporations then sold these assets generating losses the losses were used to offset the corporations’ large capital_gains as a result of the claimed losses the corporations did not pay tax on the asset sales later f stripped the proceeds of the asset sales from the corporations r issued notices of deficiency to p determining deficiencies in p’s fiduciary income_tax on account of the sale of the corporations’ stock and imposing sec_6662 i r c accuracy-related_penalties p petitioned this court and p and r entered into decision documents finding that there were no deficiencies in tax and that p was not liable for sec_6662 i r c accuracy- related penalties these decision documents were the result of a stipulated decision between the parties and not a trial on the merits r later examined the corporations’ tax returns r and the corporations entered into closing agreements which disallowed the claimed losses and imposed sec_6662 i r c accuracy-related_penalties on the underpayments of tax the corporations having been stripped of the proceeds of the asset sales lacked the funds necessary to pay the assessed tax r issued notices of transferee_liability to p attempting to collect the corporations’ unpaid tax_liabilities from their former shareholder p petitioned this court and has filed a motion for summary_judgment arguing that res_judicata bars the instant transferee_liability action and in the alternative r is collaterally estopped from arguing in this transferee_liability action that there were deemed liquidating distributions from the corporations to p held res_judicata does not bar the instant action because the cause of action in the earlier deficiency cases is not the same as the cause of action in the instant transferee_liability action held further r is not collaterally estopped from arguing in this proceeding that there were deemed liquidating distributions because the decision documents entered into by p and r to resolve the deficiency cases do not indicate that the parties intended to resolve the questions whether there were deemed liquidating distributions from the corporations to p and the deficiency cases dealt with deficiencies in p’s fiduciary income_tax while the instant action deals with p’s liability as a transferee of the corporations david r andelman and juliette galacia pico for petitioner kevin g croke for respondent opinion goeke judge this case is before the court on the trust’s motion for summary_judgment filed pursuant to rule respondent has asserted transferee_liability against the trust the trust argues in its motion papers that the doctrines of res_judicata and collateral_estoppel bar this transferee_liability action the trust argues that the issue of whether the trust is liable for the unpaid tax_liabilities at issue was decided in a prior deficiency action after respondent issued notices of deficiency to the trust the parties agree that there are no material facts in dispute for the reasons stated herein we will deny the trust’s motion background the trust has a mailing address in boston massachusetts respondent issued notices of transferee_liability asserting that the trust is liable as transferee for the unpaid income_tax liabilities of four corporations tdgh inc town taxi 1unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code cdgh inc checker taxi st botolph holding co st botolph and sixty-five bedford street inc sixty-five bedford collectively the corporations two types of transactions occurred during the and tax years first the corporations sold substantially_all of their assets to unrelated third parties the asset sales were followed by the trust’s sale of its stock in the corporations to a different unrelated third party the trust owned all of the stock of the corporations before a asset sales town taxi and checker taxi provided taxicab services in massachusetts the two companies’ primary assets were taxicab medallions that were required by the state licensing agencies in order to provide taxicab services st botolph and sixty-five bedford owned real_estate used in the operation of town taxi’s and checker taxi’s taxicab businesses st botolph owned a parking garage while sixty-five bedford owned two additional parcels of land 2in notices of deficiency and the notices of transferee_liability discussed below respondent asserted that the asset sale followed by the stock sale was part of an integrated_plan known as an intermediary transaction entered into by the trust solely to lower its tax_liability see notice_2001_16 2001_1_cb_730 we do not determine at this stage of the proceeding whether respondent’s characterization of the asset sales and stock sales as an intermediary transaction is correct in town taxi and checker taxi sold substantially_all of their assets to unrelated third-party purchasers town taxi and checker taxi recognized gain on the sales and were left with large cash holdings unless able to offset those gains with losses town taxi and checker taxi would face large contingent tax_liabilities town taxi filed a schedule d capital_gains_and_losses with its form_1120 u s_corporation income_tax return showing proceeds of dollar_figure from the sale of the medallions town taxi claimed a basis of dollar_figure in the medallions resulting in gain of dollar_figure checker taxi’s schedule d indicated proceeds of dollar_figure from its sale of the taxicab medallions checker taxi claimed a basis of zero in its medallions resulting in gain of dollar_figure on the sale in st botolph and sixty-five bedford sold their respective parcels of real_estate to two different sec_501 educational institutions like town taxi and checker taxi st botolph and sixty-five bedford recognized gain on the sales and were left holding large amounts of cash st botolph’s schedule d showed proceeds from the land sale of dollar_figure million st botolph’s claimed a basis of dollar_figure in the land resulting in gain of dollar_figure sixty-five bedford’s schedule d showed proceeds of dollar_figure from the sale of two properties sixty-five bedford claimed a basis of dollar_figure in these properties sixty-five bedford also reported on its schedule d gain of dollar_figure on its form_4797 sales of business property this resulted in total gain of dollar_figure b stock sales a representative of the trust received a promotional letter from midcoast credit corp midcoast before town taxi and checker taxi’s sales of the taxicab medallions the promotional letter indicated that midcoast was interested in acquiring c corporations with significant capital_gains town taxi and checker taxi were corporations with a potential to realize significant capital_gains and the trust’s representatives contacted midcoast because the corporations’ potential capital_gains were so large midcoast brought in fortrend international l l c fortrend fortrend was involved in the stock sales because its business relationships provided it with greater access to capital than midcoast had representatives of the trust met with representatives of fortrend and fortrend indicated that it was looking to purchase the stock of companies that had liquidated or were in the process of liquidating all their assets and had incurred or would incur large capital_gains_tax liabilities as a result fortrend indicated that it would pay a purchase_price for the stock of such a company equal to the value of the cash and other assets le sec_50 percent of the amount of the income_tax_liability the trust decided to sell the corporations’ stock to fortrend and the sales were consummated in and taxi companies the trust and fortrend agreed that the total purchase_price for the stock of town taxi and checker taxi would be the amount the trust would have received if town taxi and checker taxi had sold their assets paid their tax_liabilities and distributed the remaining cash to the trust plu sec_50 percent of the taxes which town taxi and checker taxi would ordinarily have to pay the trust entered into stock purchase agreements dated date with fortrend under which the trust agreed to sell to fortrend the stock of town taxi and checker taxi the stock purchase agreements provide a formula for the calculation of the purchase_price the purchase_price would be equal to the 3assume a corporation with dollar_figure million of income and a percent tax_rate the corporation would normally pay dollar_figure of tax and distribute dollar_figure to its sole shareholder as a liquidating_distribution in exchange for his stock the shareholder would then pay tax on any gain on the exchange of his stock see sec_331 instead by involving fortrend the trust would sell the stock of the corporation holding dollar_figure million cash for dollar_figure the trust would receive dollar_figure half of the corporation’s tax_liability more than if it had liquidated the corporation the dollar_figure excess of cash in the corporation dollar_figure million over the amount_paid by fortrend dollar_figure would be fortrend’s fee for entering into the transaction 4in date the trust requested of fortrend that it be allowed to retain the corporate names town taxi and checker taxi fortrend agreed and the two corporations whose stock was purchased by fortrend were renamed tdgh inc and cdgh inc respectively for purposes of continuity we will refer to town taxi and checker taxi by the original names value of town taxi’s and checker taxi’s assets le sec_50 percent of the specified remaining tax_liability of each the specified remaining tax_liabilities were the federal and state tax_liabilities arising from the sale of each corporation’s assets the purchase_price for the stock of town taxi was dollar_figure the purchase_price for the stock of checker taxi was dollar_figure land companies as discussed above st botolph and sixty-five bedford owned parcels of land the trustee of the trust decided after the taxicab medallions were sold in to sell these parcels of land after the land sales were completed st botolph and sixty-five bedford were in the same position that town taxi and checker taxi had just been in--holding large amounts of cash and facing large capital_gains_tax liabilities representatives of the trust contacted midcoast to determine whether midcoast was interested in purchasing the stock of st botolph and sixty-five bedford midcoast was interested and again involved fortrend the formula used to determine the total purchase_price was similar to the one used to calculate the purchase_price of the town taxi and checker taxi stock--the