t c memo united_states tax_court gerald nelson petitioner v commissioner of internal revenue respondent docket no filed date gerald nelson pro_se brian e peterson and monica e koch for respondent memorandum findings_of_fact and opinion lauber judge with respect to petitioner’s federal_income_tax for the internal_revenue_service irs or respondent determined a deficiency of dollar_figure the questions for decision are whether petitioner received but failed to 1all statutory references are to the internal_revenue_code in effect for the continued report unemployment_compensation of dollar_figure and wages of dollar_figure for that year concluding that he did we will sustain the deficiency that respondent has determined findings_of_fact petitioner resided in new york when he timely petitioned this court from through date petitioner was employed as a van driver by mv trans- portation co mv his job was transporting elderly and disabled people around the five boroughs of new york city in date mv terminated petitioner’s employment for alleged involve- ment in a vehicle accident thereafter petitioner obtained short-term employment with empire films services empire for which he received wages of dollar_figure the irs received from empire a form_w-2 wage and tax statement reporting that it had paid petitioner during wages in that amount from which it had withheld federal_income_tax of dollar_figure he applied for and received during from the new york state department of labor nydol unemployment_compensation of dollar_figure nydol reported that payment to petitioner and to the irs on a form 1099-g certain government payments continued year at issue and all rule references are to the tax_court rules_of_practice and procedure we round all monetary amounts to the nearest dollar believing that petitioner’s employment had been wrongfully terminated his labor_union initiated an arbitration proceeding in date the arbitrator ruled that mv had improperly terminated petitioner’s employment ordered that he be reinstated and retained jurisdiction to decide any disputes concerning back pay in date the arbitrator issued a supplemental opinion to clarify how back pay may be calculated the arbitrator explained that back pay is a term of art and means the amount the employee would have earned had he not been dis- charged less what the employee did earn during the period of the outage thus where an employee receives income from any source that is in any way re- lated to the loss of employment that amount constitutes a deduction in the calculation of a make whole remedy pursuant to the arbitrator’s ruling petitioner’s labor_union and mv in sep- tember executed a backpay agreement requiring mv to pay petitioner gross back pay for weeks or dollar_figure less dollar_figure that petitioner received from new york state in unemployment benefits the agreement further provided that in the event petitioner is required by new york state to re- 2the record does not explain the difference between the dollar_figure of unem- ployment benefits that nydol reported having paid petitioner and the dollar_figure fig- ure the parties adopted in the backpay agreement petitioner evidently received additional unemployment checks after that agreement was finalized pay any amount of unemployment_compensation because of his reinstatement mv shall reimburse him for such amounts as he may be required to repay petitioner admitted at trial that nydol did not require him to repay any of the unemployment_compensation he had received the backpay agreement provided that mv would pay petitioner dollar_figure less applicable taxes and other payroll deductions in full settlement of his arbi- tration case that sum represented the difference between the gross backpay dollar_figure and the unemployment_compensation he had received to date dollar_figure on date mv issued petitioner a check for dollar_figure minus applicable taxes and payroll deductions petitioner filed for a delinquent federal_income_tax return on form 1040ez income_tax return for single and joint filers with no dependents the irs selected his return for examination after receiving third-party information re- ports showing income he had failed to report on date the irs is- sued him a timely notice_of_deficiency reflecting the unreported income and he timely petitioned this court for redetermination opinion the irs’ determinations in a notice_of_deficiency are generally presumed correct and the taxpayer bears the burden of proving them erroneous rule a 290_us_111 petitioner does not contend that the burden_of_proof shifts to respondent under sec_7491 as to any issue of fact absent stipulation to the contrary appeal of this case would lie to the u s court_of_appeals for the second circuit see sec_7482 that court has held that in order for the presumption of correctness to apply in unreported in- come cases the commissioner must establish some evidentiary foundation linking the taxpayer to the income-producing activity see eg 649_f2d_152 2d cir aff’g in part rev’g in part and remanding 74_tc_260 once the commissioner has produced evidence linking the tax- payer to an income-producing activity the burden_of_proof shifts to the taxpayer to prove by a preponderance_of_the_evidence that the commissioner’s determinations are arbitrary or erroneous 293_us_507 tokar- ski v commissioner 87_tc_74 gross_income means all income from whatever source derived including unemployment_compensation sec_61 sec_85 for the irs received from empire a form_w-2 reporting that it had paid petitioner during wages of dollar_figure respondent also introduced two relevant documents that confirm this information a copy of the notice_of_deficiency issued to petitioner for and petitioner’s wage and income transcript for we find that these documents sufficiently connect petitioner to an income-producing activity see eg banister v commissioner tcmemo_2008_201 holding that a notice_of_deficiency indicating third-party payers paid the taxpayer specific amounts in question satisfied the minimal evidentiary bur418_fedappx_637 9th cir at trial petitioner did not deny receiving wages of dollar_figure but asserted re- ferring to empire that he did not know who these guys are we did not find pe- titioner’s testimony credible we conclude that he has failed to carry his burden of proving respondent’s determination erroneous and hence that he received during unreported taxable wages of dollar_figure for the irs received from nydol a form 1099-g reporting that it had paid petitioner unemployment_compensation of dollar_figure from which it had sec_6201 provides that if a taxpayer asserts a reasonable dispute with respect to any item_of_income reported on an information_return and the taxpayer has fully cooperated with the secretary the irs may not rely solely on the information_return to satisfy its burden of production petitioner has not al- leged a reasonable dispute concerning the form_w-2 and he wholly failed to cooperate with irs representatives during the examination and trial preparation see parker v commissioner tcmemo_2012_66 103_tcm_1321 finding sec_6201 inapplicable where the taxpayer did not bring any fact- ual dispute over any item_of_income to the irs’ attention within a reasonable_time but instead raised frivolous arguments withheld federal_income_tax of dollar_figure petitioner does not dispute having applied for and received unemployment_compensation and the parties to the backpay agreement explicitly acknowledged that he had done so rather he argues that he should not have to pay tax on this income because mv took it away by offsetting it against his gross backpay petitioner is mistaken the arbitrator specifically ruled that any income pe- titioner received that is in any way related to the loss of employment consti- tutes a deduction in the calculation of a make whole remedy this offset is ne- cessary to prevent the windfall that would result if petitioner were to receive full- time gross pay for the 21-week period plus unemployment_compensation that he would not have received if had been employed full time the backpay agreement accordingly provided that the amount due to peti- tioner was gross backpay for the 21-week period less dollar_figure that he received from new york state in unemployment benefits in effect the unem- ployment benefits petitioner received replaced a portion of the larger backpay award that he would otherwise have received instead of receiving a taxable back- pay award of dollar_figure he received two income streams totaling dollar_figure both income streams were taxable we accordingly sustain respondent’s determination that petitioner received taxable unemployment_compensation of dollar_figure in in the notice_of_deficiency the irs gave petitioner credit for the dollar_figure and dollar_figure of federal_income_tax that empire and nydol had withheld the sum of those amounts is dollar_figure the amount ultimately in dispute in this case is thus only dollar_figure the deficiency of dollar_figure less withholding credits of dollar_figure to reflect the foregoing decision will be entered for respondent


significant index number department of the treasury internal_revenue_service washington d c dec tep ra az tax_exempt_and_government_entities_division re taxpayer - ‘ dear - this letter constitutes notice that approval has been granted for your request for a 5-year automatic_extension for amortizing the unfunded liabilities as of date for the above-named plan which are described in sec_431 b and b of the internal_revenue_code code and sections _304 b 2xb and b of the employee retirement income security act of - erisa this extension is effective with the plan_year beginning date this extension applies to the eligible bases established as of date amortization charge the extension of the amortization periods of the unfunded liabilities of the plan was granted in accordance with sec_431 d of the code sec_431 a of the code requires the secretary to extend the period of time required to amortize any unfunded_liability of a plan for a period of time not in excess of years if the plan submits an application meeting the criteria stated in sec_431 dx1 b the plan has submitted the required information to meet the criteria in sec_431 d b including a certification from the plan's actuary that i absent the extension under subparagraph a the plan would have an accumulated_funding_deficiency in the current pian year or any of the succeeding plan years ii the plan_sponsor has adopted a plan to improve the plan's funding status iii the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period as extended and iv the notice required under paragraph a has been provided we have sent a copy of thislettertothe and to the’ - a ot this ruling is directed only to the taxpayer that requested it sec_6110 k of the internal_revenue_code provides that it may not be used or cited by others as precedent if you require further assistance in this matter please contact sincerely yours i - david m ziegler manager ep actuarial group


