Taxpayer was allowed travel expenses outside of his usual and principal place of employment and was both temporary and forseeably terminable. A travel log was met the substantiation requirements of section 274(d). Costs for daily transportation outside of his metropolitan area where he normally worked are deductible within the meaning of Rev. Rul. 99-7, 1999-1 C.B. 361.


Estate of David B. Lease, Deceased, Kathy A. Lease, Administratrix, and Kathy A. Lease v. Commissioner.

Docket No. 5455-05S . Filed January 30, 2008.

[Code Secs. 162 and 274]


Tax Court: Summary opinion: Business expenses: Traveling expenses: Meal expenses: Substantiation --
The estate of a millwright was entitled to deduct travel expenses incurred by the millwright in traveling to worksites beyond the area of his home and union hall. During the time that the expenses were incurred, job scarcity required the millwright to accept jobs outside of his principal place of employment and from a distant union hall. His work assignments expanded from within 50 miles of his home to within 250 miles of his home. Each of the jobs accepted outside of his principal place of employment were short in duration, and his travel was both temporary and forseeably terminable. The millwright properly substantiated the travel expenses in a travel log; thus, the amounts claimed, which were based on the standard mileage deduction, were allowed. The estate was not, however, entitled to deduct meal expenses, because the millwright did not substantiate the expenses and did not establish that he was away from home overnight.

PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b), THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.



GERBER, Judge:1 This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed.2 Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. Respondent determined a $2,403 income tax deficiency for the 2002 tax year of David B. and Kathy A. Lease. The deficiency was predicated on the disallowance of several deductions, and after concessions the issues we must decide are whether Mr. Lease's expenses of driving to and from his work locations are deductible and/or whether his meal expenses are deductible.


Background

Some of the facts have been stipulated and are incorporated by this reference. At the time the petition was filed Mr. and Mrs. Lease resided in West Virginia. Mr. Lease, now deceased, was employed as a millwright during 2002. His jobs were assigned at his local union hiring hall in Cumberland, Maryland. Every week Mr. Lease would go to the union hall and sign up for work in the "workbook". The union representative would call when a job was available, and Mr. Lease would then proceed from his locality to his work. Many jobs were within a 50-mile radius, but during 2002 local jobs were scarce, and his work assignments expanded to as far as a 250-mile radius. Some of those assignments were from the Pittsburgh, Pennsylvania, union hall.

As a millwright, Mr. Lease would work on various jobs. A typical job involved maintenance, making of parts, and rebuilding of a motor, sometimes at an electric power generating plant. Once he completed the rebuilding of a motor or completed a job, he was laid off and awaited an assignment from the union. Usually, he did not work again for the same employer. He would generally not spend the night at a work location but would return home. Mr. Lease worked long days, leaving as early as 3:30 or 4 a.m. and returning home at 7 or 8 p.m. Mr. Lease was required to bring tools to his work assignments. His tools consisted of "standard tools", "metric tools", and "precision tools". The three sets of tools were kept in tool boxes that Mr. Lease transported to the jobsite in his truck.

During 2002 Mr. Lease regularly drove to worksites beyond the area of his home and union hall. He received nine Forms W-2, Wage and Tax Statement, for 2002 from different employers. Mr. Lease drove an average of 900 miles per month to and from work assignments; he worked 112 days and drove an average of almost 100 miles per workday.

For 2002, Mr. and Mrs. Lease deducted $3,934 in business travel expenses using the standard mileage rate of 36.5 cents per mile. They also deducted $5,503 for away from home expenses which were largely for meals. In the notice of deficiency, respondent disallowed both deductions.


Discussion 3

Mr. and Mrs. Lease deducted the expense of Mr. Lease's trips between his residence and various worksites, contending that the employment was temporary. Respondent contends that Mr. Lease's work outside of the area of his residence was a permanent situation and that he made the personal (nonbusiness) choice to drive to and from work rather than to move. In effect, respondent's argument is that Mr. Lease's tax home was where he normally worked and that his trips constituted commuting.

Section 162 allows a deduction for ordinary and necessary expenses paid or incurred in carrying on a trade or business. Conversely, section 262 provides that no deduction is allowed for personal, living, or family expenses. Generally, the cost of commuting to and from work is a nondeductible personal expense. Commissioner v. Flowers, 326 U.S. 465, 473-474 (1946); sec. 1.162-2(e), Income Tax Regs.

Traveling expenses include meals and lodging while away from home. Sec. 162(a)(2). To deduct such expenses a taxpayer must show: (1) The expenses are reasonable and necessary; (2) they were incurred while away from home; and (3) they were incurred in the pursuit of a trade or business, including meals while away from home. Commissioner v. Flowers, supra at 470.

A taxpayer's "home", as used in section 162(a)(2), has been defined to mean the vicinity of the taxpayer's principal place of employment rather than the location of his personal or family residence. Mitchell v. Commissioner, 74 T.C. 578, 581 (1980); Daly v. Commissioner, 72 T.C. 190 (1979), affd. 662 F.2d 253 (4th Cir. 1981).

Where a taxpayer's principal place of employment is other than his residence and he chooses not to move his residence for personal reasons, the additional living or travel expenses are not considered to be ordinary and necessary business expenses. Tucker v. Commissioner, 55 T.C. 783 (1971). Where, however, a taxpayer is away from home on a temporary basis, his living or travel expenses may be considered deductible business expenses. Peurifoy v. Commissioner, 358 U.S. 59, 60 (1958). Employment has been defined as "temporary" if it is forseeably terminable or lasts for a relatively short fixed duration. Boone v. United States, 482 F.2d 417, 419 (5th Cir. 1973). Whether a taxpayer's job is temporary or indefinite is determined by the facts and circumstances of each case. Peurifoy v. Commissioner, supra at 61.

To be deductible, traveling expenses must be substantiated by adequate records or sufficient corroborating evidence. Sec. 274(d).

Before 2002, Mr. Lease regularly worked out of the Cumberland, Maryland, union hall and was assigned jobs that were within 50 miles of his residence. For 2002, there were fewer jobs available from the Cumberland, Maryland, union hall and he was forced to accept jobs outside of his principal place of employment, some from a distant union hall that he had not previously used. Each of the jobs outside of his principal place of employment was of short duration.

Considering the record as a whole, we hold that Mr. Lease's 2002 travel was outside of his usual and principal place of employment and was both temporary and forseeably terminable. Mr. Lease's travel log was stipulated by the parties and meets the substantiation requirements of section 274(d). Mr. Lease's costs for daily transportation outside of his metropolitan area where he normally worked are deductible within the meaning of Rev. Rul. 99-7, 1999-1 C.B. 361. Accordingly, petitioners are entitled to deduct travel expenses of $3,934 for 2002.

Although it is likely that Mr. Lease incurred meal expenses during 2002, no substantiation or sufficient corroborating evidence was offered that would meet the substantiation requirements of section 274(d). Moreover, Mr. Lease normally returned home each day, and the record is insufficient to show the occasions that he was away from home overnight. See, e.g., Bissonnette v. Commissioner, 127 T.C. 124 (2006). Mrs. Lease testified that there were no receipts and that the meals were likely paid for in cash. Accordingly, we must hold that petitioners are not entitled to the $5,503 meal expense deductions claimed for tax year 2002.

To reflect the foregoing,

Decision will be entered under Rule 155.

1 This case was submitted to Special Trial Judge Carleton D. Powell, who died on Aug. 23, 2007, after the trial. By order dated Oct. 25, 2007, Chief Judge Colvin resubmitted this case to Judge Joel Gerber without objection of the parties.

2 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for 2002, the taxable year in issue, and Rule references are to the Tax Court Rules of Practice and Procedure.

3 No questions were raised concerning the burden of proof.

Section 7122 - Offer in Compromise -although the IRS did not abuse its discretion in this case, the Tax Court does follow the IRS Internal Revenue Manual in calculating "reasonable collection potential."


The IRS did not abuse its discretion by rejecting an attorney's offer-in-compromise when there were outstanding excise and income liabilities, nor by determining the attorney's reasonable collection potential (RCP) to be the full amount of his liabilities. Moreover, the IRS properly calculated the future income component of his RCP by using the attorney's average wage income over 3 years since the Internal Revenue Manual recommends averaging over 3 years for similar circumstances and averaging over more years would still have yielded more than the amount he offered. Finally, the IRS effectively balanced the need for efficient tax collection against the concern that collection be no more intrusive than necessary.





Henry M. Lloyd v. Commissioner.




kt. No. 4395-06L , TC Memo. 2008-15, January 29, 2008.



Code Sec. 7122


Offers in compromise: Rejection: No abuse of discretion. --

MEMORANDUM OPINION

CHIECHI, Judge: This case is before the Court on respondent's motion for summary judgment (respondent's motion). We shall grant respondent's motion.


Background

The record establishes and/or the parties do not dispute the following.

Petitioner resided in Washington, D.C., at the time he filed the petition in this case.

On April 15, 1991, petitioner filed a Federal income tax (tax) return (return) for his taxable year 1990 (1990 return). When petitioner filed his 1990 return, he paid the tax due shown in that return.

At a time not disclosed by the record after petitioner filed his 1990 return and before September 2, 1996, the Internal Revenue Service (IRS) conducted an examination with respect to petitioner's taxable year 1990. During that examination, the IRS proposed an increase in petitioner's tax of $55,609 for that taxable year, to which petitioner agreed.

On September 2, 1996, respondent assessed the additional tax of $55,609 to which petitioner had agreed and interest as provided by law for petitioner's taxable year 1990.1 (We shall refer to any unpaid assessed amounts with respect to petitioner's taxable year 1990, as well as interest as provided by law accrued after September 2, 1996, as petitioner's unpaid 1990 liability.)

Respondent issued to petitioner the notice and demand for payment required by section 6303(a) 2 with respect to petitioner's unpaid 1990 liability.

On April 15, 1992, petitioner filed a return for his taxable year 1991 (1991 return). In that return, petitioner showed no tax due.

At a time not disclosed by the record after petitioner filed his 1991 return and before August 26, 1996, the IRS conducted an examination with respect to petitioner's taxable year 1991. During that examination, the IRS proposed an increase in petitioner's tax of $13,380 for that taxable year, to which petitioner agreed.