value of st botolph’s and sixty-five bedford’s assets minus a percentage of their specified remaining tax_liabilities the only difference was the applicable_percentage which was applied pincite percent for both town taxi and checker taxi and percent for sixty-five bedford however st botolph qualified for a lower rate of percent fortrend paid dollar_figure for the stock of st botolph and dollar_figure for the stock of sixty-five bedford c the trust’s tax returns the trust reported the stock sales on its fiduciary income_tax returns for tax years and the trust reported the following on its income_tax return entity date of sale sale price basis gain town taxi checker taxi dollar_figure dollar_figure big_number big_number -0- -0- the trust reported the following on its amended income_tax return entity date of sale sale price basis gain st botolph dollar_figure dollar_figure dollar_figure sixty-five bedford big_number big_number big_number d notices of deficiency and examination of the corporations’ tax returns respondent examined both the trust’s and the corporations’ tax returns respondent issued statutory notices of deficiency to the trust for tax years and the notice and the notice respectively collectively the notices of deficiency the notices of deficiency determined that the trust was liable for the following tax_year deficiency dollar_figure big_number penalty sec_6662 dollar_figure big_number the notice included an explanation of adjustments it explained in pertinent part that the adjustments made to the trust’s tax_liability were due to changes in the trust’s bases in the checker taxi and town taxi stock it further explained that in the alternative to stock sales these adjustments reflect additional gains from the sale of assets by checker taxi company and town taxi inc and deemed distributions in liquidation the notice further explained that the internal_revenue_service irs position was that town taxi and checker taxi in effect sold all of their assets paid off all of their liabilities and liquidated because the trust was the sole shareholder of both town taxi and checker taxi the trust received the liquidation proceeds and was required pursuant to sec_331 to report the gain the notice in effect required the trust to recognize and pay tax on the entire amount received in the asset sales the notice also included an explanation of adjustments it explained in pertinent part that in lieu of the reported stock sales of these two corporations your return is adjusted to reflect gains from deemed distributions in liquidation from the sec_331 provides that amounts received by a shareholder in a distribution in complete_liquidation of a corporation shall be treated as in full payment in exchange for the stock see mueller v commissioner tcmemo_2001_178 corporations following the corporations’ sales of assets the explanation of adjustments also included a memorandum explaining the legal basis for the changes made to the trust’s federal_income_tax return the recharacterization of the stock sales resulted in the following treatment the corporations’ selling their assets the corporations’ liquidating and distributing all of the cash proceeds to the trust the trust’s paying fortrend its fee for entering into the transaction and the trust’s not being entitled to a deduction for amounts paid to fortrend the notice calculated the trust’s increased income and the deficiency by disallowing deductions for the amounts paid to fortrend in effect the trust was treated as having sold the assets and distributed to itself all of the proceeds without paying any taxes thus because the deductions for payments to fortrend were disallowed the trust had a higher income than that reported on its return the difference being the amounts paid to fortrend the trust filed petitions in this court contesting respondent’s determinations the trust filed a petition in docket no for tax_year on date and in docket no for tax_year on date on date this court entered decisions in both dockets deciding that there was no deficiency in the trust’s federal tax_liability for either of the tax years and and that the trust was not liable for sec_6662 accuracy-related_penalties the decision documents reflected a compromise by the parties and were not the result of a trial on the merits neither this court nor the decision documents addressed any of respondent’s theories for determining a deficiency nor were there any pertinent stipulations between the parties other than that the trust did not have a deficiency in tax or owe any penalties e the corporations’ returns as discussed above fortrend-controlled entities purchased the stock of the corporations after the asset sales the corporations held large amounts of cash and faced large contingent tax_liabilities after purchasing the stock of the corporations fortrend transferred assets with inflated bases to the corporations these assets consisted mostly of stock discussed below the corporations then sold these assets generating an artificial loss these artificial losses were used to offset the capital_gains recognized on the sales of the taxicab medallions and the parcels of real_estate as a result town taxi and checker taxi did not pay taxes on the income earned from the medallion sales while st botolph and sixty-five bedford did not pay taxes on the gain from the land sales town taxi filed its form_1120 for tax_year on date reporting proceeds of dollar_figure and a basis in the medallions of dollar_figure on schedule d town taxi recognized gain of dollar_figure on the sale of the taxicab medallions during town taxi sold stock in trex communications which had been contributed by fortrend to the corporation’s capital town taxi reported a sale price of dollar_figure and a basis of dollar_figure resulting in a loss of dollar_figure on the sale this resulted in a net_long-term_capital_loss of dollar_figure checker taxi also filed its form_1120 for tax_year on date reporting proceeds of dollar_figure and a basis of zero this resulted in checker taxi’s recognizing gain of dollar_figure on the sale of its taxicab medallions during checker taxi sold stock in paclaco equities inc and trex communications for dollar_figure and dollar_figure respectively the paclaco equities inc and trex communications stock had been contributed by fortrend checker taxi claimed bases in this stock of dollar_figure and dollar_figure respectively this resulted in losses of dollar_figure and dollar_figure on the sales of the paclaco equities inc and trex communications stock respectively this resulted in a net long-term loss of dollar_figure st botolph filed its form_1120 for tax_year on date reporting the sale of a parking garage st botolph reported a sale price of dollar_figure million and a basis of dollar_figure in the parking garage this resulted in gain of dollar_figure on the sale of the parking garage during st botolph sold stock in telcel equity and theodor tower inc contributed by fortrend for dollar_figure and dollar_figure respectively st botolph claimed bases of dollar_figure and dollar_figure in this stock this resulted in losses of dollar_figure and dollar_figure on the sale of telcel equity and theodor tower inc stock respectively this resulted in a net long-term loss of dollar_figure sixty-five bedford filed its form_1120 for tax_year on date reporting total gain of dollar_figuredollar_figure on the sale of land sixty-five bedford sold u s treasury bills during these treasury bills had been contributed by fortrend sixty-five bedford reported a sale price of dollar_figure and a basis of dollar_figure in the treasury bills this resulted in a loss on the sale of dollar_figure sixty-five bedford reported a long-term_capital_gain of dollar_figure fortrend distributed to itself the proceeds of the asset sales taking as profit the difference between those amounts and the amounts it paid for the stock respondent examined the corporations’ federal tax returns after examination the corporations and respondent entered into closing agreements memorializing the agreed-upon changes to the corporations’ returns the town taxi checker taxi and st botolph closing agreements were fully executed on date the sixty-five bedford closing_agreement was fully executed on date the closing_agreement for town taxi provided in pertinent part that town taxi recognized an additional dollar_figure on the sale of the taxicab medallions the closing_agreement also provided that town taxi did not recognize any of the claimed dollar_figure loss on the sale of trex communications stock the closing_agreement imposed a 40-percent accuracy-related_penalty under sec_6662 on the portion of the underpayment attributable to the disallowed loss and a 20-percent accuracy- related penalty on a portion of the increased gain on the sale of the taxicab medallions the closing_agreement for checker taxi provided in pertinent part that checker taxi was not entitled to any of the claimed losses of dollar_figure and dollar_figure on the sale of paclaco equities inc and trex communications stock respectively the closing_agreement also imposed a 40-percent accuracy-related_penalty on a portion of the disallowed losses the closing_agreement for st botolph provided in pertinent part that st botolph was not entitled to any of the claimed losses of dollar_figure and dollar_figure on the sale of telcel equity and theodor tower inc stock respectively the closing_agreement also imposed a 40-percent accuracy-related_penalty on a portion of the disallowed losses the closing_agreement for sixty-five bedford provided in pertinent part that sixty-five bedford was not entitled to any of the claimed loss of dollar_figure on the sale of u s treasury bills the closing_agreement also imposed a 40-percent accuracy- related penalty on a portion of the disallowed loss the closing agreements set forth the following liabilities entity year tax town taxi checker taxi st botolph sixty-five bedford dollar_figure big_number big_number big_number penalty sec_6662 dollar_figure big_number big_number big_number respondent was unable to collect against the corporations because they were insolvent at the time the closing agreements were entered into and the taxes and penalties were assessed on date respondent issued four statutory notices of liability to the trust notices of transferee_liability determining that the trust is liable as transferee for the unpaid federal_income_tax liabilities and penalties of the corporations set out in the