internal_revenue_service number release date index number ----------------------------- ------------------------------------ ------------------ --------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------ telephone number ------------------ refer reply to cc psi plr-106523-14 date date legend x d1 d2 ---------------------------------------------------- ----------------------- ---------------- --------------------- trust1 ---------------------------------------------------- ---------------------- trust2 ---------------------------------------------------- ---------------------------------------------------- ---------------------- dear ----------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representative requesting a ruling under sec_1362 of the internal_revenue_code code facts x was incorporated on d1 and elected to be an s_corporation effective d1 on d2 trust1 and trust2 became shareholders of x x represents that trust1 and trust2 satisfy the qualified_subchapter_s_trust qsst requirements under sec_1361 however the income_beneficiary of trust1 and trust2 failed to file elections for trust1 and trust2 to be qssts effective d2 therefore trust1 and trust2 were not permitted shareholders plr-106523-14 x represents that the termination was not motivated by tax_avoidance or retroactive tax planning x further represents that x and its shareholders have filed consistently with the treatment of x as an s_corporation since d1 x and its shareholders have agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation law and analysis sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder sec_1361 provides that a qsst whose beneficiary makes an election under sec_1361 will be treated as a_trust described in sec_1361 and the beneficiary of such trust shall be treated as the owner for purposes of sec_678 of that portion of the trust which consists of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1361 provides that a beneficiary of a qsst or his legal_representative may elect to have sec_1361 apply sec_1361 provides that an election under sec_1361 shall be effective up to days and months before the date of the election sec_1_1361-1 of the income_tax regulations provides that the current income_beneficiary of the trust must make the election under sec_1361 by signing and filing with the service_center where the corporation files its income_tax return the applicable form or a statement including the information listed in sec_1_1361-1 plr-106523-14 sec_1362 provides that an election under sec_1362 will be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides in part that if an election under sec_1362 by any corporation was terminated under sec_1362 or the secretary determines that the circumstances resulting in the termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the termination steps were taken so that the corporation for which the termination occurred is a small_business_corporation and the corporation for which the termination occurred and each person who was a shareholder in the corporation at any time during the period specified pursuant to sec_1362 agrees to make the adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the termination the corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election terminated on d2 when stock in x was transferred to trust1 and trust2 we further conclude that the termination was inadvertent within the meaning of sec_1362 accordingly pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d2 and thereafter provided that x’s s_corporation_election was otherwise valid and has not otherwise terminated under sec_1362 this ruling is conditioned on the beneficiary of trust1 and trust2 filing a qsst election for trust1 and trust2 effective d2 with the appropriate service_center within days of the date of this letter a copy of this letter should be attached to the qsst elections except as specifically ruled above we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provisions of the code including x’s eligibility to be a valid s_corporation or trust1 or trust2’s eligibility to be a qsst plr-106523-14 this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to x’s authorized representative sincerely holly porter branch chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


t c memo united_states tax_court american valmar international ltd inc et al petitioners v commissioner of internal revenue respondent docket nos filed date an individual and his wholly owned corporation each received wire transfers of u s dollars from within the former soviet bloc of countries ps claim that the wire transfers to the individual were part of a ruble hoard accumulated before he came to the united_states and the wire transfers to the corporation were deposits received in the corporation’s business as a commission agent r treated all the wire transfers as gross_income to the corporation and treated the amounts received by the individual as distributions from the corporation r also disallowed certain deductions of the corporation and imposed accuracy-related_penalties and delinquency additions held wire transfers to corporation and some of wire transfers to the individual are gross_income to the cases of the following petitioners are consolidated herewith valeri markovski docket nos and american valmar international ltd inc docket no corporation held further p had constructive_dividend held further all but one deduction disallowed held further accuracy-related_penalties sustained held further delinquency addition sustained ira b stechel and thomas j fleming for petitioners daniel o'brien and patrick e whelan for respondent memorandum findings_of_fact and opinion halpern judge these cases have been consolidated for trial briefing and opinion by separate notices of deficiency respondent had determined deficiencies in additions to and penalties with respect to the federal income taxes of petitioners valeri markovski markovski and american valmar international ltd inc american valmar as follows additions to tax petitioner year1 deficiency sec_6651 sec_6662 markovski dollar_figure big_number -- -- dollar_figure big_number american valmar big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number american valmar's taxable_year is a fiscal_year ending june markovski is an individual taxpayer whose taxable_year ends dec after concessions the issues for decision with respect to american valmar are whether american valmar had gross_income on account of receipts of dollar_figure dollar_figure and dollar_figure during and respectively whether american valmar had gross_income on account of deposits to bank accounts of its sole shareholder markovski whether american valmar is entitled to additional deductions for business_expenses of dollar_figure dollar_figure and dollar_figure for and respectively whether american valmar is subject_to accuracy-related_penalties for and whether american valmar is subject_to delinquency additions for and the issues for decision with respect to markovski are whether markovski had gross_income on account of constructive dividends of dollar_figure and dollar_figure received from american valmar during and respectively whether markovski is subject_to accuracy-related_penalties for and unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure introduction findings_of_fact some of the facts have been stipulated and are so found the stipulations of fact filed by the parties with accompanying exhibits are incorporated herein by this reference at the time the petitions were filed american valmar maintained its principal office in new york new york and markovski resided in fort lee new jersey markovski markovski was born in dniepepetrovsk u s s_r in in he emigrated to the united_states and in he became a u s citizen prior to emigrating to the united_states he accumulated a substantial hoard of rubles the ruble hoard the ruble hoard was in part attributable to markovski’s sale of soviet government securities and inherited jewelry american valmar american valmar a new york corporation was organized in markovski is the sole shareholder of american valmar during its taxable years here in issue american valmar was engaged as a commission broker purchasing goods in the united_states for export to customers located in the former soviet union it had four customers video computer a moscow-based trading company engaged in the sale of electronic goods diapazon also a moscow-based trading company interrosa a ukraine-based trading company and kond petroleum a company in the oil business in siberia american valmar filed federal_income_tax returns for the years in issue on those returns it did not report gross_sales and cost_of_goods_sold the only income reported by it was commission income of between and percent of the dollar amount of purchases made for customers the books_and_records of american valmar reflect the receipt of incoming wire transfers of american currency as credits to an account denominated accounts payable-contracts contracts payable at year’s end amounts expended by american valmar for customer purchases otherwise disbursed at the request of customers or refunded to customers together with commissions earned were debited to contracts payable credit balances in the contracts payable account at the end of american valmar’s and taxable years were dollar_figure dollar_figure and dollar_figure respectively for each of those years the following table shows amounts credited to contracts payable debits on account of purchases made and commissions charged and the yearend excess of such credits over such debits credits to contracts payable less purchases big_number big_number big_number commissions big_number big_number big_number excess_amount big_number big_number big_number dollar_figure dollar_figure dollar_figure at the time american valmar received funds from customers it did not necessarily have instructions as to how those funds were to be used funds received from customers were held in interest-bearing accounts or used to purchase u s treasury bills until disbursed american valmar retained all interest earned the fort lee residence on date markovski purchased a condominium apartment in fort lee new jersey the condominium for dollar_figure previously markovski had rented the condominium during american valmar spent at least dollar_figure for improvements to and home furnishings for the condominium that dollar_figure was debited to contracts payable subsequently markovski sold the condominium and purchased another apartment in the same building the improvements to the condominium and some of the furnishings purchased for it remained in the condominium when it was sold american valmar’s bank accounts during the years in issue american valmar maintained the following bank accounts bank account number reference chemical chem manufacturers hanover manh markovski’s bank