On August 26, 1996, respondent assessed the additional tax of $13,380 to which petitioner had agreed and interest as provided by law for petitioner's taxable year 1991. (We shall refer to any unpaid assessed amounts with respect to petitioner's taxable year 1991, as well as interest as provided by law accrued after August 26, 1996, as petitioner's unpaid 1991 liability.)

Respondent issued to petitioner the notice and demand for payment required by section 6303(a) with respect to petitioner's unpaid 1991 liability.

On July 12, 1993, petitioner filed a return for his taxable year 1992 (1992 return). When petitioner filed his 1992 return, he paid the tax due shown in that return.3

At a time not disclosed by the record after petitioner filed his 1992 return and before September 2, 1996, the IRS conducted an examination with respect to petitioner's taxable year 1992. During that examination, the IRS proposed an increase in petitioner's tax of $323 for that taxable year, to which petitioner agreed.

On September 2, 1996, respondent assessed the additional tax of $323 to which petitioner had agreed and interest as provided by law for petitioner's taxable year 1992. (We shall refer to any unpaid assessed amounts with respect to petitioner's taxable year 1992, as well as interest as provided by law accrued after September 2, 1996, as petitioner's unpaid 1992 liability.)4

Respondent issued to petitioner the notice and demand for payment required by section 6303(a) with respect to petitioner's unpaid 1992 liability.

On April 15, 1995, petitioner filed a return for his taxable year 1994 (1994 return). When petitioner filed his 1994 return, he did not pay the tax due shown in that return (i.e., $656).

On May 29, 1995, respondent assessed the tax due of $656 shown in petitioner's 1994 return, an addition to tax under section 6651(a)(2) of $6.56, and interest as provided by law for petitioner's taxable year 1994. (We shall refer to any unpaid assessed amounts with respect to petitioner's taxable year 1994, as well as interest as provided by law accrued after May 29, 1995, as petitioner's unpaid 1994 liability.)

Respondent issued to petitioner the notice and demand for payment required by section 6303(a) with respect to petitioner's unpaid 1994 liability.

On October 10, 1997, petitioner filed a return for his taxable year 1996 (1996 return). When petitioner filed his 1996 return, he did not pay the tax due shown in that return (i.e., $4,291).

On November 10, 1997, respondent assessed the tax due of $4,291 shown in petitioner's 1996 return, additions to tax under sections 6651(a)(1) and (2) and 6654 of $386.19, $133.38, and $202, respectively, and interest as provided by law for petitioner's taxable year 1996. On April 13, 1998, respondent abated $480 of the assessed tax and $43.20 of the assessed addition to tax under section 6651(a)(1). On the same date, respondent also assessed an addition to tax under section 6651(a)(2) of $95.28 and interest as provided by law accrued after November 10, 1997.5 (We shall refer to any unpaid and unabated assessed amounts with respect to petitioner's taxable year 1996, as well as interest as provided by law accrued after April 13, 1998, as petitioner's unpaid 1996 liability.)

Respondent issued to petitioner the notice and demand for payment required by section 6303(a) with respect to petitioner's unpaid 1996 liability.

On September 10, 1998, petitioner filed a return for his taxable year 1997 (1997 return). When petitioner filed his 1997 return, he did not pay the tax due shown in that return (i.e., $12,530).

On October 26, 1998, respondent assessed the tax due of $12,530 shown in petitioner's 1997 return, additions to tax under sections 6651(a)(1) and (2) and 6654 of $563.85, $438.55, and $228.11, respectively, and interest as provided by law for petitioner's taxable year 1997. (We shall refer to any unpaid assessed amounts with respect to petitioner's taxable year 1997, as well as interest as provided by law accrued after October 26, 1998, as petitioner's unpaid 1997 liability.)

Respondent issued to petitioner the notice and demand for payment required by section 6303(a) with respect to petitioner's unpaid 1997 liability.

On April 15, 2003, petitioner filed a return for his taxable year 2002 (2002 return). When petitioner filed his 2002 return, he paid $36,389 of the tax due shown in that return (i.e., $37,248).

On June 16, 2003, respondent assessed the tax due, including the $859 unpaid portion of that tax, shown in petitioner's 2002 return, an addition to tax under section 6651(a)(2) of $12.88, and interest as provided by law for petitioner's taxable year 2002. On January 19, 2005, petitioner paid $1,095.63 with respect to his taxable year 2002.6 On February 14, 2005, respondent assessed a total of $216.42 consisting of an additional amount of the addition to tax under section 6651(a)(2) of $150.33 and interest as provided by law accrued after June 16, 2003, of $66.09 for petitioner's taxable year 2002. (We shall refer to any unpaid assessed amounts with respect to petitioner's taxable year 2002,7 as well as interest as provided by law accrued after February 14, 2005, as petitioner's unpaid 2002 liability. )8

Respondent issued to petitioner the notice and demand for payment required by section 6303(a) with respect to petitioner's unpaid 2002 liability.

On November 20, 2002, Kenneth H. Silverberg (Mr. Silverberg), petitioner's authorized representative, sent a letter (Mr. Silverberg's November 20, 2002 letter) to a manager in the IRS's offer-in-compromise unit (IRS offer-in-compromise unit). In that letter, Mr. Silverberg stated in pertinent part:

RE: Henry M. Lloyd * * *

Henry M. Lloyd PC * * *

Attached Offers in Compromise

* * * * * * *

Pursuant to your letters of November 5, 2002, and on behalf of my clients identified above, I respectfully submit copies of two Offers In Compromise, attached as completed Forms 656, along with supporting Forms 433-A and 433-B, and additional documentation which was provided by your Revenue Officer * * * [first revenue officer].

We were advised by your Process Examiners that this OIC as previously submitted to you on October 28, 2002, was acceptable in form other than the fact that certain previous-period returns were not on file with the IRS (see attached statement by the taxpayer explaining why these returns were not required, and attaching copies of returns as recently filed) and also that an obsolete version of Form 433-A and 433-B was used (the obsolete forms have been replaced with appropriate forms, revision date 5/2001).

The history of this OIC is set forth here as follows:

I am advised by the taxpayer and his accountant that a lengthy Collection Division investigation and negotiation process has been conducted by * * * [the first revenue officer]. In early 2002, * * * [the first revenue officer] and the taxpayers' accountant reached agreement regarding the amount of an OIC that would be satisfactory to the Service. * * * [the first revenue officer] had reviewed the taxpayers' Forms 433- A and 433-B, and had prepared the Service's analysis of the "Amount That Could Be Paid" by each taxpayer. * * * [the first revenue officer] asked for an OIC in the amount of $19,200 from Mr. Lloyd's PC, and for an OIC in the amount of $6,576 from Mr. Lloyd personally. The accountant was assured by * * * [the first revenue officer] that these OIC's would be accepted by the Service. A copy of the "Amount That Could Be Paid" analysis is also included for your reference.

The OIC's were submitted on February 13, 2002 in the exact amounts requested and the taxpayer received no response to date from the Service in respect of these OIC's.

We have been advised by your Revenue Officer * * * [second revenue officer] of the IRS Appeals Office in Baltimore that the PC was considered to be "out of compliance" during the first quarter of 2002, because a payment by the taxpayer of a Form 941 payroll deposit was timely but mistakenly mailed as an attachment to the Form 941 return as opposed to being correctly deposited with a bank. Therefore, these two OIC's were not rejected, but rather "returned" and thus held in abeyance and eligible for resubmission once the taxpayers were compliant for two consecutive calendar quarters from the first quarter of 2002. Both taxpayers have been fully compliant for the second and third quarters of 2002, and these OIC's should thus be eligible for action.

After familiarizing herself with the case, and after consulting with the OIC Manager in the IRS Baltimore Office, * * * [the second revenue officer] instructed us that, since the February 13 OIC's had not been "rejected" (only "returned"), the taxpayers may now resubmit the OIC's directly to your office.

Accordingly, since the taxpayers have now been in compliance for the two calendar quarters ended June 30, 2002 and September 30, 2002 ----and since the taxpayers are currently in full compliance ----I respectfully submit the attached OIC's.

Mr. Silverberg enclosed with Mr. Silverberg's November 20, 2002 letter, inter alia, (1) completed Form 656, Offer in Compromise (Form 656 or offer-in-compromise), that petitioner signed and that was dated November 27, 2002 (petitioner's November 27, 2002 offer-in-compromise) and (2) completed Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals (Form 433-A), that petitioner signed and that was dated November 27, 2002 (petitioner's November 27, 2002 Form 433-A).9

Respondent assigned an offer-in-compromise specialist (first offer specialist) with the IRS offer-in-compromise unit to investigate petitioner's November 27, 2002 offer-in-compromise.

On January 12, 2004,10 Mr. Silverberg sent a letter to the first offer specialist (Mr. Silverberg's January 12, 2004 letter). In that letter, Mr. Silverberg stated in pertinent part:

RE: Offer In Compromise --Henry M. Lloyd* * * and Henry M. Lloyd, P.C. * * *

* * * * * * *

This letter and its attachments constitute revised Offers In Compromise (OIC) for the two taxpayers identified above.

In our telephone discussion of December 22, you described certain things which needed to be done in order for the Service to consider the revised offers. This cover letter describes how everything you sought has been accomplished. The attached Forms 656 contain the actual OIC's. 11

* * * * * * *


Court-Ordered Payments

You advised me that your computation of Reasonable Collection Potential, which indicates Mr. Lloyd has the ability to pay monthly installments of $1,304, includes no consideration of the cost of supporting his children or providing for their education, because we had produced no evidence that he was required by a court order to pay such amounts. I apologize if you asked for the court order and I neglected to supply it - I did not understand that such a request had been made.

The Marital Settlement Agreement between Mr. Lloyd and his ex-wife is attached for your use. It imposes a number of financial obligations on Mr. Lloyd, including the provision of health insurance and education, both of which Mr. Lloyd is currently paying for. If you add these obligations to the other Necessary Living Expenses on your worksheet, you will see that they totally eliminate Mr. Lloyd's ability to make any installment payments in connection with this OIC.