table above on date the trust filed a petition contesting respondent’s determination that it was liable as transferee on date the trust filed its motion for summary_judgment on date respondent filed his objection and on date the trust filed a reply to respondent’s objection discussion i summary_judgment summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials fla peach corp v commissioner 90_tc_678 the court may grant summary_judgment where there is no genuine issue of material fact and a decision may be rendered as a matter of law rule a and b 98_tc_518 affd 17_f3d_965 7th cir the moving party bears the burden of proving that there is no genuine issue of material fact and the court will draw any factual inferences in the light most favorable to the nonmoving party 85_tc_812 rule d provides that where a party properly makes and supports a motion for summary_judgment an adverse_party may not rest upon the mere allegations or denials of such party’s pleading but must set forth specific facts by affidavits or otherwise showing that there is a genuine issue for trial the parties agree that there are no material facts in dispute barring stipulation to the contrary the venue for appeal would appear to be the court_of_appeals for the first circuit see sec_7482 flush language and ii res_judicata res_judicata serves the dual purpose of protecting litigants from the burden of relitigating an identical issue and of promoting judicial economy by preventing unnecessary or redundant litigation 91_tc_273 under the doctrine_of res_judicata when a court of competent jurisdiction enters a final judgment on the merits of a cause of action the parties to the action are bound ‘not only as to every matter which was offered and received but as to any other admissible matter which might have been offered for that purpose ’ 333_us_591 quoting 94_us_351 see also aunyx corp v canon u s a inc 978_f2d_3 1st cir the doctrine_of res_judicata bars all parties and their privies from relitigating issues which were raised or could have been raised in a previous action once a court has entered a final judgment on the merits in the previous action the essential elements of res_judicata are a final judgment on the merits in an earlier action an identity of parties or privies in the two suits and an identity of the cause of action in the earlier and later suits 118_tc_348 see also commissioner v sunnen supra pincite aunyx corp v canon u s a inc supra pincite sands v commissioner tcmemo_1997_146 affd without published opinion sub nom murphy v commissioner 164_f3d_618 2d cir the parties agree that the first and second elements are met the entry of decisions in the trust’s deficiency cases was a final judgment on the merits and the parties are identical the parties dispute the third element for purposes of determining whether two proceedings share the same cause of action restatement judgment sec_2d sec_24 states when a valid and final judgment rendered in an action extinguishes the plaintiff’s claim pursuant to the rules of merger or bar the claim extinguished includes all rights of the plaintiff to remedies against the defendant with respect to all or any part of the transaction or series of connected transactions out of which the action arose what factual grouping constitutes a transaction and what groupings constitute a series are to be determined pragmatically giving weight to such considerations as whether the facts are related in time space origin or motivation whether they form a convenient trial unit and whether their treatment as a unit conforms to the parties’ expectations or business understanding or usage see 773_f2d_1 1st cir see also aunyx corp v canon u s a inc supra pincite quoting restatement supra sec_24 104_tc_221 applying the transactional approach identity between causes of action will be found if both sets of claims--those asserted in the earlier action and those asserted in the subsequent action--derive from a common nucleus of operative facts 27_f3d_751 1st cir even if both claims derive from a common nucleus of operative facts however res_judicata will not bar a subsequent claim not available during the earlier action see 589_f2d_20 1st cir sec_6901 authorizes the assessment of transferee_liability in the same manner as in the case of the taxes in respect of which the liability was incurred it does not create a new liability but merely provides a remedy for enforcing the existing liability of the transferor 334_f2d_875 9th cir affg 37_tc_1006 57_tc_680 sec_6902 provides that the commissioner has the burden of proving the taxpayer’s liability as a transferee but not that of proving that the transferor was liable for the tax the existence and extent of transferee_liability is determined under state law massachusetts adopted the uniform fraudulent transfer act ufta mass ann laws ch 109a lexis nexis effective date respondent alleges that the trust violated ufta respondent’s position is that the deemed transfers from the corporations to the trust were both actual and constructive fraud under ufta a the trust’s arguments the trust argues that res_judicata bars respondent’s attempts to collect the corporations’ tax_liabilities from the trust as a transferee the trust contends that the liabilities asserted in both the notices of deficiency and the notices of transferee_liability arise out of the following transactions and factual events the asset sales by the corporation which resulted in substantial long-term gains the stock sales and the failure of the corporations to pay the taxes attributable to the asset sales the trust argues that the deficiency proceedings and the instant proceeding are closely related in time space origin and motivation the trust argues that the deficiency action and the instant action are related in time and space because the cause of action underlying both is the same--the corporations’ failures to pay taxes the trust contends that respondent made a tactical decision to attempt to collect the corporations’ unpaid tax_liabilities by issuing the notices to the trust that gave rise to the deficiency cases the trust argues that the deficiency cases and the instant action have the same origin because both arise out of the same transactions and the failure of the corporations to pay their tax_liabilities the trust contends that the fact that the deficiency cases arose out of an examination of the trust’s tax returns and the instant action arises out of an attempt to collect the unpaid tax of the corporations does not negate the fact that the origins of both are the same underlying transactions the trust argues that the motivation behind the deficiency cases and the instant case is the same--to hold the trust liable for the unpaid tax_liabilities of the corporations the trust points to respondent’s characterization of the asset sales and the stock sales as parts of a prearranged intermediary transaction of the kind described in notice_2001_16 2001_1_cb_730 as support for this argument the trust points to respondent’s determination of penalties in the deficiency cases as further evidence that both actions share the same motivation the trust also quotes a sentence in the explanation of items attached to the notices of deficiency the intermediary entity served no legitimate business_purpose and was nothing more than a diversion to avoid paying corporate_income_tax the trust further argues that the facts underlying the two actions would form a convenient trial unit that the underlying injury in both actions is the same and that both actions rest on the same cause of action and identical factual bases the trust argues that both the deficiency cases and the instant action arise because the corporations failed to pay taxes on income earned by the corporations on the asset sales the trust contends that the unpaid tax_liabilities of the corporations were the underlying cause of both the deficiency cases and the instant action the trust again points to respondent’s characterization of the stock sales as intermediary transactions described in notice_2001_16 supra and argues that this supports the conclusion that the corporate taxes were at issue in the deficiency cases the trust contends that although the earlier cases involved notices of deficiency increasing the trust’s tax_liabilities and the instant cases involve collection of the corporations’ unpaid tax_liabilities both arose because following respondent’s theory that the corporations transferred property cash to the trust in a deemed liquidation of the corporations the corporations failed to pay taxes on the gain from the asset sale the trust contends that both the deficiency cases and the instant action rely upon respondent’s theory of constructive liquidations b respondent’s arguments and the trust’s rejoinder respondent disputes the trust’s contentions and argues that res_judicata does not bar the instant action respondent argues that the causes of action are not identical contending that the notices of deficiency concerned deficiencies in the trust’s fiduciary income_tax arising from the sale of stock while the notices of liability concern a collection action for the corporations’ assessed but unpaid tax_liabilities respondent further disagrees that the operative facts of the two cases are related in time space origin and motivation respondent argues that the two cases differ in time and space because the deficiency cases involved the trust’s and tax deficiencies specifically whether the trust reported the appropriate amounts of capital_gains on its returns while the instant case involves the collection of the corporations’ tax_liabilities respondent contends that the deficiency cases originated in an examination of the trust’s and income_tax returns while the instant action originates from the examination of the corporations’ and income_tax returns respondent argues that the motivation behind the deficiency cases was to determine the correct amounts of income_tax due from the trust for and while the motivation behind the instant action is to collect from the trust as transferee the unpaid tax_liabilities of the corporations respondent argues that the deficiency cases and the instant action would not form a convenient trial unit because respondent was unable to raise transferee_liability during the deficiency cases respondent contends that the requirements of sec_6901 prevented him from asserting the transferee_liability claim during the pendency of the deficiency cases respondent