accounts during the years in issue markovski maintained the following bank accounts bank account number reference chemical chem manufacturers hanover manh wire transfers to american valmar american valmar received wire transfers of u s dollars as follows date account amount originator identification manh dollar_figure bank of fgn econ affairs moscow manh big_number bank of fgn econ affairs moscow contract date ordering customer video- computer moscow videocomputer ordering customer manh big_number lloyds bank london england air foyle ltd luton airport manh big_number chem big_number bank of fgn econ affairs moscow re videocomputer bank of fgn econ affairs moscow firms invoice invoice for supplied equip chem big_number manh big_number dbs bank singapore energologila kiev manh big_number -- manh big_number -- according to agreement equipment contract kiev - ukranian prod assoc ukranian production associates contract dec rem kiev equipment contract during april and date the following wire transfers of u s dollars were made to markovski's personal bank accounts date account amount originator identification manh dollar_figure manh big_number manh big_number chem big_number ykrainian production assoc ykrainian production assoc beneficiary - american valmar equipment contract for equip contract bank for fgn econ affairs moscow bank for fgn econ affairs moscow beneficiary american valmar by order - interrosa during american valmar’s taxable_year the following wire transfers of u s dollars were made from budapest hungary to american valmar's accounts date account amount originator chem dollar_figure hungarian fgn trade bank chem big_number -- in date and date the following wire transfers of u s dollars were made from the former soviet union and budapest hungary to markovski's personal bank accounts date account amount originator identification manh dollar_figure rem kiev beneficiary - american valmar equipment contract manh big_number chem big_number wire transfer to mila panarey bank of fgn econ affairs moscow beneficiary - american valmar equipment contract dec hungarian fgn trade bank order ansa szeged on date american valmar wired dollar_figure to the account of mila panarey ms panarey is a housewife who at the time of the trial lived in philadelphia pennsylvania ms panarey is the cousin of ludmila piker who was a consultant for american valmar from through at least and who is markovski’s stepdaughter the dollar_figure transmitted to ms panarey was sent pursuant to an agreement whereby ms panarey would receive the funds and immediately return them to her cousin ms piker ms panarey did return the funds to her cousin transfers to manufacturer’s hanover bank account during its taxable_year american valmar transferred dollar_figure to a manufacturer’s hanover bank account in the name of anatoly seregin american valmar’s federal_income_tax returns simon bolonik bolonik became american valmar’s accountant in date bolonik established the books_and_records of american valmar based on his conversations with markovski he determined the accounting and federal_income_tax treatment of american valmar’s receipts and disbursements based on what markovski told him he determined the federal_income_tax treatment of amounts received by wire transfer by markovski bolonik prepared american valmar’s and markovski’s federal_income_tax returns certificates of assessments and payments maintained by the internal_revenue_service for american valmar reflect that the income_tax returns of the corporation for the fiscal years at issue were filed as follows taxpayer period date filed american valmar american valmar american valmar the income_tax returns filed by american valmar for the fiscal years at issue bear date received stamps on their face as follows taxpayer period date received stamp american valmar american valmar none american valmar the envelopes in which the income_tax returns of american valmar for the fiscal years in issue were mailed to the internal_revenue_service reflect the below-listed postmark dates taxpayer period postmark date american valmar american valmar none american valmar american valmar’s income_tax returns for and were received by the internal_revenue_service on date date and date respectively i introduction opinion the principal issues in this case involve the proper characterization of various amounts received from abroad by wire transfer into bank accounts of petitioner american valmar international ltd inc american valmar and its principal_shareholder petitioner valeri markovski markovski respondent disagrees with petitioners’ claim that the amounts received by american valmar did not constitute items of gross_income because of american valmar’s obligation to expend those amounts on behalf of its clients respondent also disagrees with petitioners’ claim that the amounts received by markovski did not constitute items of gross_income because those amounts were the proceeds of a hoard of rubles accumulated before markovski emigrated to the united_states petitioners place substantial reliance on markovski’s testimony while respondent relies substantially on circumstantial evidence that respondent claims negates much if not all of markovski’s testimony we do not agree completely with either party we also decide a deduction issue with respect to american valmar and the various additions to tax and penalties petitioners bear the burden_of_proof see rule a ii wire transfers to american valmar during each of its taxable years in issue american valmar received substantial deposits into its bank accounts by wire transfers from abroad the american valmar deposits the american valmar deposits were received principally from countries in the former soviet bloc american valmar argues that it was a commission broker and the american valmar deposits did not constitute gross_income because of its obligation to disburse those deposits as directed by its clients respondent agrees both that american valmar was a commission broker and that refundable deposits do not constitute items of gross_income respondent is unpersuaded however that american valmar had any bona_fide obligation to its clients respondent argues that american valmar’s books_and_records did not adequately establish its liabilities to individual clients and american valmar treated some of the funds it received as if they were its own respondent adjusted american valmar’s income by treating the american valmar deposits as gross_receipts from sales respondent increased american valmar’s gross_income for the years in issue by the excess of the american valmar deposits received during a year over purchases made and commissions earned during such year dollar_figure dollar_figure and dollar_figure for and respectively the excess amounts we have found that american valmar had four customers during the years in issue video computer diapazon interrosa and kond petroleum the customers petitioners claim that the customers were the source of the american valmar deposits and that until expended on behalf of one of the customers or earned as a commission by american valmar the american valmar deposits belonged to the customers petitioners rely principally on the testimony of markovski that american valmar had liabilities to the customers for the unexpended balance of the american valmar deposits although petitioners did produce some correspondence with three of the customers petitioners produced no written agreements with any of them in its financial records american valmar did credit the american valmar deposits to contracts payable video computer is identified on some of the wire transfers but none of the other customers are no representative of any of the customers testified petitioners explain their lack of documentary substantiation by explaining that it was the normal business practice for business entities located in the former soviet union to deposit funds with foreign businesses without documentary_evidence based on the testimony of petitioners' expert yakov m balakhovsky an attorney experienced with russian and soviet law petitioners claim the following russian businesses as a matter of custom and practice during the taxable years in issue herein would deposit funds abroad due to their inability to open foreign bank accounts as well as the absence of a private banking system in the u s s_r and rampant economic political and social turmoil in the u s s_r l ittle formal documentation or other legal niceties would accompany such deposits because of the embryonic nature of the soviet commercial law the absence of skilled lawyers and the inability to enforce contractual obligations through government legal channels due to endemic corruption and the systemic hostility of the soviet state towards entrepreneurial activity respondent did not challenge petitioners' expert's testimony and we accept his opinions and find accordingly respondent made a common response to many of petitioners’ proposed findings_of_fact with respect to the existence of the customers and american valmar’s obligations to them objection to the proposed finding of fact in that it is based upon the uncorroborated self-serving testimony of valeri markovski it is undoubtedly true that many of petitioners’ proposed findings_of_fact are uncorroborated and self-serving that however does not necessarily mean that they are false respondent also adverts to the paucity of american valmar’s records and certain seeming inconsistencies in those records as grounds for rejecting all of american valmar’s allegations we have examined the records and are unconvinced that either their minimal extent or seeming inconsistencies prove that the customers did not exist or that american valmar had no obligation to them indeed we find respondent’s wholesale rejection of petitioners’ proof even as to the existence of the customers inconsistent with respondent’s requiring american valmar to include in gross_income for each year only the excess of the american valmar deposits received over purchases made and commissions earned during such year petitioners rely principally on markovski’s testimony which is uncorroborated they say because of business conditions in the former soviet union we give petitioners the benefit of the doubt with respect to business conditions in the former soviet union nevertheless in some respects we found mr markovski credible and in some we did not american valmar spent at least dollar_figure for home furnishings delivered to a condominium apartment the condominium that markovski owned and in which he lived that amount was charged to contracts payable and markovski testified that the expenditure was made at the direction of diapazon to outfit a bedroom as living space and office for diapazon employees visiting the united_states after supposedly outfitting the condominium for diapazon markovski sold the condominium with many of the improvements left behind petitioners have not explained what happened to