He is required to pay for private school or college undergraduate tuition for his two children, and his wife is only required to contribute in the event her income exceeds $75,000 per year (page 10 of agreement). It does not. In this event, Mr. Lloyd's obligation is limited to the cost of providing the cost of undergraduate out-of-state education at the University of Virginia. I have attached information from the internet which indicates that the cost of tuition, required fees, room and board for an out-of-state student was $25,036 per year during the 2002-2003 academic year.



Per child annual obligation 25,036

X 2 children 50,072

Per month 4,172


Since this additional obligation exceeds by more than threefold the amount you computed as a reasonable installment payment, I trust you will understand why the OIC cannot include any installment amount. * * *

On September 6, 2004, the first offer specialist sent a letter to petitioner (first offer specialist's September 6, 2004 letter). In that letter, the first offer specialist stated in pertinent part:

This letter is only being sent to you because your representative Mr. Silverberg, doesn't have coverage for the Excise tax assessed on Form 5330, Return of Initial Excise Taxes Related to Employee Benefit Plans for tax periods ending December 31, 1991 and December 31, 1992. The payoff balance computed through October 15, 2004 is $5,875.78.

In order to perfect your offer we have enclosed an amended Form 656, Offer in Compromise that includes these tax periods and have adjusted the offer figure to $139,766.0012 and this is based on the math error on your last amended F656 that you signed on September 29, 2004.13 If agreed, sign, date and return to the address listed below.

Your timely response is requested by October 15, 2004 or your current offer may be returned without any appeal rights.

If you have any questions or need more information, please contact me at the address or the telephone number listed below * * *

On September 15, 2004, the first offer specialist sent another letter to petitioner (first offer specialist's September 15, 2004 letter). In that letter, the first offer specialist stated in pertinent part:

During an offer investigation an offer may be returned when the investigation reveals the taxpayer doesn't have sufficient income tax withheld or paid. Our records show you have an extension until October 15, 2004 for filing your year 2003 return. But only $68,499.00 in tax payments was withheld. Based on our calculations for year 2003 and using a gross income figure of $351,223.00 a total of $105,161.00 should have been paid on the income earned.

Enclosed is a copy of Form 1040-ES, Estimated Tax for Individuals for you to figure and pay your estimated tax due for year 2003. Provide us with a copy of the completed worksheet and a check for the payment due, if any[,] should be mailed to the address listed below.

Your timely response and receipt of this information are requested by September 29, 2004 or this offer may be returned[.]

If you have any questions or need more information, please contact me at the address or the telephone numbers listed below * * *

On September 17, 2004, Mr. Silverberg and the first offer specialist had a telephonic discussion with respect to the first offer specialist's September 15, 2004 letter (September 17, 2004 telephonic discussion). During that discussion, the first offer specialist requested certain information from Mr. Silverberg. Thereafter, on October 1, 2004, the first offer specialist left Mr. Silverberg a voice mail message (first offer specialist's October 1, 2004 voice mail) requesting certain additional information.

On October 1, 2004, in response to, inter alia, at least certain of the requests made by the first offer specialist during the September 17, 2004 telephonic discussion and the first offer specialist's October 1, 2004 voice mail,14 Mr. Silverberg sent a letter (Mr. Silverberg's October 1, 2004 letter) to the first offer specialist via facsimile. In that letter, Mr. Silverberg stated in pertinent part:

This responds to your voice mail message received this morning.

You asked that I fax to you today a copy of the personal Form 656 Offer In Compromise which has been reformatted to reflect the amount of $139,797, payable over the 84 month period in equal installments. That is attached to this fax, and the signed original will be hand-delivered to your office on Monday. Please let me know if there are any questions.

In response to your other questions, Mr. Lloyd's accountant informs me that Mr. Lloyd is neither underpaid nor under-withheld for 2003 and 2004. For 2003, the tax which has been withheld via the amended 941's ($68,655) exceeds 100% of Mr. Lloyd's 2002 liability ($36,389). His 2003 return is extended until October 15, and if there is any balance due for 2003 we understand he is "in compliance" by paying in full on that date. For the P.C., he has filed 941's and made appropriate payments for the first two quarters of 2004. The third quarter payment is not due until October 15.

The following items are attached to substantiate his compliance.

1. Approval of the extension of the 2003 form

1040.

2. Copy of form 941 for the first quarter of 2004.

3. Copy of cancelled check for payment with the first quarter of 2004.

4. Copy of form 941 for the second quarter of 2004.

5. Copy of bank receipt for deposit with the second quarter of 2004.

Please let me know if you have any questions.

Mr. Silverberg enclosed with Mr. Silverberg's October 1, 2004 letter, inter alia, completed Form 656, that petitioner signed and that was dated September 29, 2004 (petitioner's September 29, 2004 offer-in-compromise).15 In item 5 of petitioner's September 29, 2004 offer-in-compromise, petitioner provided the responses indicated to the following questions:

Item 5 --To: Commissioner of Internal Revenue Service

I/We * * * submit this offer to compromise the tax liabilities plus any interest, penalties, additions to tax, and additional amounts required by law (tax liability) for the tax type and period marked below:

* * *

[x] 1040/1120 Income Tax --Year(s) 1990, 1991, 1992, 1994, 1996, 1997, 2002

* * * * * * *

[x] Trust Fund Recovery Penalty as a responsible person of (enter corporate name) Henry M. Lloyd PC, for failure to pay withholding and Federal Insurance Contributions Act Taxes (Social Security taxes), for period(s) ending 9703.

[] Other Federal Tax(es) [specify type(s) and period(s)]

In items 6 and 7 of petitioner's September 29, 2004 offerin-compromise, petitioner provided the responses indicated to the following questions:

Item 6 --I/We submit this offer for the reason(s) checked below:

[] Doubt as to Liability --"I do not believe I owe this tax." * * *

[x] Doubt as to Collectibility --"I have insufficient assets and income to pay the full amount." You must include a complete Collection Information Statement, Form 433-A and/or Form 433-B.

[] Effective Tax Administration --"I owe this amount and have sufficient assets to pay the full amount, but due to my exceptional circumstances, requiring full payment would cause an economic hardship or would be unfair and inequitable." You must include a complete Collection Information Statement, Form 433-A and/or Form 433B * * *.

Item 7

I/We offer to pay $139,707.00 (must be more than zero). * * *

Check only one of the following:

* * * * * * *

[] Short-Term Deferred Payment Offer (Offered amount paid in MORE than 90 days but within 24 months from written notice of acceptance of the offer.)

* * * * * * *

[x] Deferred Payment Offer (Offered amount will be paid over the remaining life of the collection statute.)

$1,664 within 90 days * * * from written notice of acceptance of the offer; and

beginning in the first month after written notice of acceptance of the offer $1,664 on the 1st day of each month for a total of 83 months.

On November 3, 2004, respondent's collection division sent a letter to petitioner (respondent's November 3, 2004 letter) and sent a copy of that letter to Mr. Silverberg. That letter stated in pertinent part:

We are returning your Form 656, Offer in Compromise for the following reason(s):

All tax periods with a balance due must be included in your Offer in Compromise. Our records indicate the following period(s) was/were not included: Excise tax for 1991 and 1992 tax periods.

If a deposit was made with the offer, we will mail the refund separately in four to six weeks.

If you believe the return of your offer was made in error, or your failure to provide the information/ substantiation we requested was due to circumstances beyond your control (your serious illness, death or serious illness of your immediate family member, or disaster)[,] within 30 days from the date of this letter you may contact * * * [the first settlement officer] to request reconsideration of our decision to close your offer. You should be prepared to discuss specifics, provide verification of the circumstances beyond your control and provide the information previously requested.

Enclosed with respondent's November 3, 2004 letter was petitioner's September 29, 2004 offer-in-compromise.16 At no time did respondent accept petitioner's September 29, 2004 offer-in-compromise by issuing a written notice of acceptance to petitioner as required by section 301.7122-1(e)(1), Proced. & Admin. Regs.

Around December 7, 2004, respondent issued to petitioner a notice of Federal tax lien filing and your right to a hearing (notice of tax lien) with respect to petitioner's taxable years 1990 through 1992, 1994, 1996, and 2002.17 Petitioner did not file Form 12153, Request for a Collection Due Process Hearing (Form 12153), with respect to that notice of tax lien. See infra note 18.

On February 7, 2005, respondent issued to petitioner a notice of intent to levy and notice of your right to a hearing with respect to each of petitioner's taxable years 1990 through 1992, 1994, 1996, 1997, and 2002. (We shall refer collectively to those notices of intent to levy as the notices of intent to levy.)

On March 7, 2005, respondent received Form 12153 that Mr. Silverberg submitted on behalf of petitioner (petitioner's Form 12153). In that form, Mr. Silverberg indicated petitioner's disagreement with the notices of intent to levy and requested a hearing with respondent's Appeals Office (Appeals Office).18 Mr. Silverberg attached a letter to petitioner's Form 12153. In that letter, Mr. Silverberg stated in pertinent part:

Mr. Lloyd has been dealing, through me as his representative, with the Collections Division in Fairfax, Virginia, and with your [first] Offer Specialist * * *. Mr. Lloyd has submitted Form 656 proposing Offers in Compromise to settle these liabilities due to doubt as to collectibility. Throughout a period exceeding one year, * * * [the first offer specialist] has evaluated Mr. Lloyd's Reasonable Collection Potential (RCP) and has performed an extensive investigation of his assets, his income potential and his costs of living.

After conducting his investigation, * * * [the first offer specialist] and Mr. Lloyd reached an agreement in principle, whereby Mr. Lloyd submitted an Amended Form 656 in October, 2004, offering to pay $139,707 over an installment period of 84 months. This amount is 100 per cent of the RCP finally determined by * * * [the first offer specialist]. For reasons which Mr. Lloyd and I do not understand, this OIC was treated by the Service as withdrawn at the last minute, rather than accepted. We were given the explanation that some out-of-compliance situation had been identified, and that the OIC could not be considered until Mr. Lloyd was back in compliance. Upon investigation, it was determined he was not out-of-compliance. However, no action was taken on his OIC. Instead, you have issued notices indicating you intend to levy.