further argues that the trust’s deficiency cases and the transferee_liability case could not be consolidated because the trust’s transferee_liability case was not docketed with this court until after the deficiency cases were closed the deficiency cases were resolved on date before the transferee case was docketed on date the trust disputes respondent’s contention that transferee_liability could not be at issue in the deficiency cases the trust contends that respondent made a tactical decision not to raise transferee_liability during the deficiency cases or to have the deficiency cases joined with the instant action the trust further contends that respondent’s characterizing the deficiency cases as so-called intermediary transactions shows his awareness that the corporate tax was at issue in those proceedings the trust relies on aunyx corp v canon u s a inc 978_f2d_3 1st cir and argues that respondent knew enough about the facts of the transactions to have issued a notice of transferee_liability rather than the notices of deficiency the trust further contends that respondent could have asserted transferee_liability during the deficiency cases rather than letting the deficiency cases close and trying to get a second bite at the apple c conclusion we agree with respondent that res_judicata does not bar the instant action the cause of action in the deficiency cases is not the same as that in the instant action the deficiency cases dealt with the trust’s gain on the sale of its stock in the corporations the issue to be determined was the trust’s fiduciary income_tax_liability had respondent’s determinations in the notices of deficiency been upheld the trust would have paid more tax on the sale of the corporations’ stock however that determination would not have required the trust to pay the unpaid tax_liabilities of the corporations the instant action deals with the trust’s liability as transferee for the unpaid tax_liabilities of the corporations the trust’s liability as transferee is not the same as the trust’s fiduciary tax_liability the corporations’ tax_liabilities arose from the disallowance of the claimed losses and the corporations’ entering into closing agreements with the irs because the corporations held no assets respondent was forced to attempt to collect the unpaid tax from the trust the trust’s contention that a statement in the notice_of_deficiency shows respondent’s intention to collect the corporations’ tax by issuing the notices of deficiency is misplaced the notices of deficiency stated that the intermediary entity served no purpose other than to avoid paying corporate tax this avoidance of corporate tax however does not mean that the notice was an attempt by respondent to collect that unpaid corporate tax the time space origin and motivation of the deficiency cases and the instant action differ it is a longstanding principle that the commissioner can collect the unpaid tax_liabilities of a corporation from transferee shareholders see 283_us_589 101_f2d_595 7th cir affg 36_bta_268 60_f2d_430 8th cir 52_f2d_920 4th cir revg 18_bta_800 24_bta_828 20_bta_106 castorina v commissioner tcmemo_1986_540 fugate v commissioner tcmemo_1977_18 the commissioner likewise can determine a deficiency against a taxpayer by adjusting the taxpayer’s claimed basis in stock see 540_f2d_427 9th cir affg tcmemo_1974_78 gleason v commissioner tcmemo_2006_191 arnold v commissioner tcmemo_2003_259 res_judicata does not bar the commissioner from issuing a notice_of_deficiency to a taxpayer determining a deficiency and issuing a notice of transferee_liability to a taxpayer in an attempt to collect from the taxpayer the unpaid tax of another see 43_bta_33 see also 64_tc_713 allowing issuance of a second notice_of_deficiency because the two notices were based upon two separate returns covering different taxable periods and the determined deficiencies originated from taxes enacted for different purposes although the deficiency cases and the instant action arise out of similar facts there is no identity between the causes of action and the third element required for res_judicata to apply has not been met see 123_tc_284 milk bottle exchange inc v commissioner supra pincite res_judicata does not bar respondent’s attempts to collect the corporations’ tax_liabilities in this transferee proceeding further even if we were to agree with the trust that the cause of action in the deficiency cases arose from the same common nucleus of operative facts as the instant action restatement supra sec_26 provides an exception to restatement supra sec_24 that allows respondent to assert transferee_liability against the trust the general_rule of sec_24 does not apply to bar a claim for relief if there was a jurisdictional barrier or limit on the authority of the tribunal hearing the first action that did not allow the plaintiff to put forward that claim for relief respondent could not assert transferee_liability in the deficiency cases because the trust’s fiduciary tax_liabilities and the trust’s liability as transferee could not be litigated in one proceeding see milk bottle exchange inc v commissioner supra pincite locke v commissioner tcmemo_1996_541 affd without published opinion 152_f3d_927 9th cir although the deficiency cases and the instant action share some of the same facts respondent could not raise transferee_liability in the deficiency cases because the two proceedings present two distinct causes of action therefore res_judicata does not bar respondent’s attempts to collect the corporations’ unpaid tax_liabilities from the trust iii collateral_estoppel the trust argues in the alternative that respondent is collaterally estopped from arguing in this case that the stock sales were in substance deemed liquidating distributions from the corporations to the trust collateral_estoppel has the dual purpose of protecting litigants from the burden of relitigating an identical issue and of promoting judicial economy by preventing unnecessary or redundant litigation meier v commissioner t c pincite see also 440_us_147 439_us_322 in general the doctrine_of collateral_estoppel forecloses relitigation of issues actually litigated and necessarily decided in a prior suit parklane hosiery co v shore supra pincite n meier v commissioner supra pincite 90_tc_162 affd 904_f2d_525 9th cir this court has set forth five prerequisites necessary for the application in factual contexts of collateral_estoppel the issue in the second suit must be identical in all respects with the one decided in the first suit there must be a final judgment rendered by a court of competent jurisdiction collateral_estoppel may be invoked against parties and their privies to the prior judgment the parties must actually have litigated the issues and the resolution of these issues must have been essential to the prior decision the controlling facts and applicable legal rules must remain unchanged from those in the prior litigation peck v commissioner supra pincite citations omitted the trust focuses on the fourth element--that the parties must have actually litigated the issues and the resolution of the issue must have been essential to the prior decision the trust concedes that there was no trial during the deficiency cases but argues that the parties’ pleadings put in issue whether the trust was the recipient of liquidating distributions from the corporations the trust points to 831_f2d_1292 7th cir arguing that collateral_estoppel can apply to issues not litigated if the parties to the first proceeding could reasonably have foreseen the conclusive effect of their actions the trust contends that respondent’s theory in the deficiency cases was that there were deemed liquidating distributions because respondent conceded that there were no deficiencies in tax the trust argues that respondent implicitly conceded that there could not have been liquidating distributions therefore the trust cannot be liable as transferee because there were no transfers of property from the corporations to the trust respondent argues that collateral_estoppel is inapplicable because the issues underlying the trust’s potential transferee_liability were not actually litigated or necessarily decided in the deficiency cases respondent argues that the exception in klingman v levinson supra does not apply because the trust and respondent did not agree to any stipulations in the deficiency cases other than what appears in the decision documents and those stipulations as embodied in the final decisions do not concede that the stock sales should be respected for federal tax purposes that the trust received no distributions from the corporations or that the trust was not liable as transferee respondent concludes that there is no basis to read the stipulated decisions as a concession that the sales of stock were reported properly or that the trust is not liable as transferee in klingman v levinson supra the court_of_appeals for the seventh circuit was asked to decide whether a judgment obtained by ms klingman against mr levinson was dischargeable in bankruptcy ms klingman and mr levinson entered into a_trust agreement with mr levinson as trustee id pincite later ms klingman filed suit against mr levinson in state court alleging dissipation of trust assets id the action was resolved by consent judgment and pursuant to that judgment mr levinson was to pay ms klingman dollar_figure plus interest and dollar_figure of attorney’s fees id the parties stipulated a number of facts in the consent judgment including that mr levinson allowed or caused the dissipation and loss of the trust corpus and that mr levinson’s obligation to ms klingman was not to be dischargeable in any bankruptcy or similar proceeding filed by mr levinson id the stipulation also indicated that if there were to be any further proceedings the facts included in the consent judgment would be taken as true id mr levinson later filed for bankruptcy id ms klingman filed a response claiming that her judgment against mr levinson was not dischargeable under bankruptcy laws because it resulted from fraud by mr levinson id the bankruptcy court granted ms klingman’s motion for summary_judgment and held in part that mr levinson was barred from relitigating the issue of defalcation because he had stipulated the finding contained in the consent judgment that he had violated his fiduciary duties by defalcating assets of the trust id pincite the district_court affirmed the bankruptcy court’s order