diapazon’s interest in the condominium we did not find markovski’s testimony or the testimony of his wife lina credible with respect to the condominium transaction also we did not find credible markovski’s testimony with respect to the wire transfer to mila panarey of dollar_figure that sum was received pursuant to an agreement that ms panarey would turn the sum over to ludmila piker her cousin ludmila piker had been a consultant to american valmar and was markovski’s stepdaughter markovski testified that he knew nothing of that transaction other than that he had been instructed by a customer interrosa to wire the money to ms panarey he also testified that the dollar_figure never came back to american valmar since we found markovski’s testimony to be unconvincing with respect to both the apartment transaction and the mila panarey wire transfer we think it a fair assumption that markovski or american valmar benefited from both transactions in the apartment transaction it was his living quarters that were improved with respect to the mila panarey wire transfer it was markovski’s step-daughter who ended up with the money in both cases the expenditures were charged to the contracts payable account we find that markovski benefited from both transactions we therefore question his assertion that the american valmar deposits accounted for by the contracts payable account were held under an obligation to use them solely for the benefit of the customers petitioners have failed to convince us of that fact and on that basis we sustain respondent’s adjustment with respect to the american valmar deposits iii american valmar additional deductions as stated respondent increased american valmar’s gross_income for the years in issue by the excess of the american valmar deposits received during a year over purchases made and commissions earned during such year respondent disallowed certain of american valmar’s claims of purchases made on behalf of customers as follows dollar_figure dollar_figure and dollar_figure for and respectively respondent has conceded dollar_figure of the purchases disallowed for and dollar_figure of the purchases disallowed for leaving at issue dollar_figure dollar_figure and dollar_figure for and respectively although petitioners claim on brief that additional_amounts of purchases were conceded by respondent they have failed to prove any additional concessions apparently believing that all other disallowed purchases have been conceded petitioners address only dollar_figure of the remaining disallowance of dollar_figure petitioners first claim that dollar_figure of funds attributable to interrosa was disbursed during american valmar’s taxable_year to a manufacturer’s hanover bank account in the name of anatoli seregin an officer of interrosa the parties have stipulated transfers in that amount during that year to that bank in that name the transfer in evidence is correspondence purporting to be from interrosa and authorizing american valmar to open an account in the name of anatoli seregin respondent offers nothing to rebut petitioners’ proposed finding that the transfer was a disbursement of interrosa’s funds other than the claim that the proposed finding is based on the self-serving testimony of valeri markovski although we have doubts about some aspects of markovski’s testimony there was nothing suspicious about his testimony concerning the transfer american valmar has carried its burden of proving that the transfer was a disbursement to interrosa and we so find in his notice_of_deficiency for respondent states that he is disallowing some of the purchases claimed on the grounds that such amounts were not for ordinary and necessary business_expenses or were not paid for the purposes designated we assume that the transfer is covered by the purposes-designated-language in respondent's notice and since we have found that the transfer was for the purposes designated we do not sustain the deficiency to the extent it is attributable to the transfer petitioners' second claim relates to the dollar_figure wire transfer to mila panarey which they claim was a disbursement at the direction of interrosa we found markovski’s testimony unconvincing with respect to that transaction and conclude that petitioners have failed to carry their burden of proving that the mila panarey transfer was a disbursement at the direction of interrosa in addition to the two claims with respect to petitioners also claim credit for the dollar_figure spent with respect to the condominium petitioners have failed to prove that such amount was disbursed at the direction of diapazon except with respect to the transfer respondent’s determination_of_a_deficiency is sustained to the extent it relates to respondent’s disallowances of purchases iv constructive dividends during and markovski received seven deposits into his bank accounts by wire transfer from abroad the markovski deposits six of those deposits were made in and totaled dollar_figure the seventh deposit was made in in the amount of dollar_figure respondent treated the markovski deposits as if they had been received by and belonged to american valmar and had then been distributed to markovski with respect to his stock respondent made positive adjustments to american valmar’s income on the basis that the markovski deposits were items of gross_income to american valmar respondent made positive adjustments in markovski’s income on the basis that the markovski deposits constituted constructive dividends from american valmar in his notices of deficiency to american valmar respondent labels the adjustments to american valmar’s income receipts from shareholder account the adjustments are dollar_figure and dollar_figure for american valmar’s taxable years ending date and inexplicably respondent has omitted making an adjustment to american valmar’s income for the markovski deposits in the amounts of dollar_figure and dollar_figure received by markovski on july and respectively the adjustment for totaled dollar_figure which is dollar_figure greater than the markovski deposits received during continued petitioners assigned error to respondent’s adjustments claiming that the markovski deposits constituted the tax free receipt of a substantial hoard of rubles the ruble hoard accumulated before markovski emigrated to the united_states petitioners rely principally on markovski’s testimony and the testimony of larisa saltevskiya saltevskiya a close personal friend to establish the existence and size of the ruble hoard petitioners also direct us to a copy of a letter from r b gevorkian an executive of diapazon dated date the gevorkian letter the gevorkian letter states diapazon received dollar_figure from markovski in date and transferred a portion of it to the chem account in various amounts which include all of the markovski deposits made in respondent relies principally on similarities with respect to the source and identifying information between the markovski deposits and the american valmar deposits respondent disbelieves markovski’s and saltevskiya’s testimony concerning the ruble hoard pointing out certain inconsistences in the testimony of each again we must weigh petitioners’ less than perfect testimonial evidence against respondent’s circumstantial evidence we have found that markovski accumulated the ruble continued apparently the dollar_figure represents the amount american valmar spent for home furnishings delivered to markovski’s condominium apartment hoard before he emigrated from russia no purpose would be served in going into the details of his testimony we have considered the inconsistencies pointed out by respondent nevertheless respondent has no effective rebuttal to much of markovski’s narrative of his activities and family history in russia we believe that markovski did accumulate some substantial amount of wealth before he emigrated to the united_states whether the markovski deposits comprised all or part of the ruble hoard is another question petitioners offered no good explanation for the similarities between the markovski deposits and the american valmar deposits a similar notation--for equipment contract 14-12-90--accompanies four of the markovski deposits those of april may july and date in the amounts of dollar_figure dollar_figure dollar_figure and dollar_figure respectively and three of the american valmar deposits those of january june and date the date markovski deposit in the amount of dollar_figure carries the notation by order of sv interrousa sic the date markovski deposit in the amount of dollar_figure carries the notation beneficiary american valmar intl co we believe that the similarities in notation between the april may july and date markovski deposits and certain of the american valmar deposits and the notations on the may and date markovski deposits are evidence that those deposits related to the business of american valmar we accord that evidence more weight than markovski’s testimony that those deposits were from his ruble hoard and so find we do not find sufficient similarities between the date markovski deposit of dollar_figure and any american valmar transactions to rebut markovski’s testimony that that deposit was from his ruble hoard and we so find we find that the april may may and may markovski deposits were constructively received by american valmar and constitute items of gross_income to american valmar for see eg 89_tc_1280 diverted amounts taxed to a shareholder as constructive dividends also remain fully taxable to the corporation to which attributable we see little difference between those deposits and the ones made on july and nevertheless since respondent has not determined any deficiency in american valmar’s tax on account of those deposits we shall ignore them with respect to american valmar we find that all of the april may may may july and date markovski deposits were distributed to markovski with respect to his stock since petitioners have failed to prove an insufficiency in american valmar’s earnings_and_profits the distributions are dividends includable in markovski’s gross_income see sec_301 sec_316 see supra note the dollar_figure that american valmar spent for home furnishings delivered to the condominium also constitutes a constructive_dividend to markovski includable in his gross income v additions to tax and penalties a additions to tax for failure_to_file return respondent determined additions to tax against american valmar for each of its years in issue under sec_6651 sec_6651 provides that in the case of a failure_to_file an income_tax return by the due_date there shall be imposed an addition_to_tax for such failure of percent of the amount of tax reduced by timely payments and credits under sec_6651 for each month or portion thereof during which the failure continues not exceeding percent in the aggregate unless such failure is due to reasonable_cause and not due to willful neglect respondent determined that american