Mr. Lloyd is still willing to agree to the October 2004 OIC which is 100 per cent of his RCP. He believes that he and the IRS have an agreement. However, for reasons unknown to us the Collections Division was unwilling to indicate its acceptance by signing off on the OIC.

Too much time has been invested by Mr. Lloyd and by the Service to waste it by treating the OIC as withdrawn. The agreement should be signed and Mr. Lloyd should begin making the monthly installments which will put this matter to rest.

Mr. Lloyd and I hereby request an opportunity to appear in person to discuss this matter at a CDP hearing. Our hope is that an agreed OIC will result from that hearing. * * *

On May 24, 2005, a settlement officer with the Appeals Office (settlement officer) sent a letter (settlement officer's May 24, 2005 letter) to petitioner with respect to petitioner's Form 12153. In that letter, the settlement officer stated in pertinent part:

I have received your Collection Due Process hearing request. The objective of a Collection Due process hearing is to determine whether an acceptance alternative to the levy/lien exists, while balancing the Government's need to efficiently collect this tax liability. Options available to you for resolution of your lien/levy issue may include the following:

--Full payment

--Installment agreement

--Offer in Compromise

--Surety bond

On your hearing request you indicated your offer was rejected because of non-compliance. A check of our records indicated you had an outstanding balance on your tax return for period ending 12/31/2003. The outstanding balance was paid after the offer was rejected. You cannot accumulate new liabilities. Our records also indicate you have an outstanding liability for period ending 12/31/2004. I have attached a transcript for period ending 12/31/2003.19 If you wish to submit an offer, you must start the process again.

If you feel that one of the above resolutions are possible, please respond back with your proposal by no later than June 15th 2005. If your proposal is anything other than full payment, then I will need you to complete and return the enclosed Forms 433-A & B. If you do not own a business, then please disregard the Form 433-B.

* * * * * * *

If you do not provide the information requested, I cannot consider certain collection alternatives. If I do not have a detailed response by June 15th 2005 I will make a determination based upon the evidence that I have in the case file. If I do that[,] I will sustain the District's position and issue a determination letter.

On June 7, 2005, Mr. Silverberg and the settlement officer had a telephonic discussion (June 7, 2005 telephonic discussion). The settlement officer made the following pertinent entries in her "Case Activity Records" with respect to that discussion:

Received a call from POA [Mr. Silverberg] and he wanted to know what did his client [petitioner] has to do to have the offer [petitioner's September 29, 2004 offerin-compromise] accepted. I explained his client wasn't in full compliance and the offer [petitioner's September 29, 2004 offer-in-compromise] was rejected. He must submit a new offer and fee of $150.00. He was also made aware the new offer will be investigated as a new offer and the rejected offer [petitioner's September 29, 2004 offer-in-compromise] is not considered. [Reproduced literally.]

On June 21, 2005, the settlement officer sent a letter to petitioner. In that letter, the settlement officer stated in pertinent part:

I have reviewed your appeal and additional information was requested. The information was due in the office on or before June 15th 2005 and as of today we haven't received the information. If you wish to bring this information to the office and have a conference, please call to arrange an appointment.

Please submit the requested information or contact me to arrange a telephone conference on or before July 6th 2005.

If you do not submit the information or call to schedule an appointment I will make a determination based upon the information in the case file. If I do that I will sustain the IRS position and issue a determination letter.

If you have any questions, please contact me at the address or telephone number shown above.

On July 7, 2005, Mr. Silverberg sent a letter to the settlement officer (Mr. Silverberg's July 7, 2005 letter). Mr. Silverberg enclosed with that letter (1) completed Form 656, that petitioner signed and that was dated June 24, 2005 (petitioner's June 24, 2005 offer-in-compromise), (2) completed Form 433-A, that petitioner signed and that was dated June 24, 2005 (petitioner's June 24, 2005 Form 433-A), and (3) various documents with respect to those forms.

In item 5 of petitioner's June 24, 2005 offer-in-compromise, petitioner provided the responses indicated to the following questions:

Item 5 --To: Commissioner of Internal Revenue Service

I/We * * * submit this offer to compromise the tax liabilities plus any interest, penalties, additions to tax, and additional amounts required by law (tax liability) for the tax type and period marked below:

* * *

[X] 1040/1120 Income Tax --Year(s) 1990, 1991, 1992, 1994, 1996, 1997, 2002

* * * * * * *

[X] Trust Fund Recovery Penalty as a responsible person of (enter corporate name) Henry M. Lloyd PC, for failure to pay withholding and Federal Insurance Contributions Act Taxes (Social Security taxes), for period(s) ending 9703.

[X] Other Federal Tax(es) [specify type(s) and period(s)] excise taxes (all) 1991 & 1992

In items 6 and 7 of petitioner's June 24, 2005 offer-in-compromise, petitioner provided the responses indicated to the following questions:

Item 6 --I/We submit this offer for the reason(s) checked below:

[]Doubt as to Liability --"I do not believe I owe this tax." You must include a detailed explanation of the reason(s) why you believe you do not owe the tax in Item 9.

[X]Doubt as to Collectibility --"I have insufficient assets and income to pay the full amount." You must include a complete Collection Information Statement, Form 433-A and/or Form 433-B.

[]Effective Tax Administration --"I owe this amount and have sufficient assets to pay the full amount, but due to my exceptional circumstances, requiring full payment would cause an economic hardship or would be unfair and inequitable." You must include a complete Collection Information

Statement, Form 433-A and/or Form 433B and complete Item 9.

Item 7

I/We offer to pay $139,776 (must be more than zero). Complete item 10 to explain where you will obtain the funds to make this offer.

Check only one of the following:

[X]Cash Offer (Offered amount will be paid in 90 days or less.)

* * * * * * *

[X] Short-Term Deferred Payment Offer (Offered amount paid in MORE than 90 days but within 24 months from written notice of acceptance of the offer.)

* * * * * * *

[X] Deferred Payment Offer (Offered amount will be paid over the remaining life of the collection statute.)

$1,664 within 90 days * * * from written notice of acceptance of the offer; and

beginning in the first month after written notice of acceptance of the offer $1,664 on the 1st day of each month for a total of 83 months.

In items 9 and 10 of petitioner's June 24, 2005 offer-in-compromise, petitioner provided the responses indicated to the following questions:

Item 9 --Explanation of Circumstances

I am requesting an offer in compromise for the reason(s) listed below:

Note:If you are requesting compromise based on doubt as to liability, explain why you don't believe you owe the tax. If you believe you have special circumstances affecting your ability to fully pay the amount due, explain your situation. You may attach additional sheets if necessary. * * *

Doubt as to collectibility. Taxpayer is a 70-yearold sole practitioner with significant tax debts and a declining law practice. This OIC accompanies another OIC being made by Mr. Lloyd's professional corporation for its tax debts. 20 Based on a detailed investigation just completed by the IRS, this offer is 100% of the Reasonable Collection Potential of Mr. Lloyd, and the P.C.'s offer is 100% of its Reasonable Collection Potential.

Item 10 --Source of Funds

I/We shall obtain the funds to make this offer from the following source(s):

Liquidation of assets and borrowing.

Petitioner's June 24, 2005 Form 433-A contained several sections identified as sections 1 through 9. In sections 1 and 2 of that form, petitioner provided the responses indicated to the following questions:

6. List the dependents you can claim on your tax return: * * *



Does this person
First Name Relationship Age live with you?

Victoria Daughter 24 [X]No [ ]Yes

Hunter Son 18 [ ]No [X]Yes


* * * * * * *

7. Are you or your spouse self-employed or operate a business? (Check "Yes" if either applies)

[X] No [X] Yes If yes, provide the following information:

7a. Name of Business Henry M. Lloyd P.C.

* * * * * * *

7e. Do you have accounts/notes receivable? No Yes If yes, please complete Section 8 on page 5.

In section 3 of petitioner's June 24, 2005 Form 433-A, petitioner indicated that he did not have an employer other than Henry M. Lloyd, P.C.

In section 4 of petitioner's June 24, 2005 Form 433-A, petitioner provided the response indicated to the following question:

10. Do you receive income from sources other than your own business or your employer? (Check all that apply.)

[X] Pension [X]Security [X] Other (specify, i.e. child support, alimony, rental) Rental

In section 5 of petitioner's June 24, 2005 Form 433-A, petitioner indicated that he (1) maintained a checking account that had a balance of $15,000, (2) owned a brokerage account with no current account balance, (3) had two credit cards with unspecified balances, and (4) had $16,300 of credit available to him.

In sections 5 and 6 of petitioner's June 24, 2005 Form 433- A, petitioner provided the responses indicated to the following questions:

16. LIFE INSURANCE. Do you have life insurance with a cash value? [X] No []Yes

* * * * * * *

17a. Are there any garnishments against your wages?

[X] No []Yes

* * * * * * *

17b. Are there any judgments against you? ®[X] No []Yes

* * * * * * *

17e. In the past 10 years did you transfer any assets out of your name for less than their actual value?

[X] No []Yes

* * * * * * *

17f. Do you anticipate any increase in household income in the next two years? [X] No []Yes

* * * * * * *

17g. Are you a beneficiary of a trust or an estate?

[X] No []Yes

* * * * * * *

17h. Are you a participant in a profit sharing plan?

[X] No []Yes

In section 7 of petitioner's June 24, 2005 Form 433-A, petitioner indicated that he owned real estate in Washington, D.C., the current value of that real estate was $741,330, there were two outstanding mortgage loans totaling $625,000 with respect to that real estate, and he was required to make monthly payments totaling $3,929.59 with respect to those loans.

In section 7 of petitioner's June 24, 2005 Form 433-A, petitioner indicated that he did not own or lease any automobiles and did not respond to the question asking whether he owned any personal assets (e.g., furniture/personal effects) or business assets.

In section 9 of petitioner's June 24, 2005 Form 433-A, petitioner listed various income items and various living expense items. With respect to the income items listed in that section, petitioner indicated that he had total monthly income of $4,342.33 consisting of $2,708.33 of monthly income from wages and $1,634 of monthly income from his pension and/or Social Security benefits. With respect to the monthly expense items listed in section 9 of petitioner's June 24, 2005 Form 433-A, petitioner indicated that he had total monthly living expenses of $5,658.94 consisting of $3,463.94 of monthly expenses for housing and utilities and $2,195 of monthly expenses for court-ordered payments.