id the court_of_appeals for the seventh circuit affirmed the decisions of the bankruptcy court and the district_court the court_of_appeals first had to determine whether a state court judgment was entitled to any weight in determining whether collateral_estoppel applied in a federal proceeding klingman v levinson supra pincite the court_of_appeals answered in the affirmative stating that where a state court determines factual questions using the same standards as the bankruptcy court would use collateral_estoppel should be applied to promote judicial economy by encouraging the parties to present their strongest arguments id the court_of_appeals then applied the doctrine to the facts of the case after laying out the four factors required for collateral_estoppel to apply the court focused on the requirement that the issue be actually litigated id pincite the court_of_appeals quoting 575_f2d_530 5th cir stated that if the parties to a consent decree ‘indicated clearly the intention that the decree to be entered shall not only terminate the litigation of claims but also determine finally certain issues then their intention should be effectuated ’ id applying that rule to the case before it the court_of_appeals held that collateral_estoppel applied to bar mr levinson from challenging the facts in the consent decree because it is certainly reasonable to conclude that the parties understood the conclusive effect of their stipulation in a future bankruptcy proceeding id we agree with respondent that he is not collaterally estopped from arguing in this proceeding that there were deemed liquidating distributions from the corporations to the trust the deficiency cases and the instant action concern different liabilities the deficiency cases concerned the trust’s fiduciary tax_liabilities while the instant case concerns the trust’s liability as transferee the notices of deficiency laid out alternative grounds for respondent’s adjustments an adjustment to the trust’s claimed bases in the stock or an increase in the amounts received as the result of liquidating distributions the decision documents however do not mention either alternative let alone stipulate that respondent was conceding on either or both theories as the supreme court stated in 345_us_502 in denying the application of the principle of collateral_estoppel to a later proceeding in this court after the parties entered into a compromise in an earlier proceeding a judgment entered with the consent of the parties may involve a determination of questions of fact and law by the court but unless a showing is made that that was the case the judgment has no greater dignity so far as collateral_estoppel is concerned than any judgment entered only as a compromise of the parties see also 48_f3d_576 n 1st cir although apparel’s allegations of fraudulent conveyance were raised in apparel ii and dismissed by the district_court neither factual determinations nor conclusions as to the legal merit of these claims were made by the trial_court in united_states v intl bldg co supra the court was unable to tell whether the agreement of the parties was based upon the merits or on some collateral consideration see also 33_tc_379 affd 286_f2d_258 10th cir in which we stated a decision by this court entered upon a stipulation of deficiencies without a hearing on the merits is not a decision on the merits such as will support a plea of collateral_estoppel see also estate of cavett v commissioner tcmemo_2000_91 respondent’s decision to concede the deficiency cases could have been based on any number of considerations we cannot determine on the basis of the parties’ stipulations why respondent conceded those cases because the question whether there were liquidating distributions was not actually litigated nor was it essential to the decisions in the deficiency actions collateral_estoppel does not bar respondent from asserting in the instant action that there were liquidating distributions from the corporations to the trust the exception in 831_f2d_1292 7th cir does not apply the stipulated decisions do not include stipulations of the type present in klingman v levinson supra where mr levinson attempted to argue that his debt was dischargeable even though he had stipulated the contrary the decision documents in the deficiency cases do not identify the basis underlying respondent’s concession it would be unreasonable to read those decision documents as a concession by respondent that the stock sales were to be respected or that the trust was not a transferee because the issue of whether there were liquidating distributions was not actually litigated in the deficiency cases respondent is not collaterally estopped from arguing in the instant transferee_liability action that there were liquidating distributions iv conclusion because res_judicata and collateral_estoppel do not bar the instant action the trust’s motion will be denied to reflect the foregoing an appropriate order denying the trust’s motion will be issued


t c summary opinion united_states tax_court cheryl d flathers petitioner v commissioner of internal revenue respondent docket no 24235-07s filed date cheryl d flathers pro_se fred e green jr for respondent dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code the petition was timely filed in response to a notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination pursuant to sec_6330 petitioner seeks review of respondent’s final notice_of_intent_to_levy and notice of your right to a hearing notice_of_intent_to_levy relating to her tax_liabilities for and and civil penalties for through neither the underlying tax_liabilities for and nor the civil penalties for filing frivolous returns for through are in dispute the issues for decision are whether petitioner was denied an opportunity for a fair and meaningful sec_6330 hearing and the appeals officer abused her discretion in failing to provide petitioner an opportunity to present an offer-in-compromise oic at a hearing as required by sec_6330 and c a iii background some of the facts have been stipulated and are so found the stipulation of facts and the exhibits received into evidence are incorporated herein by reference when the petition was filed petitioner resided in nevada petitioner failed to file timely returns for and respondent prepared substitutes for returns and issued notices of deficiency to petitioner for and on date and date respectively petitioner did not petition the court in response to the notices of deficiency on date respondent issued a notice_of_intent_to_levy advising petitioner that respondent intended to collect unpaid liabilities for and and civil penalties for through in response to the notice_of_intent_to_levy petitioner mailed form request for a collection_due_process_hearing on date on form petitioner states these charges have already been disputed and are currently in litigation the irs is attempted sic to doubly collect i request a hearing to review records as to how these charges are listed again petitioner’s case was assigned to an appeals officer from respondent’s appeals_office in fresno california appeals_office on date respondent sent petitioner a letter acknowledging petitioner’s request for a sec_6330 hearing in the letter the appeals officer stated i have scheduled a telephone sec_6330 hearing for you on date pincite am pst i will call you at the date and time indicated above this call will be your primary opportunity to discuss with me the reasons you disagree with the collection action and or to discuss alternatives to the collection action if this time is not convenient for you or you would prefer your sec_6330 hearing to be held by correspondence please let me know within fourteen days from the date of this letter you will be allowed a face-to-face conference on any nonfrivolous issue s however you will need to provide the nonfrivolous issue in writing or by calling me within days from the date of this letter before a face-to-face conference will be scheduled for me to consider alternative collection methods such as an installment_agreement or offer_in_compromise you must provide any items listed below in addition you must have filed all federal tax returns required to be filed emphasis added completed collection information statement form 433-a for individuals signed tax_return s for the following tax periods our records indicate they have not been filed type of tax period or periods and if you did not file a return because your yearly income was below the amount for which a return is required to be filed please let me know please send me the items listed or checked above by date i cannot consider collection alternatives at your conference nor can i consider alternatives during the hearing process without the information requested above on date petitioner sent a certified letter thanking the appeals officer for their telephone conservation stating it would not be feasible for her to deal with the fresno office due to time and distance constraints she also requested that her case be transferred to her local appeals_office in las vegas nevada on date the appeals officer notified petitioner that her case did not qualify for transfer to her local appeals_office the appeals officer scheduled the telephone sec_6330 hearing for date pincite a m advised petitioner to complete form 433-a collection information statement for wage earners and self-employed individuals and requested petitioner to file tax returns for and the appeals officer emphasized that in order for collection alternatives such as an installment_agreement or an oic to be considered petitioner had to provide the requested information and file her and tax returns on date petitioner sent a response to the appeals officer stating that she did not understand why her case could not be transferred to her local appeals_office and requesting the specific reasons her case did not qualify for transfer petitioner also stated that she was unable to receive personal phone calls during the scheduled sec_6330 hearing time but she was willing to proceed with a correspondence conference once she received the answers to her questions on date the appeals officer called petitioner for the scheduled telephone hearing but petitioner was unavailable 1respondent’s date letter refers to the filing of petitioner’s and tax returns however in respondent’s date correspondence and pretrial memorandum respondent requests that petitioner file returns for and petitioner does