valmar’s income_tax return for due on date was months delinquent and that its and income_tax returns due on account of extensions on date and respectively were not filed until date and date respectively we have found that american valmar’s income_tax returns for through were received by the internal_revenue_service on date date and date respectively we have done so based on respondent’s records and the other information set forth in our findings_of_fact petitioners’ evidence of timely filing consists of the testimony of simon bolonik bolonik by whose office the returns were filed and who testified that the returns were mailed one week before the due dates bolonik testified mr markovski was one of my oldest clients and i basically remember where i put -- if i mailed it the return or not i would take special care in mailing them we found bolonik’s testimony inexact and unconvincing and we accord it no weight moreover two of the returns bear postmarks well after the relevant due_date the returns in question were not timely received by the internal_revenue_service and petitioners have failed to satisfy the requirements of sec_7502 that timely mailing constitutes timely filing we find that the returns in question were filed on the dates received by the internal_revenue_service the returns were thus not timely and petitioners have failed to show reasonable_cause and lack of willful neglect respondent’s determinations of additions to tax under sec_6651 are sustained adjusted only to take into account the deficiencies redetermined by us b accuracy-related_penalty respondent determined penalties against american valmar and markovski for each of their respective years in issue under sec_6662 sec_6662 provides for the imposition of an accuracy- related penalty equal to percent of any portion of an underpayment attributable to among other things any substantial_understatement_of_income_tax sec_6662 and b an understatement is substantial when the understatement for the taxable_year exceeds the greater of percent of the tax required to be shown or dollar_figure dollar_figure in the case of a corporation sec_6662 and b the understatement is reduced to the extent that the taxpayer has adequately disclosed his or her position or has substantial_authority for the tax treatment of an item sec_6662 additionally no penalty is imposed with respect to any portion of an understatement as to which the taxpayer acted with reasonable_cause and in good_faith sec_6664 petitioners do not claim adequate_disclosure on their returns they do claim substantial_authority however in making that claim they refer generally to the portions of their brief containing their arguments that neither a deposit nor a taxpayer’s receipt of his own funds is an item_of_gross_income and the expenditures in question were made by american valmar as an agent for its clients we have rejected the factual basis of petitioners’ claim and thus what authority they cite is not relevant to the facts of this case and cannot constitute respondent determined an alternative basis for the penaltie sec_5 imposed by sec_6662 on account of negligence or disregard of rules and regulations see sec_6662 and b respondent failed to address that alternative basis on brief so we will assume that respondent has abandoned that alternative see 22_tc_1146 affd 230_f2d_603 2d cir 22_tc_593 roberts v commissioner tcmemo_1996_225 substantial_authority see 91_tc_686 cases that are factually distinguishable are not substantial_authority affd 893_f2d_656 4th cir see also 46_f3d_760 8th cir affg tcmemo_1993_197 petitioners also claim that with respect to any underpayment there was reasonable_cause and each acted in good_faith petitioners argue that both elements reasonable_cause and good_faith are established by markovski’s ignorance of the law and reliance on his tax adviser bolonik sec_1 b income_tax regs states the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case- by-case basis taking into account all pertinent facts and circumstances the most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax_liability circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of the experience knowledge and education of the taxpayer reliance on the advice of a professional such as an appraiser attorney or accountant does not necessarily demonstrate reasonable_cause and good_faith reliance on professional advice constitutes reasonable_cause and good_faith if under all the circumstances such reliance was reasonable and the taxpayer acted in good_faith bolonik’s testimony clearly establishes that he both determined the tax treatment of the american valmar deposits and the markovski deposits and related items and prepared the petitioners’ returns we can thus assume that the petitioners relied on him in determining their tax_liabilities bolonik’s testimony is also clear that he determined the tax treatment of the american valmar and markovski deposits based on what markovski told him about the nature of those deposits with respect to the american valmar deposits bolonik testified that in setting up american valmar’s books_and_records he had conversations with markovski about the nature of the corporation’s business and the books_and_records reflected those discussions with respect to the markovski deposits mr bolonik testified that he believed that those deposits did not constitute items of gross_income during the years received based on markovski’s statements to him that those sums had been earned before markovski moved to the united_states in substantial part petitioners have failed to prove their version of the facts concerning the american valmar and markovski deposits bolonik’s advice thus was faulty and petitioners can rely on it to establish reasonable_cause and good_faith only if such reliance was reasonable and they acted in good_faith reasonable_cause and good_faith may be established by a showing of an honest misunderstanding of fact petitioners have failed to convince us of what actually transpired here they have thus failed to convince us that they honestly misunderstood any facts we are not convinced--i e petitioners have failed to prove--that there was reasonable_cause for their underpayment and that they acted in good_faith in determining their income_tax liabilities with respect to the american valmar and markovski deposits we sustain respondent’s determinations of penalties under sec_6662 subject only to modification with respect to the deficiencies as redetermined decisions will be entered under rule


id office uilc cca_2010110309371837 ---------- number release date from ------------------- sent wednesday november am to ------------------- cc subject re question --------- there is no tmp for a corporation the statement from the stock holder would have to certify that a person was an officer of the corp authorized to act on its behalf that would be o k but the statement could not appoint or designate an officer since only the board_of directors as reflected in the minutes of a board_of director meeting could do that so either a certified statement or minutes would suffice


office_of_chief_counsel internal_revenue_service memorandum number release date cc pa lrpounders posts-131336-13 uilc 6041a date date to trudee l brillo senior program analyst tax exempt government entities from bridget e tombul senior technical reviewer procedure administration third party communication none date of communication not applicable subject information reporting with respect to payments made to veterinary corporations this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent issues do payments made by a taxpayer in the course of his or her trade_or_business to a veterinarian operating as a corporation have to be reported to the irs under internal_revenue_code irc or code sec_6041 conclusions generally yes payments made by a taxpayer in the course of the taxpayer’s trade_or_business to an incorporated veterinarian must be reported to the irs to the extent the payments aggregate to dollar_figure or more per year incorporated veterinarians are not exempted from the reporting requirement by sec_1_6041-3 because veterinarians are engaged in providing medical and healthcare services for the purposes of sec_1_6041-3 background sec_6041 of the code generally requires taxpayers to file annual information returns for payments made in the course of the taxpayer’s trade_or_business to the extent those posts-131336-13 payments amount to dollar_figure or more in aggregate in order to be subject_to sec_6041 reporting two initial criteria must exist first the payment must be reported if it is made in the course of the taxpayer’s trade_or_business and second the sum of the payments made to the payee must amount to dollar_figure or more in that year many payments to veterinarians will not be subject_to sec_6041 reporting because they are either not made in the course of the taxpayer’s trade_or_business or because they do not amount to dollar_figure in a given year for instance a payment to a veterinarian to vaccinate the family pet is probably not subject_to sec_6041 reporting because it is not made in the course of a trade_or_business however there are many other instances where veterinarian services are procured for animals used in the course of a taxpayer’s trade_or_business and will exceed dollar_figure a year examples of a trade_or_business that might utilize veterinary services include animal farmers ranchers zoos pet shops etc payments made to veterinarians in the course of the taxpayer’s trade_or_business which amount to dollar_figure or more in a given year are subject_to information reporting under sec_6041 unless an exception applies sec_1_6041-3 provides several exceptions from information reporting under sec_6041 for certain types of payments in particular sec_1_6041-3 provides exceptions for payments made to certain payees such as certain corporations tax exempt entities and government entities under sec_1_6041-3 payments made to corporations described in sec_1_6049-4 are generally exempted from the reporting requirement however under sec_1_6041-3 corporations engaged in providing medical and healthcare services are not exempted from the reporting requirement veterinary practices are operated through many types of business_entity including corporations the analysis below addresses whether the exception for payments to corporate payees should apply to otherwise reportable payments made to a corporation providing veterinary services law and analysis to determine whether a corporation that renders veterinary services is an excepted payee under sec_1_6041-3 we must determine whether a veterinarian is engaged in providing medical and healthcare services for purposes of sec_1_6041-3 our analysis turns on our interpretation of teas reg sec_1_6041-3 which applies equally to both sec_6041 and sec_6041a see irs notice_2001_38 stating that sec_1_6041-3 also applies to sec_6041a see also proposed