On August 2, 2005, the settlement officer sent a letter to petitioner. In that letter, the settlement officer stated in pertinent part:

I recently received the offer in compromise file to be associated with the CDP case file. I am making an Appeals Referral Investigation request to have the offer analyzed along with the supporting documentation that you provided. You will be contacted by an offer specialist in the near future. I will maintain jurisdiction of the case and all final decisions regarding this matter will be rendered by appeals. If you have any further questions regarding this correspondence, do not hesitate to call me.

On August 2, 2005, the settlement officer forwarded petitioner's June 24, 2005 offer-in-compromise and petitioner's June 24, 2005 Form 433-A to the IRS offer-in-compromise unit.

Around August 4, 2005, respondent assigned an offer-in-compromise specialist other than the first offer specialist to investigate petitioner's June 24, 2005 offer-in-compromise and petitioner's June 24, 2005 Form 433-A.

On September 1, 2005, the offer-in-compromise specialist (second offer specialist) with the IRS offer-in-compromise unit assigned to investigate petitioner's June 24, 2005 offer-in-compromise and petitioner's June 24, 2005 Form 433-A made the following pertinent entries in the "integrated collection system history transcript":

Initial Review: TP is making a DPO of $139,777 at $1,664 in 84 payments to compromise approx $264,457 sole liability, on the basis of DATC.

* * * * * * *

- Special Circumstances: doubt as to collectibility, because TP is 70-yr-old and his law practice is declining.

- Funding for the offer: Liquidation of assets and borrowing.

* * * * * * *

TP is unmarried 70-yr old practicing attorney, with no health issues and a household of 2 (18-yr old son) in Wash D.C. * * * Claims income of 4342 vs 5659 living expenses. However, TP reported AGI of 87,163 in '04; 345,165 in '03; 216,074 in '02.

CONCLUSION: Does not appear to be a valid offer on the basis of DATC: not everything is on the table, and his income and residence seem extravagant. Next step: do preliminary investigation and if RCP exceed liability of 264,457, conclude investigation and report findings to Appeals.

* * * * * * *

* * * Claims declining income, but no evidence provided and research indicates "fluctuating" income. [Reproduced literally.]

On September 6, 2005, the second offer specialist sent petitioner a letter (second offer specialist's September 6, 2005 letter). In that letter, the second offer specialist stated in pertinent part:

I have been assigned to investigate your offer in compromise dated 06/24/2005. I have completed a preliminary analysis of your offer, after reviewing the information you provided. My analysis shows that you have the ability to pay your liability in full within the time provided by law, based on the following computations:



Total net equity in assets: $372,231.00

Total future income value: $607,296.00

Total ability to pay: $979,527.00

Balance due (as of 08/15/2005) $264,457.49

Amount you offered: $139,776.00


Copies of my worksheets are enclosed for you[r] review. If you disagree, you may provide additional documentation showing that the figures are incorrect. You may also provide any other information you believe I should consider in making my recommendation as to whether to accept your offer.

Please respond by September 19, 2005, or I will proceed with my recommendation that your offer not be accepted.

If you have any questions or need more information, please contact me at the address or the telephone number listed below:

* * * * * * *

A copy of this letter with all enclosures is being provided to your Power of Attorney, Mr. Silverberg, and to the Appeals Officer controlling your case.

The second offer specialist enclosed with the second offer specialist's September 6, 2005 letter the following so-called Asset/Equity Table:


The second offer specialist also enclosed with the second offer specialist's September 6, 2005 letter the following so-called Income/Expense Table:


Petitioner did not respond by September 19, 2005, to the second offer specialist's September 6, 2005 letter. On September 20, 2005, the second offer specialist returned petitioner's June 24, 2005 offer-in-compromise to the settlement officer and recommended that it not be accepted.

On September 23, 2005, Mr. Silverberg sent a note by facsimile to the settlement officer and the second offer specialist. In that note, Mr. Silverberg stated in pertinent part:

I am writing to request an extension of time until October 14 for Mr. Lloyd to respond to * * * [the second offer specialist's] letter of 9/6/05. My schedule has been full and I have until now been unable to confer with him about providing additional information for you to consider. Thank you in advance for your consideration.

On September 27, 2005, Mr. Silverberg sent another note by facsimile to the settlement officer and the second offer specialist. In that note, Mr. Silverberg stated in pertinent part:

Please grant Mr. Lloyd additional time to get back to you through * * *, his accountant. * * * [petitioner's accountant] will be sending you a new Power of Attorney to discuss both Henry M. Lloyd PC and Mr. Lloyd's individual accounts. If you have any questions before receiving the new Power, please contact me.

On November 9, 2005, the settlement officer sent a letter to petitioner. In that letter, the settlement officer stated in pertinent part:

I have scheduled a telephone conference call for you on December 6, 2005 at 10:00AM. This call will be your CDP hearing.

Please call me at * * * the date and time indicated above.

Your offer in compromise will not be recommended for acceptance and we need to discuss other alternatives [sic] means for payment such as full payment or an installment agreement.

On November 14, 2005, at 1:02 p.m., Stephen P. Kauffman (Mr. Kauffman) sent a letter by facsimile to the settlement officer (Mr. Kauffman's first November 14, 2005 letter). In that letter, Mr. Kauffman stated in pertinent part:

Re: Henry M. Lloyd * * *

Henry M. Lloyd, P.C.* * *

* * * * * * *

I have been retained to represent the above-referenced taxpayers in matters pending before the Internal Revenue Service. Enclosed you will find two (2) powers -of-attorney, form 2848, pursuant to which these taxpayers have authorized me to represent them. 21 I understand that a Collection Due Process Hearing is currently scheduled for December 6, 2005 at 10:00 a.m. to review levies that have been issued to Mr. Lloyd personally, and that offers-in-compromise are pending for both taxpayers. Earlier today, I sent you a copy of a CDP request I filed in connection with levies issued to Henry M. Lloyd, PC.

* * * I am planning to contact * * * the [second] Offer Specialist assigned to determine the RCP of these matters to discuss his calculations. * * *

Because I have just been retained, I have an open mind about this case, and will be happy to discuss with you any and all resolutions which you might consider appropriate, giving due consideration, of course, to Mr. Lloyd's advanced age and what I consider to be limited earning ability.

On November 14, 2005, at 4:51 p.m., Mr. Kauffman sent another letter by facsimile to the settlement officer. In that letter, Mr. Kauffman stated in pertinent part:

Re: Henry M. Lloyd * * *

Henry M. Lloyd, P.C.* * *

* * * * * * *

I want to thank you for your prompt reply to the letter I sent you earlier this morning. This letter is written to confirm our conversations this afternoon. Because I have just been retained, let me summarize my understanding of the status of the above-referenced matters in the remainder of this letter. Please respond to this letter only if my summary is incorrect.

I understand that offers-in-compromise were submitted for Henry M. Lloyd ("Mr. Lloyd") and Henry M. Lloyd, P.C. (the "PC"). After the PC's offer was formally rejected, it filed an appeal. Sometime in August of this year, the PC's appeal was rejected, and the PC's delinquency is now back in collection.

In contrast, Mr. Lloyd's offer has not yet been formally rejected; however, I understand that you do intend to reject it, but not until after we speak on December 6th. When you reject Mr. Lloyd's offer, you will send a formal written notice of rejection and appeal rights. I also understand that * * * [the second offer specialist] is no longer working the case at this time.

On December 6th, we will discuss Mr. Lloyd's pending request for due process hearing, and potential alternative approaches to resolving the PC's and Mr. Lloyd's tax delinquencies.

On December 6, 2005, the settlement officer held a telephonic conference with Mr. Kauffman. The settlement officer made the following pertinent entries in her "Case Activity Records" with respect to that conference:

Telephone conference with POA Mr.Kauffman. We discussed the OIC and I explained taxpayer RCP is close to 1 million dollars. He wanted to know if the taxpayer obtain the equity in his real property would I recommend acceptance of the offer. This request was denied because it appears taxpayer can enter into an installment agreement at a rate of $12,000.00 a month. he stated that the taxpayer is elder and his business is no longer at a high point. I explained he is still working and in good health. We average his last three years to determine his monthly income. We discussed the one-year rule in allowing expenses. He requested a copy of the 433A and the O/S worksheet computation. He requested time to discuss with client and telephone conference scheduled for 12/16/2005 @ 10:00AM. Information faxed to POA. [Reproduced literally.]

On December 15, 2005, Mr. Kauffman sent a letter to the settlement officer via facsimile (Mr. Kauffman's December 15, 2005 letter). In that letter, Mr. Kauffman stated in pertinent part:

This letter is written as a follow-up to our several telephone conversations, and in anticipation of our telephone conference tentatively scheduled for Friday afternoon. Up to this time, the focus of our discussions has been on Mr. Lloyd's income, and specifically how to calculate his average monthly income in a fair fashion. Enclosed with this letter are the income/expense table which you were kind enough to fax me last week, and a spreadsheet analysis of Mr. Lloyd's income which I have prepared. Before addressing the enclosed spreadsheet analysis, a few observations about Mr. Lloyd's income are in order.

Mr. Lloyd, who is an attorney engaged in the private practice of law, will be 71 this March. The cases handles are virtually all contingent fee cases. This means he doesn't make a cent unless and until his client recovers, at which time he receives a percentage of the recovery. A contingent fee practice is very risky for an attorney, for a variety of reasons. Sometimes you lose, in which case you recover nothing. Sometimes you win, but much less than what you hoped for. Sometimes you win a big judgment against a defendant who doesn't have any money, in which case you recover nothing. Sometimes you win, but only after year and years of hard work, during which time you are spending your own money to advance your client's case.

In Mr. Lloyd's case, he is the only employee of Henry M. Lloyd, P.C., a professional corporation which he owns. Each year the corporation pays all of its net income before salary to Mr. Lloyd as his salary. Consequently, each year, the corporation has no net income and all of the net income from Mr. Lloyd's law practice is reported by Mr. Lloyd on his personal income tax return.