not raise this issue 2petitioner’s date letter was received stamped and dated by the appeals_office on date and stamped received by the fresno appeals campus on date however in the appeals officer’s case activity report the appeals officer does not acknowledge receipt of the letter the appeals officer left a message for petitioner asking her to contact the appeals_office on date the appeals officer issued to petitioner a notice_of_determination regarding the proposed levy action for and in the notice_of_determination the appeals officer stated that petitioner did not provide the requested information also the appeals officer acknowledged that although petitioner did respond to the government’s attempts to collect the balance owed she offered no collection alternatives during the appeals process nor did she present information that would warrant withdrawal of the filed notice_of_intent_to_levy discussion under sec_6330 a taxpayer is entitled to notice and opportunity for a hearing before levy action is taken by the commissioner in the process of collecting unpaid federal taxes upon request a taxpayer is entitled to a fair sec_6330 hearing conducted by an impartial appeals officer sec_6330 the sec_6330 hearing does not need to be conducted face to face a taxpayer may receive a fair hearing by telephone or through written correspondence sec_301 d q a-d7 proced admin regs 3at trial petitioner admitted that during the appeals process she had not provided the requested documentation when conducting a sec_6330 hearing the appeals officer is required to obtain verification from the secretary that the requirements of applicable law and administrative procedure have been met consider certain issues raised by the taxpayer such as collection alternatives and consider whether any proposed collection action balances the need for the efficient collection_of_taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary sec_6330 sec_6330 also prescribes the matters that a taxpayer may raise at a sec_6330 hearing under sec_6330 the taxpayer may raise any relevant issue relating to the unpaid tax or the proposed levy including appropriate spousal defenses challenges to the appropriateness of collection actions and offers of collection alternatives which may include an oic the decision to entertain accept or reject an offer_in_compromise is squarely within the discretion of the appeals officer and the irs in general 454_f3d_688 7th cir although sec_6330 provides taxpayers faced with lien or levy actions the right to offer collection alternatives during the sec_6330 hearing process this right carries with it certain obligations see kindred v commissioner supra sec_301_6330-1 proced admin regs requires taxpayers to provide all relevant information requested by the appeals_office including financial statements for its consideration of the facts and issues involved in a sec_6330 hearing sec_301_6330-1 q a-d8 proced admin regs provides a face-to-face sec_6330 hearing concerning a collection alternative such as an installment_agreement or an oic will not be granted unless other taxpayers would be eligible for the alternative in similar circumstances for example because the irs does not consider oics from taxpayers who have not filed required returns or have not made certain required deposits of tax as set forth in form_656 offer_in_compromise no face-to-face conference will be granted to a taxpayer who wishes to make an oic but has not fulfilled those obligations emphasis added the court has jurisdiction to review the commissioner’s determination sec_6330 when the validity of the underlying tax_liability is not at issue the court reviews the appeals officer’s determination under the abuse_of_discretion standard 114_tc_604 114_tc_176 in doing so the court does not conduct an independent review of what would be an acceptable oic rather the court reviews only whether the appeals officer’s decision to issue the notice_of_determination without reviewing petitioner’s proposed oic was arbitrary capricious or without sound basis in fact or law see 112_tc_19 petitioner argues that she was denied a sec_6330 hearing in direct violation of sec_6330 and therefore was not allowed to offer collection alternatives such as an oic the appeals officer however advised petitioner that all requested documents had to be received before consideration of petitioner’s collection alternatives petitioner has a history of not timely filing returns and not paying her federal income taxes consequently because petitioner did not comply with the requests to provide all required_documentation the appeals officer was not required to and did not transfer petitioner’s case to her local appeals_office or conduct a face-to-face hearing sec_301_6330-1 q a-d8 proced admin regs the appeals officer sent a letter scheduling the telephone sec_6330 hearing for date in her june letter petitioner requested a correspondence hearing stating that she was unable to receive personal phone calls at work and therefore would be unavailable for the telephone sec_6330 hearing on the date and time of the telephone sec_6330 hearing the appeals officer called petitioner but she was unavailable assuming arguendo that the appeals officer was unaware4 that petitioner was unable to receive phone calls during the scheduled telephone sec_6330 hearing time or that petitioner requested a hearing by correspondence her case was not administratively 4see supra note closed until months after the scheduled telephone hearing thus petitioner had notice and ample opportunity to submit the form 433-a and to file her and tax returns before her case was administratively closed but she failed to do so see roman v commissioner tcmemo_2004_20 reasonable to issue adverse sec_6330 determination when after weeks taxpayer had failed to submit information requested with respect to an oic it is well within the appeals officer’s discretion to require that petitioner be in full compliance before accepting an oic see gregg v commissioner tcmemo_2009_19 otto’s e-z clean enters inc v commissioner tcmemo_2008_54 corona pathology servs inc v commissioner tcmemo_2003_120 the appeals officer was under no obligation to consider petitioner’s oic without having received the requested documents thus there was a reasonable basis for the appeals officer’s determination therefore the court finds that petitioner was afforded a fair and meaningful opportunity for a sec_6330 hearing and that the appeals officer did not abuse her discretion see morlino v commissioner tcmemo_2005_203 upholding the commissioner’s determination to proceed by levy when the taxpayer was given a little over a month to provide the 5petitioner is still free having provided the appropriate information to submit an offer-in-compromise questionnaire and oic form to the appeals officer but failed to do so the appeals officer verified that all requirements of applicable law or administrative procedure have been met and balanced the need for the efficient collection_of_taxes with petitioner’s legitimate concern that the collection action be no more intrusive than necessary see sec_6330 c tufft v commissioner tcmemo_2009_59 accordingly the court holds that respondent’s proposed levy should be sustained other arguments made by the parties and not discussed herein were considered and rejected as irrelevant without merit or moot to reflect the foregoing decision will be entered for respondent


t c no united_states tax_court richard d frazier and yvonne frazier petitioners v commissioner of internal revenue respondent docket no filed date ps owned investment real_property subject_to a recourse mortgage upon default the property was acquired by the lender at a foreclosure sale at the foreclosure sale the lender bid in an amount for the property which was in excess of the property's fair_market_value r determined that the amount_realized by ps at the foreclosure sale was the amount bid in by the lender regardless of fair_market_value held p's amount_realized at the foreclosure sale is the property's fair_market_value held further bifurcated analysis used to determine income_tax consequences of amount_realized and income from cancellation of indebtedness held further ps are not liable for accuracy- related penalty determined by r michael l cook and william r leighton for petitioners steven b bass for respondent parr judge respondent determined deficiencies in petitioners' federal_income_tax for taxable years and in the amounts of dollar_figure and dollar_figure respectively in the answer respondent asserted that petitioner is liable for an addition_to_tax pursuant to sec_6662 after concessions the issues for decision are whether for petitioners realized dollar_figure on the foreclosure sale of certain real_property or a lower amount which represents the property's fair_market_value we hold petitioners realized a lower amount which represents the property's fair_market_value whether for petitioners are liable for the accuracy- related penalty pursuant to sec_6662 we hold they are not some of the facts have been stipulated and are so found the stipulated facts and the accompanying exhibits are incorporated herein by this reference at the time the petition in this case was filed petitioners resided in austin texas findings_of_fact petitioners owned real_property located pincite dime circle in austin texas the dime circle property the dime circle all section references are to the internal_revenue_code in effect for the taxable years in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated references to petitioner are to richard d frazier all dollar amounts are rounded to the nearest dollar property was not used in any trade_or_business of petitioner the mortgage on the dime circle property which secured a recourse obligation against petitioner was foreclosed by the lender on date at which time petitioners were insolvent the lender bid in the dime circle property at the foreclosure sale for dollar_figure the record is silent as to how the bid-in price was determined apparently the only bid was that of the lender at the time of the foreclosure sale the outstanding principal balance of the debt was dollar_figure the lender did not attempt to collect the difference between the outstanding balance of the debt and the bid-in amount on date petitioners' adjusted_basis in the dime circle property was dollar_figure cost_basis of dollar_figure minus accumulated depreciation of dollar_figure after the transaction