sec_1_6041a-1 proposed date therefore the analysis applies equally to information reporting required under either sec_6041 or sec_6041a note that this analysis is limited to the applicability of the general corporate exception a veterinarian corporation may still be an exempt payee under a different exception posts-131336-13 the words medical and healthcare typically refer broadly to the prevention diagnosis treatment and management of disease illness or injury by a professional see eg american heritage dictionary of the english language houghton mifflin harcourt publ’g co 5th ed defining medical as of or relating to the study or practice of medicine defining medicine as the science and art of diagnosing and treating disease or injury and maintaining health and defining healthcare as the prevention treatment and management of illness and the preservation of mental and physical well-being through the services offered by the medical and allied health professions the language of sec_1_6041-3 does not restrict the terms medical or healthcare to services performed on humans the common definition of veterinarian is a professional engaged in the prevention diagnosis and treatment of animal diseases and injuries see eg id defining a veterinarian as a person who practices a branch of medicine that deals with the causes diagnosis and treatment of diseases and injuries of animals especially domestic animals bureau of labor statistics u s dep’t of labor occupational outlook handbook veterinarians edition available at http www bls gov ooh healthcare veterinarians htm listing veterinarians under healthcare and defining a veterinarian as someone whose profession it is to diagnose treat or research diseases and injuries of animals reading these definitions together a veterinarian’s services squarely fall within the scope of what are generally considered medical and healthcare services congress and the irs have historically included veterinarians in the field of medical and healthcare services and specifically excluded veterinarians when exclusion was intended for example in revrul_91_30 the irs determined that veterinarians are in the field of health and should be included within the meaning of similar healthcare providers akin to doctors nurses and dentists for purposes of defining a personal_service_corporation as an example where congress intended to exclude veterinarians from a consideration of what is considered medical congress specifically limited the definition of medical device in sec_4191 to devices intended for humans under sec_1_6041-3 the language does not limit the terms medical or healthcare to services intended to treat humans accordingly we conclude that a corporation providing veterinary services is engaged in providing medical and healthcare services for purposes of sec_1_6041-3 and is therefore not excepted from the information reporting requirement of sec_6041 as a corporate payee case development hazards and other considerations 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--------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------- this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call ---------------------- if you have any further questions


internal_revenue_service number release date index number --------------------------------------------------------- --------------------------------- ------------------- ------------------------------ - department of the treasury washington dc person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b01 - plr-114230-04 date may legend x ------------------------------------------------------ date date dear --------------- ---------------------- ----------------- --------------------------------------------------------- this responds to a letter dated date and subsequent according to the information submitted x was incorporated on date and began correspondence submitted on behalf of x requesting relief under ' b of the internal_revenue_code facts business on date the sole shareholder of x intended for x to be an s_corporation effective date but the election to be treated as an s_corporation was not timely filed x requests a ruling under sec_1362 that it will be treated as an s_corporation effective date law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first plr-114230-04 two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under ' b however if an s election is made after the first two and one-half months of a corporation's taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed sec_1362 provides that if no ' a election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and ' b shall not apply x did not file an election to be treated as an s_corporation under ' a x has however established reasonable_cause for not making a timely s election and is entitled to relief under ' b conclusion except as expressly provided herein no opinion is expressed or implied in accordance with the power_of_attorney on file with this office a copy of this this ruling is directed only to the taxpayer s requesting it sec_6110 of based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective date within days from the date of this letter x should submit a properly completed form_2553 effective date with a copy of this letter attached to the relevant service_center concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter the code provides that it may not be used or cited as precedent letter is being sent to your authorized representative the rulings contained in this letter are based upon information and plr-114230-04 representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination s dianna k miosi enclosures copy of this letter copy for sec_6110 purposes cc ---------------------- dianna k miosi chief branch associate chief_counsel passthroughs and special industries sincerely ----------------------------- ------------------------------------ ----------------------------------------------------------- ---------------------------------------- ----------------------------


internal_revenue_service number release date index number ------------------------------------------------------- ------------------------ ---------------------------- -------------------------------------- --------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-108675-05 date date --------------------- ---------------------- ---------------------------------- legend legend x ------------------------------------------ country date dear --- ----------- this responds to a letter dated date submitted on behalf of x requesting that the service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect to be treated as a disregarded_entity under sec_301_7701-3 x represents that x is a foreign_entity eligible to elect to be treated as a disregarded_entity however the service has no record of a timely filed form_8832 entity classification election electing to treat x as a disregarded_entity effective date entity for federal_income_tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if the foreign eligible_entity has only one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 on form_8832 and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date on which the form is filed sec_301_7701-3 provides that an entity classification election must be filed the information submitted states that x was formed under the laws of country sec_301_7701-3 provides guidance on the classification of a foreign sec_301_9100-1 through provide the standards the sec_301_9100-1 provides that the commissioner may grant a reasonable plr-108675-05 extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect to be treated as a disregarded_entity effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose federal tax consequences of the facts described above under any other provision of the code provides that it may not be used or cited as precedent being sent to x’s authorized representatives except as specifically set forth above no opinion is expressed concerning the based solely on the information submitted and the representations made we pursuant to a power_of_attorney on file with this office a copy of this letter is this ruling is directed only to the taxpayer requesting it sec_6110 sincerely heather c maloy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury int ernal revenue service washington d c o f f i c e o f c h i e f c o u n s e l number release date alspeetjens cc te_ge eb qp1 uilc date internal_revenue_service national_office field_service_advice memorandum for area_counsel te_ge northeast mid-atlantic area attn mark hulse from michael j roach chief qualified_plans branch cc te_ge eb qp1 subject this field_service_advice responds to your request for assistance on or about date relating to the refund claim at issue in the above- referenced case field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be used or cited as precedent disclosure statement field_service_advice is chief_counsel_advice and is open to public inspection pursuant to the provisions of sec_6110 the provisions of sec_6110 require the service to remove taxpayer identifying information and provide the taxpayer with notice of intention to disclose before it is made available for public inspection sec_6110 and i sec_6110 also authorizes the service to delete information from field_service_advice that is protected from disclosure under u s c sec_552 b and c before the document is provided to the taxpayer with notice of intention to disclose only the national_office function issuing the field_service_advice is authorized to make such deletions and to make the redacted document available for public inspection accordingly the examination appeals or counsel recipient of this document may not provide a copy of this unredacted document to the taxpayer or their representative the recipient of this document may share this unredacted document only with those persons whose official tax_administration duties with respect to the case and the issues discussed in the document require inspection or disclosure of the field_service_advice legend taxpayer x plan day day day date date date date date date date date date dollar_figurek dollar_figurej a b c d e f g h j k the claim involves whether under sec_404 taxpayer x may deduct contributions made to plan a 401_k_plan on the last day of taxpayer x’s taxable_year if such contributions are attributable to compensation earned after the close of taxpayer x’s taxable_year resolution of this issue involves consideration of whether the accrual rules of sec_461 must be satisfied before a deduction can be properly taken under sec_404 as you know revrul_90_105 1990_2_cb_69 addressed the applicability of the sec_461 accrual rules to sec_401 and m contribution deductions under sec_404 more recently this office also issued an fsa recommending that the service not pursue the applicability of sec_461 to sec_404 deductions in connection with a case involving so-called sec_404 grace period