The income/expense table was prepared on September 2, 2005, which means that it probably covered the three-year period September 1, 2002 through August 31, 2005. These were the three best years Mr. Lloyd has had in the past twelve years. In contrast and as discussed below, my enclosed analysis looks at Mr. Lloyd's income for the previous 7 and 12 year periods.

As you can see, for the past 7 years, Mr. Lloyd earned nothing from his law practice for the years 1998, 1999, 2000, and 2001. If his average income had been computed for that four year period, it would have been zero. As it stands, his average monthly income for the seven year period is only $2,548.[22]

Mr. Lloyd's income for the past 12 years is better, but only marginally so, and certainly nowhere near as good as the income reflected on the income/ expense table. In fact, for the 12 year period ending in 2004, Mr. Lloyd's average monthly is only $5,435,22 which is less than 1/3 of the average monthly income reflected on the income/expense table.

As this analysis demonstrates, this is the type of case where it would be unfair and misleading to calculate average monthly income over only 3 years, because income which is essentially earned over a much longer period is bunched into one or two tax years. Furthermore, nowhere in the Code, the Regulations, or the Internal Revenue Manual is a Revenue Officer such as yourself constrained to average income over only three years. IRM 5.8.5.5 identifies a number of situations which "may warrant placing a different value on future income than current or past income indicates." One such situation is where "a taxpayer has a sporadic employment history or fluctuating income," in which case the revenue officer is directed to "average earnings over several prior years." Although the IRM does indicate this is "usually . . . the prior 3 years," it does not and should not indicate that this is always the case, particularly in a situation such as this one where blind adherence to that rule would be patently unfair.

Mr. Kaufmann enclosed with Mr. Kauffman's December 15, 2005 letter a copy of the Income/Expense Table that the second offer specialist enclosed with the second offer specialist's September 6, 2005 letter and the following "Analysis of Gross Income" of petitioner:

12 year analysis



Cum. Tax Average Cum. Avg.
Year Gross Income Income Monthly Monthly

________________________________________________________________________________

1 1993 55,000 55,000 4,583 4,583

2 1994 52,000 107,000 4,333 4,458

3 1995 110,100 217,100 9,175 6,031

4 1996 85,000 302,100 7,083 6,294

5 1997 98,000 400,100 8,167 6,668

6 1998 - 400,100 - 5,557

7 1999 - 400,100 - 4,763

8 2000 - 400,100 - 4,168

9 2001 - 400,100 - 3,705

10 2002 200,000 600,100 16,667 5,001

11 2003 329,151 929,251 27,429 7,040

12 2004 71,842 1,001,093 5,987 6,952

23 See infra
note 32.

12 Year average monthly 5,435


7 year analysis



Cum. Tax Average Cum. Avg.
Year Gross Income Income Monthly Monthly

________________________________________________________________________________

1 1998 - - - -

2 1999 - - - -

3 2000 - - - -

4 2001 - - - -

5 2002 200,000 200,000 16,667 3,333

6 2003 329,151 529,151 27,429 7,349

7 2004 71,842 600,993 5,987 7,155

23 See infra
note 32.

7 year average monthly 2,548


3 year analysis



Cum. Tax Average Cum. Avg.
Year Gross Income Income Monthly Monthly

________________________________________________________________________________

1 2002 200,000 200,000 16,667 16,667

2 2003 329,151 529,151 27,429 22,048

3 2004 71,842 600,993 5,987 16,694

24 See infra
note 32.

3 year average monthly 18,470


On December 16, 2005, the settlement officer held a telephonic conference with Mr. Kauffman. The settlement officer made the following pertinent entries in her "Case Activity Records" with respect to that conference:

POA had faxed a chart requesting that we use the last seven years to compute the income of the taxpayer. I explained I would use the last three years because these years truly reflect the high and low end of his client's income. He stated he will talk to his client and request the case be returned to compliance. A determination letter will be issued * * *

On February 8, 2006, the Appeals Office issued to petitioner a notice of determination with respect to petitioner's unpaid liabilities for 1990, 1991, 1992, 1994, 1996, 1997, and 2002. That notice stated in pertinent part:

Summary of Determination

Your offer in compromise was not recommended for acceptance because our computation indicates you have the ability to full[y] pay. We discussed the possibility of an installment agreement and you disagree with the monthly payment amount. We did not discuss any other alternatives for payment. Based on the evidence in the case file the District's decision to issue the Final Notice-Notice of Intent to Levy and Notice of your Right to a hearing is sustained.

An attachment to the notice of determination stated in pertinent part:

I. Verification of Legal and Procedural Requirements

With the best information available, the requirements of various applicable law or administrative procedures have been met.

IRC Section 6331(d) requires the taxpayer be notified at least 30 days before a notice of levy can be issued. The 30-day letter was sent on tax years ending 12/31/1990, 12/31/1991, 12/31/1992, 12/31/1994, 12/31/1996, 12/31/1997 and 12/31/2002 on February 7th 2005.

* * * * * * *

IRC 6330(c) allows the taxpayer to raise any relevant issues relating to the unpaid tax or the proposed levy at the hearing.

This Settlement Officer has had no prior involvement with respect to these liabilities.

II. Issues Raised by the Taxpayer

Challenges to the Amount of the Liability You did not challenge the amount of the liability.

III. Balancing Efficient Collection and Intrusiveness

IRC section 6330 require[s] that the Settlement Officer consider [whether] the collection action balances the need for efficient collection of taxes with the taxpayer's legitimate concern that any collection action be no more intrusive than necessary.

Collection alternatives include full payment, installment agreement, offer in compromise and temporary suspension of collection based on financial hardship. You submitted an offer in compromise and it was determined you had the ability to pay the taxes and your offer was recommended for rejection. We also discussed an installment agreement but you were not in agreement with the monthly payment amount. No further alternatives were discussed.

The rejection of your offer was based on the following:

Monthly income:



Wages: $16,903.00 - Based on 3 year average

Rental Income: 296.00

Pension: 145.00

Social Security: 1,551.00

Total Monthly Income: $18,895.00

Allowable Monthly Expenses:

National Standards: $1280.00

Housing/utilities: 1318.00

Taxes: 1450.00

Court-ordered payments: 2195.00

Total Expenses: $6243.00

Excess Monthly: $12,652.00

Assets:

Bank Accounts: $ 1517.00

Real Estate:

Fair Market Value: $995,714.00

Quick Sale Value: 796,571.20-80%

Encumbrances: Not documented

Equity: 796,571.20

Total Net Realizable Equity: $798,088.20

Future Income: (12,652 x 48) 607,296.00

Reasonable Collection Potential: $1,405,384.20


Based on the evidence in the case file the District's decision to issue the Final Notice-Notice of Intent to Levy and Notice of your Right to a Hearing is sustained.

The notice of determination made no determination with respect to the notice of Federal tax lien filed with respect to petitioner's taxable years 1990 through 1992, 1994, 1996, and 2002. See supra note 17 and accompanying text and note 18.


Discussion

The Court may grant summary judgment where there is no genuine issue of material fact and a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994). We conclude that there are no genuine issues of material fact regarding the questions raised in respondent's motion.

A taxpayer may raise challenges to the existence or the amount of the taxpayer's underlying tax liability if the taxpayer did not receive a notice of deficiency or did not otherwise have an opportunity to dispute such liability. Sec. 6330(c)(2)(B).

In petitioner's response, petitioner does not dispute the existence or the amount of petitioner's unpaid liabilities for 1990, 1991, 1992, 1994, 1996, 1997, and 2002.25 Where, as is the case here, the validity of the underlying tax liability is not properly placed at issue, the Court will review the determination of the Commissioner of Internal Revenue (Commissioner) for abuse of discretion. See Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 181-182 (2000).

In petitioner's response, petitioner advances three principal arguments in support of his position that respondent abused respondent's discretion in making the determinations in the notice of determination. We turn to petitioner's first principal argument. In petitioner's response, petitioner argues in pertinent part:

On September 6, 2004, an IRS Offer Specialist [first offer specialist] determined that the Petitioner's Reasonable Collection Potential ("RCP") was only $139,707,26 and the Petitioner promptly submitted an offer to compromise for this amount.

Thereafter, in violation of applicable provisions of the Code, Regulations, and its own Manual, the Service returned the offer in error (for an alleged underpayment of a small estimated tax penalty which the Petitioner disputed) and issued levies. The Petitioner then filed a CDP hearing request.

Upon receipt of the CDP hearing request, the Settlement Officer abused her discretion by requiring the Petitioner to submit a new offer, instead of reinstating the existing offer as required by Regulation §301.6330-1(e)(1). On September 6, 2005, exactly one year after the first RCP determination * * * a second IRS Offer Specialist looking at the same financial information determined that the Petitioner's RCP was $979,527.

Although not altogether clear, it appears that petitioner is arguing that the settlement officer abused the settlement officer's discretion by (1) not accepting as petitioner's reasonable collection potential (RCP) the amount calculated by the first offer specialist in connection with petitioner's September 29, 2004 offer-in-compromise and (2)(a) instead requiring petitioner to submit a new, updated offer-in-compromise (i.e., petitioner's June 24, 2005 offer-in-compromise) accompanied by a new, updated Form 433-A (i.e., petitioner's June 24, 2005 Form 433-A) and (b) determining as petitioner's RCP an amount different from the amount of petitioner's RCP that the first offer specialist determined.

In support of the foregoing argument, petitioner relies on section 301.6330-1(e)(1), Proced. & Admin. Regs., as in effect with respect to requests for Appeals Office hearings made before November 16, 2006. That regulation provided:

(e) Matters considered at CDP hearing. --(1) In general. --Appeals has the authority to determine the validity, sufficiency, and timeliness of any CDP Notice given by the IRS and of any request for a CDP hearing that is made by a taxpayer. Prior to issuance of a determination, the hearing officer is required to obtain verification from the IRS office collecting the tax that the requirements of any applicable law or administrative procedure have been met. The taxpayer may raise any relevant issue relating to the unpaid tax at the hearing, including appropriate spousal defenses, challenges to the appropriateness of the proposed collection action, and offers of collection alternatives. The taxpayer also may raise challenges to the existence or amount of the tax liability specified on the CDP Notice for any tax period shown on the CDP Notice if the taxpayer did not receive a statutory notice of deficiency for that tax liability or did not otherwise have an opportunity to dispute that tax liability. Finally, the taxpayer may not raise an issue that was raised and considered at a previous CDP hearing under section 6320 or in any other previous administrative or judicial proceeding if the taxpayer participated meaningfully in such hearing or proceeding. Taxpayers will be expected to provide all relevant information requested by Appeals, including financial statements, for its consideration of the facts and issues involved in the hearing.