petitioners were still insolvent at the time of the sale real_estate prices had dropped dramatically throughout texas causing many foreclosures and bank failures throughout the state the dime circle property was not resold until about and a half years later for approximately dollar_figure the fair_market_value of the dime circle property at the time of the foreclosure sale was dollar_figure opinion issue amount_realized on foreclosure sale respondent determined that petitioners realized dollar_figure on the foreclosure sale of the dime circle property which represents the amount bid in by the lender petitioners assert that the amount_realized on the foreclosure sale is determined by the fair_market_value of the property which is different from the amount bid in by the lender we agree with petitioners in general the transfer of property in consideration of the discharge or reduction of indebtedness is equivalent to the sale of property upon which gain_or_loss is realized e g gehl v commissioner 102_tc_784 affd without published opinion 50_f3d_12 8th cir 73_tc_370 73_tc_15 35_tc_649 marcaccio v commissioner tcmemo_1995_174 the amount of gain realized is the excess of the amount_realized over the taxpayer's adjusted_basis in the property and the amount of loss realized is the excess of the adjusted_basis over the amount_realized sec_1001 for purposes of computing gain_or_loss the amount_realized is defined by sec_1001 as the sum of any money received plus the fair_market_value of the property received however the amount_realized from the transfer of property in consideration of the discharge or reduction of indebtedness depends on whether the debt is recourse or nonrecourse in nature in the case of nonrecourse debt the amount_realized includes the full amount of the remaining debt see eg 461_us_300 88_tc_984 estate of delman v commissioner supra pincite- in the case of recourse_debt on the other hand the amount_realized from the transfer of property is the fair_market_value of the property see eg bialock v commissioner supra pincite marcaccio v commissioner supra furthermore the amount_realized from the sale_or_other_disposition of property that secures a recourse_debt does not include income from the discharge_of_indebtedness under sec_61 see sec_1_1001-2 income_tax regs such income will arise when the discharged amount of the recourse_debt exceeds the fair_market_value of the property generally a taxpayer must recognize income from the discharge_of_indebtedness sec_61 284_us_1 there are exceptions however to the recognition of income from the discharge_of_indebtedness including cases where the discharge occurs when the taxpayer is insolvent see sec_108 absent clear_and_convincing proof to the contrary the sale price of property at a foreclosure sale is presumed to be its fair_market_value see 79_tc_789 affd 819_f2d_940 9th cir marcaccio v commissioner supra in this case however petitioners have rebutted this presumption with the required clear_and_convincing proof petitioners introduced an appraisal opining that the fair_market_value of the dime circle property on date was dollar_figure not dollar_figure as bid in by the lender respondent offered no expert testimony on the fair_market_value and does not challenge the accuracy of the appraisal respondent merely argues that the bid-in amount must be used to determine the amount_realized regardless of how arbitrarily that amount may have been determined we disagree in arguing that the bid-in amount must be used to determine the amount_realized respondent in effect maintains that we must respect the transaction for federal_income_tax purposes we are not bound to blindly accept a transaction and the law is clear that courts may look behind a paper facade to find the actual substance and economic realities of a transaction 364_us_361 293_us_465 898_f2d_455 5th cir affg tcmemo_1989_56 and tcmemo_1989_189 873_f2d_879 5th cir affg tcmemo_1988_72 864_f2d_1214 5th cir affg 87_tc_1087 649_f2d_1168 5th cir affg 72_tc_1147 651_f2d_1066 5th cir 533_f2d_152 5th cir affg in part and revg in part 61_tc_624 90_tc_908 88_tc_860 86_tc_14 85_tc_127 affd 845_f2d_746 9th cir 79_tc_570 in a case such as this where the transaction is so disparate from the actual substance and economic realities of the situation we are empowered and in fact duty-bound to look behind the transaction in order to apply the internal_revenue_code accurately forseth v commissioner supra pincite citing 765_f2d_643 7th cir affg 80_tc_955 the facts of the instant case are analogous to those provided in an example in the regulations sec_1_1001-2 example income_tax regs provides as follows in f transfers to a creditor an asset with a fair_market_value of dollar_figure and the creditor discharges dollar_figure of indebtedness for which f is personally liable the amount_realized on the disposition of the asset is its fair_market_value dollar_figure in addition f has income from the discharge_of_indebtedness of dollar_figure dollar_figure - dollar_figure respondent relies on 99_tc_197 affd without published opinion 29_f3d_630 9th cir for the proposition that the amount_realized constitutes the amount of the proceeds of the foreclosure sale ie the bid-in amount of the lender in aizawa the taxpayers owned rental property which was subject_to a recourse mortgage and upon default the property was acquired by the mortgagee at a foreclosure sale we held that the amount of the proceeds of the foreclosure sale constituted the amount_realized under sec_1001 notwithstanding the similar facts and circumstances aizawa is distinguishable from the instant case on one key matter in aizawa the amount that the lender paid for the property at the foreclosure sale was equal to the fair_market_value of the property in aizawa v commissioner supra pincite- the court stated it cannot be gainsaid that the property was sold for dollar_figure an amount which we have no reason to conclude did not represent the fair_market_value of the property and that petitioners received by way of a reduction in the judgment of the foreclosure that amount and nothing more that is the amount_realized under sec_1001 which is subtracted from petitioners' basis in order to determine the amount of their loss fn ref omitted emphasis added in the instant case we have clear_and_convincing proof to conclude that the bid-in price of the lender does not represent the fair_market_value of the dime circle property we note that this was not an arm's-length_transaction between a willing buyer and a willing seller neither being under compulsion to buy or sell and both having reasonable knowledge of relevant facts see 411_us_546 346_f2d_213 5th cir 98_tc_554 see also sec_1_170a-1 income_tax regs the amount bid in by a lender at a foreclosure sale may be arbitrary as petitioners stated on brief there are many possible reasons why a lender would bid in higher than the fair_market_value such as if the lender believed it would be unable to collect a deficiency judgment because the debtor is contemplating bankruptcy or simply to erase the loss from its books see eg 58_tc_667 however we need not determine the intent of the lender in formulating the bid-in price we are satisfied that the bid-in price did not represent the fair_market_value of the dime circle property we find that the fair_market_value of the dime circle property on date was dollar_figure accordingly petitioners realized dollar_figure on the disposition of the dime circle property we must now determine the federal_income_tax consequences of this transaction for petitioners petitioners rely on revrul_90_16 1990_1_cb_12 and argue for bifurcation of the transaction respondent argues against his own revenue_ruling asserting that a revenue_ruling has limited precedential value for a court while we agree that a revenue_ruling is not binding on the court 445_f2d_1142 5th cir a bifurcated analysis of the tax consequences for petitioners is appropriate here as discussed above petitioners' gain_or_loss on their disposition of the dime circle property is computed pursuant to sec_1001 and as a general_rule the amount_realized includes the full amount of the remaining debt sec_1_1001-2 income_tax regs however sec_1_1001-2 income_tax regs provides an exception for recourse_liabilities the regulation states that the amount_realized on a sale_or_other_disposition of property that secures a recourse_liability does not include amounts that are or would be if realized and recognized income from the discharge_of_indebtedness under sec_61 this regulation effectively bifurcates the instant transaction into a taxable transfer of property and a taxable discharge from indebtedness cf 87_tc_1412 thus according to the regulation each should be treated as a separate transaction for tax purposes id for a complete review of the bifurcation approach see cunningham payment of debt with property--the two-step analysis continued therefore on the first step of the bifurcation analysis petitioners realized a capital_loss of dollar_figure on the transfer of the dime circle property on the second step of the analysis petitioners realized dollar_figure of ordinary_income from discharge_of_indebtedness under certain circumstances a taxpayer may exclude from gross_income the income_from_discharge_of_indebtedness if the discharge occurs when the taxpayer is insolvent sec_108 however the exclusion cannot exceed the amount by which the taxpayer is insolvent for purposes of this section insolvent is defined as the excess of liabilities over the fair_market_value of assets sec_108 petitioners' insolvency exceeded the income they realized from discharge_of_indebtedness accordingly the income petitioners realized from discharge_of_indebtedness in the instant transaction is excluded from their gross_income pursuant to sec_108 continued after commissioner v tufts tax law this represents the difference between the fair_market_value of the property dollar_figure and petitioners' adjusted_basis in the property dollar_figure this represents the difference between the fair_market_value of the property dollar_figure and the outstanding balance of the debt dollar_figure petitioner testified that the lender did not attempt to collect the difference between the outstanding balance of the debt and the bid-in amount issue penalty under sec_6662 in the answer respondent determined that for petitioners were liable for the accuracy-related_penalty of sec_6662 on the basis of our holding above there was no underpayment_of_tax due to petitioners' characterization of the disposition of the dime circle property accordingly petitioners are not liable for the accuracy-related_penalty pursuant to sec_6662 to reflect concessions decision will be entered under rule