contributions we reasoned in that case that the government’s position to deny deductions for contributions which are attributable to compensation_for services that have not been rendered by the close of an employer’s tax_year was well supported under the plain language of sec_404 and the case law relating thereto although the recommendation in that fsa does not reflect the service’s legal position regarding the applicability of sec_461 to sec_404 deductions we understand that taxpayer x has argued to the examination agent handling the refund claim that that fsa reflects a change in service position regarding the applicability of sec_461 to sec_404 contribution deductions issue whether under sec_404 taxpayer x may deduct contributions made to plan on the last day of taxpayer x’s taxable_year if such contributions are attributable to compensation earned after the close of taxpayer x’s taxable_year conclusion we believe that the accrual rules of sec_461 apply to plan contribution deductions in this case under the otherwise deductible language of sec_404 and that the fact of liability requirement thereof cannot be satisfied under the above- described facts accordingly we recommend that your office advise the examination agent to deny taxpayer x’s refund claim facts taxpayer x an accrual basis taxpayer maintains plan which provides for elective_deferrals matching and discretionary profit sharing contributions taxpayer x operates on a taxable_year ended day plan also operated on a plan_year ending on day effective date taxpayer x amended and restated plan in part to include a prior amendment that redefined the term plan_year as the period beginning day and ending day the day before day thus plan apparently experienced a short plan_year for the period date through date after the change to the definition of plan_year taxpayer x’s taxable_year and the plan’s plan_year overlap by day we understand that taxpayer x’s taxable_year ended date was the first tax_year in which it deducted sec_401 and m contributions to plan that were attributable to compensation earned in the subsequent tax_year we also understand that for the tax_year intervening tax_year ended date and tax_year ended date taxpayer x did not deduct sec_401 and m contributions to plan that were attributable to compensation earned in the subsequent tax_year we have been unable to confirm whether in the intervening tax_year taxpayer x deducted sec_401 and m contributions to plan that were attributable to compensation earned during that tax_year on date taxpayer x made a contribution to plan dollar_figurek of which was attributable to elective_deferrals and matching_contributions based on compensation earned during the plan_year ended date taxpayer x claimed a deduction for this contribution on its form_1120 filed for its taxable_year ended date by notice of proposed_adjustment dated date the service proposed to disallow the portion of the contribution deduction that was attributable to compensation earned after the end of the employer’s taxable_year based on revrul_90_105 and sec_404 appeals upheld the proposed_adjustment the service issued a statutory_notice_of_deficiency on date adjusting taxpayer x’s income in part by the dollar_figurek sec_401 and m contributions to plan for taxable_year ended date taxpayer x paid the tax in full on date and submitted a claim_for_refund for the dollar_figurek on or about date the claimed refund was solely attributable to the portion of the claimed date plan contribution deduction that the service previously denied because it was attributable to compensation earned by participants after taxpayer x’s taxable_year ending date under plan a and b pre-tax contributions elective_deferrals and employer matching_contributions are based in part on the amount specified by the participants on their annual salary reduction agreements under c any amounts held in the trust fund which have not been credited to participants’ accounts under plan as of the last day of the plan_year shall be credited as of such date by applying such amounts in the manner described in paragraph below in other words in operation taxpayer x makes contributions on the first day of a plan_year day which is also the last day of taxpayer x’s taxable_year and the amounts remain in the trust unallocated until allocated at some later date within the plan_year as determined by the plan committee plan d and c under plan e contributions attributable to elective_deferrals as described in sec_401 are only required to be made to plan in the amount the participant’s_compensation has been reduced pursuant to the salary reduction agreement between taxpayer x and the participant under plan f the term compensation includes basic compensation paid to a participant during any plan_year under plan g matching_contributions generally are contributed in an amount equal to h percent of the amount the participant elected to defer pursuant to the salary reduction agreement between taxpayer x and the participant subject_to certain reductions and limitations specified in plan under plan j eligible employees who want to make elective_deferrals to plan must enter into a written salary 1paragraph provides in general that forfeitures shall be applied to restore prior forfeitures to defray administrative costs of the plan and if funds remain to the matching_contribution accounts of remaining active participants in lieu of matching_contributions which otherwise would have been made on or after the date of the forfeiture reduction agreement with taxpayer x which is generally applicable to payroll periods commencing on or after the date the agreement is executed under plan k amounts contributed to plan may be refunded to taxpayer x in the event of disallowance of a deduction or disqualification of plan by the service or mistake of fact provided such return occurs within year of the disallowance disqualification or mistake we understand from the examination agent reviewing the refund claim that dollar_figurej of the dollar_figurek disallowed was not allocated to plan participants during the date date plan_year in accordance with the terms of plan however the rider to form 1120x submitted with taxpayer x’s claim_for_refund states that the dollar_figurek was allocated to participant accounts during the date 2-date plan_year the examination agent reviewing the refund claim has requested assistance from your office on whether to deny the claim we have been told that plan has a favorable determination_letter from the service the examination agent has also indicated that taxpayer x initially sought to deduct as a plan contribution the interest that accrued on the date contribution before it was allocated to participant accounts however taxpayer x has conceded its initial objection to that adjustment we understand that extensions have been obtained on the statutes of limitations otherwise appropriate for the applicable forms and law sec_404 provides as follows 2prior to the tax_reform_act_of_1986 tra pub_l_no sec_404 provided in part as follows a general_rule -- if contributions are paid_by an employer to or under a stock bonus pension profit-sharing or annuity plan or if compensation is paid_or_accrued on account of any employee under a plan deferring the receipt of such compensation such contributions or compensation shall not be deductible under sec_162 relating to trade_or_business_expenses or sec_212 relating to expenses for the production_of_income but if they satisfy the conditions of either of such sections they shall be deductible under this section subject however to the following limitations as to the amounts deductible in any year section b c i of tra’86 amended sec_404 to substitute this chapter for sec_162 relating to trade_or_business_expenses or sec_212 a general_rule --if contributions are paid_by an employer to or under a stock bonus pension profit-sharing or annuity plan or if compensation is paid_or_accrued on account of any employee under a plan deferring the receipt of such compensation such contributions or compensation shall not be deductible under this chapter but if they would otherwise be deductible they shall be deductible under this section subject however to the following limitations as to the amounts deductible in any year emphasis added sec_404 provides in part with respect to profit sharing trusts that contributions are deductible i n the taxable_year when paid if the contributions are paid into a profit sharing trust revrul_90_105 sets forth the service’s position on the deduction of sec_401 and sec_401 contributions that are attributable to compensation earned after the close of an employer’s taxable_year the issue in revrul_90_105 is stated as follows whether contributions to a qualified_cash_or_deferred_arrangement within the meaning of sec_401 or to a defined_contribution_plan as matching_contributions within the meaning of sec_401 are deductible by an employer for a taxable_year if the contributions are attributable to compensation earned by plan participants after the end of that taxable_year the rev_rul ’s analysis of the otherwise deductible requirement for deductions under sec_404 specifically concludes that the requirements of sec_1_404_a_-1 and in the case of an accrual basis taxpayer sec_461 must be satisfied in order for a contribution to be otherwise deductible under chapter of the code in the case of a contribution that is deductible under sec_162 or sec_212 sec_1_404_a_-1 provides that in order to be deductible under sec_404 the relating to expenses for the production_of_income and if they would otherwise be deductible for if they satisfy the conditions of either of such sections the legislative_history explains that the change was intended to clarify that the deduction-timing rules for nonqualified_deferred_compensation arrangements apply to any plan or method of deferring compensation regardless of the section under which the amounts might otherwise be deductible and that the amounts shall be deductible under sec_404 and shall not otherwise be deductible under any other section the clarification was necessary to prevent taxpayers from asserting that deferred_compensation is attributable to capitalizable compensation expenses and thereby accelerate the timing of the deduction for such deferred_compensation s rep no 99th cong 2nd sess contribution must be an ordinary_and_necessary_expense during the taxable_year in carrying_on_a_trade_or_business or for the production_of_income and must be compensation_for services actually rendered revrul_90_105 interprets sec_1_404_a_-1 as follows in order for the post-year end contributions to be deductible for m’s taxable_year m would have been required to show that the contributions would have been deductible under sec_404 and in turn would have been otherwise deductible under chapter of the code for m’s taxable_year if the contributions had actually been paid on the last day of that taxable_year however the