Petitioner's reliance on the above-quoted regulation is misplaced. We find (1) no requirement in that regulation that the Appeals Office use as a taxpayer's RCP an amount of RCP previously determined by respondent's collection division and (2) no prohibition in that regulation on the Appeals Office's requiring a taxpayer to submit a new, updated offer-in-compromise accompanied by a new, updated Form 433-A.27

In advancing his first principal argument, petitioner makes a related argument that respondent should not have returned to petitioner petitioner's September 29, 2004 offer-in-compromise. In support of that related argument, petitioner relies on section 301.7122-1(d)(2), Proced. & Admin. Regs.28 In the first offer specialist's September 6, 2004 letter, the first offer specialist informed petitioner that his offer-in-compromise had to be perfected to reflect Federal excise tax assessed for the tax periods ended December 31, 1991, and December 31, 1992. In the first offer specialist's September 15, 2004 letter, the first offer specialist informed petitioner (1) that an offer-in-compromise may be returned where there is insufficient Federal income tax withheld or paid and (2) that respondent's records indicated that insufficient Federal income tax had been withheld with respect to petitioner's taxable year 2003.

The first offer specialist and Mr. Silverberg had a telephonic discussion on September 17, 2004. On October 1, 2004, the first offer specialist left a voice mail for Mr. Silverberg. Thereafter, Mr. Silverberg sent Mr. Silverberg's October 1, 2004 letter to the first offer specialist and enclosed with that letter petitioner's September 29, 2004 offer-in-compromise.29 That offer-in-compromise did not offer to compromise the Federal excise tax with respect to the tax periods ended December 31, 1991, and December 31, 1992, to which the first offer specialist referred in the first offer specialist's September 6, 2004 letter.30 On November 3, 2004, respondent's collection division sent a letter to petitioner in which respondent stated: "Our records indicate the following period(s) was/were not included: Excise tax for 1991 and 1992 tax periods."31 On the record before us, we conclude that respondent complied with section 301.7122-1(d)(2), Proced. & Admin. Regs., when respondent returned to petitioner petitioner's September 29, 2004 offer-in-compromise.

On the record before us, we find that the settlement officer did not abuse the settlement officer's discretion by (1) not accepting as petitioner's RCP the amount calculated by the first offer specialist in connection with petitioner's September 29, 2004 offer-in-compromise and (2)(a) instead requiring petitioner to submit a new, updated offer-in-compromise (i.e., petitioner's June 24, 2005 offer-in-compromise) accompanied by a new, updated Form 433-A (i.e., petitioner's June 24, 2005 Form 433-A) and (b) determining as petitioner's RCP an amount different from petitioner's RCP that the first offer specialist determined.

We address next petitioner's second principal argument. In petitioner's response, petitioner argues that the settlement officer abused the settlement officer's discretion in calculating petitioner's RCP by using as the "future income" component of that calculation an average of petitioner's wage income for the three-year period 2002 through 2004, instead of using an average of petitioner's wage income for the seven-year period 1998 through 2004 or the twelve-year period 1993 through 2004.32 In calculating the "future income" component of petitioner's RCP on the basis of the three-year period 2002 through 2004, the second offer specialist first determined petitioner's average monthly income to be $18,895, consisting of (1) $16,903 of average monthly wage income calculated by using an average of petitioner's wage income for the years 2002 through 200433 and (2) other monthly income totaling $1,992. The second offer specialist then calculated petitioner's "excess" monthly income (i.e., $12,652) by subtracting allowed monthly necessary living expenses (i.e., $6,243) from petitioner's average monthly income (i.e., $18,895). Finally, the second offer specialist multiplied petitioner's "excess" monthly income ($12,652) by 48 months to determine the "future income" component of petitioner's RCP (i.e., $607,296).

The settlement officer reviewed the second offer specialist's determination of petitioner's RCP and agreed with, inter alia, that specialist's use of the three-year period 2002 through 2004 on which to calculate the "future income" component of such RCP. We believe that the second offer specialist's calculation of the "future income" component of petitioner's RCP on the basis of the three-year period 2002 through 2004, with which the settlement officer agreed, is supported by part 5.8.5.5 of the IRM (Sept. 1, 2005), which provides:

5.8.5.5 * * * Future Income

(1) Future income is defined as an estimate of the taxpayers [sic] ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future. The number of months used depends on the payment terms of the offer.

a. For cash offers --project for the next 48 months.

b. For short term deferred offers --project for the next 60 months.

c. For deferred payment offers --project for the number of months remaining on the statutory period for collection.

* * * * * * *

(3) Consider the taxpayers [sic] overall general situation including such facts as age, health, marital status, number and age of dependents, highest education or occupational training, and work experience.

(4) Retired Debts --A taxpayers [sic] ability to pay in the future may change during the period it is being considered because necessary expenses may increase or decrease. Adjust the amount or number of payments to be included in the future income calculation, based on the expected change in necessary expenses.

Example: The taxpayer may pay off an auto loan 24 months from the date the offer is accepted. This would increase the monthly future income by the amount of the loan payment. Child support payments may stop before the future income period is complete because the child turns a certain age. It is expected that these retired payments would increase the taxpayers [sic] ability to pay.

Note: Inclusion of retired debt should not be added automatically in the calculation of the reasonable collection potential (RCP). The Offer Investigator should use judgment in determining whether inclusion of the retired debt is appropriate based on the facts of the case; such as special circumstance or Effective Tax Administration (ETA) situations. In all instances, the case histories should be documented to support the inclusion and/or exclusion of the retired debt.

(5) Some situations may warrant placing a different value on future income than current or past income indicates:



________________________________________________________________________
If... Then...

________________________________________________________________________
Average earnings over several
A taxpayer has a sporadic prior years. Usually this is the
employment history or fluctuating prior 3 years. Note This practice
income does not apply to wage earners.

________________________________________________________________________
Adjust the amount or number of
payments to the expected earnings
during the appropriate number of
A taxpayer is elderly, in poor months. Consider special
health, or both and the ability to circumstance situations when making
continue working is questionable any adjustments.

________________________________________________________________________

* * * * * * *

(6) Below are some examples on when it is and is not appropriate to income average. Judgment should be used in determining the appropriate time to apply income averaging on a case by case basis. All circumstances of the taxpayer should be considered when determining the appropriate application of income averaging, including special circumstance and Effective Tax Administration considerations.

a. The examples below are instances when income averaging may or may not be appropriate.

Example: A taxpayer is a commissioned sales person and the income varies year to year. It would be appropriate to income average in this case. * * *

Even if it were arbitrary for the settlement officer to have agreed with and accepted the second offer specialist's calculation of the "future income" component of petitioner's RCP by using petitioner's average monthly wage income for the three-year period 2002 through 2004, the settlement officer did not abuse the settlement officer's discretion in agreeing with the second offer specialist that petitioner's June 24, 2005 offer-in- compromise should be rejected and in rejecting that offer. That is because part 5.8.1.1.3(3) of the IRM (Sept. 1, 2005) requires that generally "a Doubt as to Collectibility * * * offer amount must equal or exceed a taxpayers [sic] reasonable collection potential (RCP) in order to be considered for acceptance." As explained below, even if the period 1998 through 2004 or the period 1993 through 2004 were used to determine petitioner's average monthly wage income and the "future income" component of petitioner's RCP, petitioner's RCP nonetheless would exceed the amount (i.e., $139,776) that petitioner offered in petitioner's June 24, 2005 offer-in-compromise to compromise, inter alia, petitioner's unpaid liabilities for 1990, 1991, 1992, 1994, 1996, 1997, and 2002.

Part 5.8.1.1.3 of the IRM (Sept. 1, 2005) provides:

5.8.1.1.3 * * * Policy

(1) Policy Statement P-5-100 states:

The Service will accept an offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. An offer in compromise is a legitimate alternative to declaring a case currently not collectible or to a protracted installment agreement. The goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the Government.

In cases where an offer in compromise appears to be a viable solution to a tax delinquency, the Service employee assigned the case will discuss the compromise alternative with the taxpayer and, when necessary, assist in preparing the required forms. The taxpayer will be responsible for initiating the first specific proposal for compromise.

The success of the offer in compromise program will be assured only if taxpayers make adequate compromise proposals consistent with their ability to pay and the Service makes prompt and reasonable decisions. Taxpayers are expected to provide reasonable documentation to verify their ability to pay. The ultimate goal is a compromise which is in the best interest of both the taxpayer and the government. Acceptance of an adequate offer will also result in creating for the taxpayer an expectation of a fresh start toward compliance with all future filing and payment requirements.

(2) Offers will not be accepted if it is believed that the liability can be paid in full as a lump sum or through installment payments extending through the remaining statutory period for collection (CSED), unless special circumstances exist. See IRM 5.14, Installment Agreements.

(3) Absent special circumstances, a Doubt as to Collectibility (DATC) offer amount must equal or exceed a taxpayers [sic] reasonable collection potential (RCP) in order to be considered for acceptance. 34 The exception is that if special circumstances exist as defined in IRM 5.8.4.3, Effective Tax Administration and Doubt as to Collectibility with Special Circumstance, or IRM 5.8.11, Effective Tax Administration, the offer may be accepted on the basis of hardship or Effec- tive Tax Administration (ETA).35

Assuming arguendo, as petitioner argues, that the "future income" component of petitioner's RCP should have been calculated by using his average monthly wage income for the seven-year period 1998 through 2004 (i.e., $7,154.68), rather than his average monthly wage income for the three-year period 2002 through 2004, petitioner's RCP would be $937,464.84.36 Petitioner's RCP as so calculated exceeds the amount (i.e., $139,776) in petitioner's June 24, 2005 offer-in-compromise that petitioner offered to compromise, inter alia, petitioner's unpaid liabilities for 1990, 1991, 1992, 1994, 1996, 1997, and 2002. See IRM pt. 5.8.1.1.3(3) (Sept. 1, 2005).