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date number release date conex-123056-10 uilc ------------------------- ------------------------------------------ ----------------------------------- dear ---------------------- i am responding to your inquiry dated date you asked about introducing legislation that would allow gym fees as deductible medical_expenses you referred to publication medical and dental expense which excludes from medical_expenses health club_dues paid to improve one’s general health or to relieve physical or mental discomfort not related to a particular medical_condition taxpayers can deduct expenses paid for medical_care of the taxpayer spouse or dependent to the extent the expenses exceed percent of adjusted_gross_income sec_213 of the internal_revenue_code the code medical_care refers to amounts paid for the diagnosis cure mitigation treatment or prevention of disease or for the purpose of affecting a structure or function of the body sec_213 of the code the law limits deductions for medical_care to expenses paid primarily for the prevention or alleviation of a physical or mental defect or illness sec_1_213-1 of the income_tax regulations an expense qualifies as medical_care as preventing disease only if a present existence or an imminent probability of developing a disease physical or mental defect or illness exists 41_tc_324 12_tc_580 taxpayers cannot deduct personal family or living_expenses as medical_care if the expenses do not fall within the sec_213 definition sec_262 of the code and sec_1_213-1 of the income_tax regulations an expenditure that is merely beneficial to the general health of an individual is personal and is not for medical_care sec_1_213-1 of the income_tax regulations conex-123056-10 a taxpayer who claims that an expense of a peculiarly personal nature is primarily for medical_care must establish that fact objective factors that indicate that an otherwise personal_expense is for medical_care include the taxpayer’s motive or purpose for making the expenditure a physician’s diagnosis of a medical_condition and recommendation of the item as treatment or mitigation the relationship between the treatment and the illness the treatment’s effectiveness the proximity in time to the onset or recurrence of a disease 12_tc_409 the taxpayer must establish that he or she would not have paid the expense but for the disease or illness a taxpayer cannot deduct a personal_expense as medical_care if he or she would have paid the expense in the absence of a medical_condition commissioner v 62_tc_813 fees that an individual pays to health institutes where the taxpayer exercises are personal expenses but may be deductible as medical_expenses only when a physician prescribes the treatments and provides a statement that the treatments are necessary for the alleviation of a physical or mental defect or illness of the individual receiving the treatments revenue_ruling c b in addition a taxpayer who participates in a weight loss program to improve his or her appearance general health and sense of well being and not for the purpose of curing any specific ailment or disease is not a medical expense revenue_ruling c b uncompensated amounts an individual pays for participation in a weight loss program as treatment for a specific disease such as obesity or hypertension that a physician has diagnosed are expenses for medical_care that a taxpayer can deduct revenue_ruling c b conex-123056-10 a taxpayer cannot deduct costs associated with using a gym to improve general health and well-being and not to cure a specific disease or ailment a taxpayer may be able to deduct the gym fees as a medical expense if the taxpayer can establish that a physician diagnosed the taxpayer with a specific disease the taxpayer uses the gym to treat the specific disease the taxpayer would not incur the gym fees but for the specific disease the irs administers the tax law as enacted any change in the law would require legislative action by the congress i hope this information is helpful if you have any questions please contact ------------ identification_number ---------- at ----------------------- sincerely thomas d moffitt chief branch office of associate chief_counsel income_tax accounting


number release date id office uilc cca-619144-09 ---------------- from -------------------- sent date to ---------------------- cc ----------------------------- subject ------------------------------------ the information you have requested involves the application of sec_265 to taxpayers who are civilian employees of the united_states government and who when filing their state_income_tax returns for a taxable_year must pay an amount of state income taxes that is in excess of the amount of state_income_tax withheld from their pay during that taxable_year in such situations the individual taxpayer is a civilian employee of the u s government and uses the cash_receipts_and_disbursements_method of accounting the cash_method a portion of the taxpayer’s income in tax_year is attributable to a cost-of- living allowance that sec_912 exempts from federal_income_tax notwithstanding the federal tax exemption the income attributable to the allowance is subject_to state_income_tax when filing his federal_income_tax return for tax_year the taxpayer itemizes his deductions on schedule a and deducts the state_income_tax he paid in tax_year through withholding the taxpayer adjusts the amount of his deduction for state income taxes paid in year through withholding to account for the disallowance provisions of sec_265 since this deduction is allocable in part to tax-exempt_income however taxpayer also owes an additional_amount of state income taxes in excess of the amount withheld from his pay in tax_year he pays the additional_amount of state income taxes due for tax_year in tax_year when he files his state_income_tax return for tax_year since the taxpayer uses the cash_method he does not take a federal_income_tax deduction in tax_year for the additional state_income_tax he owed for tax_year but paid in tax_year instead the deduction for the additional state income taxes is reported on schedule a of his federal_income_tax return filed for tax_year the year in which he paid the additional_amount sec_912 provides that cost of living allowances received by civilian employees stationed in certain areas including the state in question here are not subject_to federal_income_tax sec_164 provides for the deduction of state or local_taxes paid during the taxable_year sec_265 generally disallows deductions for any amount -- ---- otherwise allowable as a deduction that is allocable to income other than interest that is wholly exempt from federal tax revrul_74_140 1974_1_cb_50 dealt with the situation of a civilian employee of the u s government who was stationed in hawaii and who received a cost-of-living allowance that was wholly exempt from tax under sec_912 in that revenue_ruling the service held that the portion of the state income taxes allocable to the tax-exempt_income was nondeductible under sec_265 the issue is virtually the same here the only difference is that as a result of underwithholding of state income taxes a portion of the taxpayer’s state_income_tax that is attributable to tax_year was paid in tax_year thus since the taxpayer uses the cash_method the amount of state income taxes due for tax_year that was paid in tax_year is deductible in tax_year accordingly when taxpayer files his federal income return for tax_year and deducts the additional state_income_tax payment he must also account for the portion of the additional payment that was allocable to the tax- exempt cost-of-living allowance the issue is when determining the amount of the additional state_income_tax payment that is nondeductible under sec_265 what ratio of tax-exempt_income to total income should be used to determine the portion of the tax_year payment that is allocable to tax-exempt_income that of tax_year when the tax-exempt_income that it relates to was received or that of tax_year we conclude that the portion of the state_income_tax payment made in tax_year that is allocable to tax-exempt_income received in tax_year and thus the amount that is non-deductible by virtue of sec_265 should be determined based on the ratio of the tax-exempt_income to the total income in tax_year this conclusion is based on our reading of the statute and regulations the regulations under sec_265 provide in pertinent part as follows allocation of expenses to a class or classes of exempt_income_expenses and amounts otherwise allowable which are directly allocable to any class of classes of exempt_income shall be allocated thereto and expenses and amounts directly allocable to any class or classes of nonexempt_income shall be allocated thereto sec_1_265-1 the regulations clearly state that the expenses allocable to the tax-exempt_income should be allocated thereto the tax-exempt_income at issue was received in tax_year therefore the additional payment made in tax_year should be allocated to the class of tax-exempt_income included in tax_year and the determination of the nondeductible portion should be based on the ratio of tax-exempt to total income in that year -- ---- we also note that a taxpayer who received a cost of living allowance in tax_year may not receive such an allowance in tax_year either because no such benefit was bestowed in tax_year or because the taxpayer was no longer working for the government or earning income in tax_year thus if the disallowance was based on the ratio of tax-exempt to total income in tax_year a taxpayer receiving no tax- exempt_income in tax_year would not be subject_to a disallowance of a portion of the deduction for the state tax payment made in tax_year even though a portion of the deduction is allocable to tax-exempt_income thus the only basis for determining the nondeductible portion of the state tax payment in tax_year at issue here is by allocating it according to the amount of tax-exempt_income received in tax_year this letter has called your attention to certain general principles of the law it is intended for informational purposes only and does not constitute a ruling see revproc_2005_1 sec_2 2005_1_irb_7 date