contributions are attributable to compensation earned by plan participants after the end of m’s taxable_year so that as of the last day of that taxable_year the payment of the contributions could not have been compensation_for services actually rendered under sec_1_404_a_-1 of the regulations the post-year end contributions therefore could not have been deducted for m’s taxable_year in addition revrul_90_105 states that in addition if m uses the accrual_method of accounting sec_461 also would have precluded the post-year end contributions from being deductible for m’s taxable_year because all events fixing the fact of m’s liability to make the contributions had not occurred as of the end of m’s taxable_year because the post-year end contributions are attributable to compensation earned by plan participants after the end of that taxable_year the compensation could not have been actually deferred as of that date so that m’s liability to make elective_deferral and matching_contributions with respect to that compensation would not have been fixed sec_461 provides that the amount of any deduction or credit allowed by subtitle a which includes chapter must be taken for the taxable_year that is the proper taxable_year under the method_of_accounting used in computing taxable_income for the accrual_method of accounting sec_461 provides that in determining whether an amount has been incurred with respect to any item during any taxable_year the all_events_test is not treated as met any earlier than when economic_performance with respect to that item occurs sec_461 states that the all_events_test is met with respect to an item if all events have occurred that determine the fact of liability and the amount of that liability can be determined with reasonable accuracy sec_1_461-4 provides in part that e xcept as otherwise provided in any internal revenue regulation revenue_procedure or revenue_ruling the economic_performance requirement is satisfied to the extent that any amount is otherwise deductible under sec_404 thus a liability with respect to sec_404 is not incurred until the all_events_test is satisfied and the liability is otherwise deductible under the rules of sec_404 revrul_90_105 also cites sec_1_404_a_-1t q a-1 sec_7701 and sec_301_7701-16 sec_1_404_a_-1t q a-1 provides that in order to be deductible under sec_404 a contribution otherwise deductible under sec_162 or sec_212 must be paid_or_incurred for purposes of those sections in addition to satisfying the other requirements for deductibility under those sections emphasis added sec_7701 states that the term paid_or_incurred shall be construed according to the method_of_accounting used by the taxpayer to compute its income sec_301_7701-16 of the regulations adopts the same definition for purposes of the regulations analysis sec_404 and sec_404 expressly provide that qualified_plan contributions are deductible when paid under sec_404 provided they would otherwise be deductible under chapter under sec_1_404_a_-1 in order to be deductible under sec_404 contributions must be expenses which would be deductible under sec_162 relating to trade_or_business_expenses or sec_212 relating to expenses for production_of_income if it were not for the provision in sec_404 providing that they are deductible if at all only under sec_404 in order for a contribution to be deductible under sec_162 or sec_212 an accrual basis taxpayer must also satisfy the requirements of sec_461 and the regulations thereunder as stated above sec_461 provides that the amount of any deduction or credit allowed by subtitle a which includes chapter must be taken for the taxable_year that is the proper taxable_year under the method_of_accounting used in computing taxable_income for the accrual_method of accounting sec_461 provides that in determining whether an amount has been incurred with respect to any item during any taxable_year the all_events_test is not treated as met any earlier than when economic_performance with respect to that item occurs sec_461 states that the all_events_test is met with respect to an item if all events have occurred that determine the fact of liability and the amount of that liability can be determined with reasonable accuracy sec_1_461-4 provides in part that e xcept as otherwise provided in any internal revenue regulation revenue_procedure or revenue_ruling the economic_performance requirement is satisfied to the extent that any amount is otherwise deductible under sec_404 thus a liability with respect to sec_404 is not incurred until the all_events_test is satisfied and the liability is otherwise deductible under the rules of sec_404 taxpayer x would not be obligated to contribute elective_deferrals or matching_contribution amounts unless the participant receives compensation_for services actually rendered see plan e and f under the terms of plan eligible employees who want to make elective_deferrals to plan must enter into a written salary reduction agreement with taxpayer x which is generally applicable to payroll periods commencing on or after the date the agreement is executed see plan g contributions attributable to elective_deferrals as described in sec_401 are only required to be made to plan in the amount the participant’s_compensation is reduced pursuant to the salary reduction agreement between taxpayer x and the participant see plan e matching_contributions are contributed within specified limits in an amount equal to h percent of the amount a participant’s_compensation is reduced pursuant to the salary reduction agreement between taxpayer x and the participant see plan b accordingly all the events that establish the fact of liability as to elective_deferral or matching_contributions for a plan_year only occur payroll_period by payroll_period as taxpayer x incurs a liability for compensation_for services to which plan contributions relate in revrul_90_105 the service stated its position that the condition in sec_404 that the contributions would otherwise be deductible under this chapter means that an accrual basis taxpayer must satisfy the all-events test of sec_461 not merely that contributions must be ordinary necessary and reasonable therefore revrul_90_105 indicates the service’s general position that sec_401 and m contributions must satisfy the sec_461 accrual rules in order to be otherwise deductible under sec_404 although the contributions in question in revrul_90_105 were paid after the close of the employer’s taxable_year and during the so- called sec_404 grace period we note that the deduction of contributions actually paid during an employer’s taxable_year under sec_404 and the deduction of so- called grace period contributions paid after the close of an employer’s taxable_year under sec_404 are both subject_to the otherwise deductible requirement of sec_404 in addition the recent victories for the government in lucky stores v commissioner f 3d 9th cir cert_denied 119_sct_1755 date 153_f3d_967 9th cir cert_denied 119_sct_1755 date and 170_f3d_1267 10th cir cert_denied 120_sct_182 date in the multi-employer context are not directly applicable because they involve so-called grace period contributions under sec_404 in lucky the ninth circuit affirmed the tax court’s holding that so-called grace period contributions attributable to compensation_for services rendered after the close of an employer’s taxable_year were not deductible under the plain on account of language of sec_404 in american stores the tenth circuit based its decision on sec_413 specifically applicable only to multiemployer plans rather than the plain language of sec_404 or the otherwise deductible language of sec_404 neither of the courts’ holdings were based on the sec_461 accrual rules as applicable either under sec_404 or the more general otherwise deductible language of sec_404 we have coordinated this response with cc ita and employee_plans please call if you have any further questions _____________________ michael j roach


department of the treasury internal_revenue_service washington d c mar tax_exempt_and_government_entities_division uniform issue list legend taxpayera irax bank financial_institution p amount dear this is in response to your request dated date submitted on your behalf by your authorized representative in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a represents that she received a distribution of amount from individual_retirement_account ira x maintained by bank taxpayer a asserts that her failure to accomplish a rollover within the 60-day period prescribed by sec_408 was due to a misunderstanding with a representative of financial_institution p which led to amount being placed into a non-ira account taxpayer a further represents that amount has not been used for any other purpose taxpayer a represents that ira x was invested in a certificate of deposit cd with bank that matured on date on the same date taxpayer a received a distribution check for amount from ira x and took the check to financial_institution p to deposit the check into a new ira cd at financial_institution p however due to a misunderstanding financial_institution p deposited the check into a non-ira cd account taxpayer a represents that she thought amount had been invested in another ira with financial_institution p based on the facts and representations you request a ruling that the internal_revenue_service service waive the 60-day rollover requirement contained in sec_408 of the code with respect to the distribution of amount sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if-- i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the 60th day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement revproc_2003_16 i r s date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a is consistent with her assertion that her failure to accomplish a timely rollover was due to a misunderstanding with a representative of financial_institution p which led to amount being mistakenly placed into a non-ira account therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount from ira x taxpayer a is granted a period of days from the issuance of this ruling letter to contribute amount into a rollover ira provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contribution amount will be considered a rollover_contribution within the meaning of sec_408 of the code this ruling does not authorize the rollover of amounts that are required to be distributed by sec_408 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_611 o k of the code provides that it may not be used or cited as precedent a copy of this letter has been sent to your authorized representative in accordance with a power_of_attorney on file in this office if you wish to inquire about this ruling please contact j d number correspondence to se t ep ra t3 at please address all sincerely yours carlton a watkins manager employee_plans technical group3 enclosures deleted copy of ruling letter notice of intention to disclose cc