Assuming arguendo, as petitioner argues alternatively, that the "future income" component of petitioner's RCP should have been calculated by using his average monthly wage income for the twelve-year period 1993 through 2004, rather than his average monthly wage income for the three-year period 2002 through 2004, petitioner's RCP would be $927,737.64.37 Petitioner's RCP as so calculated exceeds the amount ($139,776) in petitioner's June 24, 2005 offer-in-compromise that petitioner offered to compromise, inter alia, petitioner's unpaid liabilities for 1990, 1991, 1992, 1994, 1996, 1997, and 2002. See IRM pt. 5.8.1.1.3(3) (Sept. 1, 2005).

On the record before us, we find that the settlement officer did not abuse the settlement officer's discretion in rejecting the offer of $139,776 in petitioner's June 24, 2005 offer-in-compromise.

We turn finally to petitioner's third principal argument. In petitioner's response, petitioner argues that the settlement officer "made no effort to balance the Service's needs for efficient collection of taxes against the taxpayers' legitimate concern that collection action be no more intrusive than necessary."

We have found that, assuming arguendo that the settlement officer had calculated the "future income" component of petitioner's RCP by using petitioner's average monthly wage income for the seven-year period 1998 through 2004 or his average monthly wage income for the twelve-year period 1993 through 2004, petitioner's RCP nonetheless would have exceeded the amount (i.e., $139,776) that petitioner offered in petitioner's June 24, 2005 offer-in-compromise. In the case of the use of such seven-year period, petitioner's RCP would have exceeded petitioner's offer by $797,688.84. In the case of the use of such twelve-year period, petitioner's RCP would have exceeded petitioner's offer by $787,961.64. As discussed above, in order to be considered for acceptance, an offer based on "Doubt as to Collectibility", the basis on which petitioner submitted petitioner's June 24, 2005 offer-in-compromise, generally must equal or exceed the taxpayer's RCP. Id. Regardless of whether the "future income" component of petitioner's RCP is calculated on one of the two bases urged by petitioner or on the basis used by the settlement officer, petitioner's offer of $139,776 in petitioner's June 24, 2005 offer-in-compromise did not equal or exceed that RCP.

On the record before us, we find that the settlement officer took into consideration whether the proposed collection action with respect to petitioner's unpaid liabilities for 1990, 1991, 1992, 1994, 1996, 1997, and 2002 balanced the need for the efficient collection of those liabilities with the legitimate concern of petitioner that that collection action be no more intrusive than necessary. See sec. 6330(c)(3)(C).

Based upon our examination of the entire record before us, we find that respondent did not abuse respondent's discretion in making the determinations in the notice of determination with respect to petitioner's unpaid liabilities for 1990, 1991, 1992, 1994, 1996, 1997, and 2002. On that record, we sustain those determinations.

We have considered all of the contentions and arguments of petitioner that are not discussed herein, and we find them to be without merit, irrelevant, and/or moot.

On the record before us, we shall grant respondent's motion.

To reflect the foregoing, An order granting respondent's motion and decision for respondent will be entered.

1 On Feb. 13, 1997, and Jan. 22, 1998, petitioner made payments with respect to his taxable year 1990 of $3,000 and $6,000, respectively. In addition, respondent credited a refund of $859 due to petitioner for his taxable year 2001 against the liability for petitioner's taxable year 1990.

2 All section references are to the Internal Revenue Code in effect at all relevant times. All Rule references are to the Tax Court Rules of Practice and Procedure.

3 On Aug. 16, 1993, respondent assessed an addition to tax under sec. 6651(a)(2) of $3.27 and interest as provided by law. On Aug. 31, 1993, petitioner paid those assessed amounts.

4 We shall refer collectively to petitioner's unpaid 1990 liability, petitioner's unpaid 1991 liability, and petitioner's unpaid 1992 liability as petitioner's unpaid liabilities for 1990, 1991, and 1992.

5 On Apr. 15, 1999, respondent credited a refund of $610 due to petitioner for his taxable year 1998 against the liability for petitioner's taxable year 1996.

6 After petitioner's payment on Jan. 19, 2005, petitioner's account with respect to his taxable year 2002 showed a credit of $216.42 with respect to that year.

7 It does not appear from the record that there is any unpaid amount of liability with respect to petitioner's taxable year 2002. However, neither party makes any argument that there is no unpaid amount of liability with respect to that year.

8 We shall refer collectively to petitioner's unpaid liabilities for 1990, 1991, and 1992, petitioner's unpaid 1994 liability, petitioner's unpaid 1996 liability, petitioner's unpaid 1997 liability, and petitioner's unpaid 2002 liability as petitioner's unpaid liabilities for 1990, 1991, 1992, 1994, 1996, 1997, and 2002.

9 The record does not indicate how Mr. Silverberg could have enclosed with Mr. Silverberg's November 20, 2002 letter Form 656 and Form 433-A that petitioner signed and that were dated Nov. 27, 2002, which was after the date of that letter. We note that each of those documents was apparently signed by petitioner again on Jan. 9, 2003.

10 The record does not disclose what transpired with respect to petitioner's November 27, 2002 offer-in-compromise and petitioner's November 27, 2002 Form 433-A between the time respondent assigned them to the first offer specialist and Jan. 12, 2004.

11 The record does not contain Forms 656 referred to in Mr. Silverberg's January 12, 2004 letter. That is because the declaration by Mr. Silverberg filed in support of petitioner's response to respondent's motion indicates that he was unable to locate such forms. (Petitioner filed a response to respondent's motion, a declaration by Mr. Silverberg in support of that response, and a supplement to that response consisting of a declaration by petitioner. We shall refer collectively to those filings by petitioner as petitioner's response.)

12 The record does not contain the "amended Form 656" referred to in the first settlement officer's September 6, 2004 letter.

13 The record does not indicate why the "last amended F656" referred to in the first offer specialist's September 6, 2004 letter could have been signed by petitioner and dated Sept. 29, 2004, which was after the date of that letter. See infra note 15.

14 The record does not indicate whether Mr. Silverberg responded to all of the requests made by the first offer specialist during the September 17, 2004 telephonic discussion and the first offer specialist's October 1, 2004 voice mail.

15 The first offer specialist's September 6, 2004 letter referred to a "last amended F656", that petitioner signed and (continued...) that was dated Sept. 29, 2004. We do not know whether Form 656 that petitioner signed and that was dated Sept. 29, 2004, and that Mr. Silverberg enclosed with Mr. Silverberg's October 1, 2004 letter was the "last amended F656" referred to in the first offer specialist's September 6, 2004 letter. See supra note 13 and accompanying text.

16 The record does not establish that petitioner responded to respondent's November 3, 2004 letter.

17 The record does not indicate why respondent did not issue to petitioner a notice of tax lien with respect to petitioner's taxable year 1997. As discussed below, the notice of determination concerning collection action(s) under section 6320 and/or 6330 (notice of determination) made no determination with respect to the notice of tax lien with respect to petitioner's taxable years 1990 through 1992, 1994, 1996, and 2002.

18 In petitioner's Form 12153, Mr. Silverberg did not indicate disagreement with the notice of tax lien filed with respect to petitioner's taxable years 1990 through 1992, 1994, 1996, and 2002. See supra note 17 and accompanying text.

19 The record does not contain the "transcript for period ending 12/31/2003" referred to in the settlement officer's May 24, 2005 letter.

20 Mr. Silverberg did not enclose with Mr. Silverberg's July 7, 2005 letter Form 656 with respect to petitioner's professional corporation.

21 Only Form 2848, Power of Attorney and Declaration of Representative (Form 2848), appointing Mr. Kauffman as the attorney-in-fact for petitioner is attached to the copy of Mr. Kauffman's first November 14, 2005 letter that is in the record. Form 2848 appointing Mr. Kauffman as the attorney-in-fact for Henry M. Lloyd, P.C., is not attached to the copy of Mr. Kauffman's first November 14, 2005 letter that is in the record.

22 See infra note 32.

25 In fact, petitioner does not advance in petitioner's response any arguments with respect to the existence or the amount of petitioner's unpaid liabilities for 1990, 1991, 1992, 1994, 1996, 1997, and 2002. Assuming arguendo that petitioner were disputing in petitioner's response the existence or the amount of petitioner's unpaid liabilities for those years, on the record before us, we find that petitioner may not challenge the existence or the amount of those liabilities. That is because petitioner did not do so at the Appeals Office hearing. See Washington v. Commissioner, 120 T.C. 114, 123-124 (2003).

26 In the first offer specialist's September 6, 2004 letter, the first offer specialist indicated that he had adjusted petitioner's offer figure to $139,766 to reflect, inter alia, assessed Federal excise tax for the tax periods ended Dec. 31, 1991, and Dec. 31, 1992. See Internal Revenue Manual (IRM) pt. 5.8.1.7(1); 5.8.2.3.1(2) (May 15, 2004). Petitioner's September 29, 2004 offer-in-compromise, which was investigated by the first offer specialist, did not include such excise tax in the liabilities with respect to which petitioner submitted that offer and offered $139,707, and not $139,766, to compromise the liabilities that that offer was submitted to compromise. After the settlement officer indicated during the June 7, 2005 telephonic discussion that petitioner was required to submit a new offer-in-compromise, petitioner submitted petitioner's June 24, 2005 offer-in-compromise. Petitioner's June 24, 2005 offer-in-compromise offered $139,776 to compromise the liabilities that that offer was submitted to compromise and included Federal excise tax for the tax periods Dec. 31, 1991, and Dec. 31, 1992, in the liabilities with respect to which petitioner submitted that offer. With the exception of those differences, the September 29, 2004 offer-in-compromise and the June 24, 2005 offer-in-compromise are identical.

27 Part 5.8.5.2.2 of the IRM (Nov. 15, 2004) requires any agent of the Commissioner who investigates an offer-in-compromise to request updated financial information from the taxpayer if the information submitted with such an offer is older than 12 months or if there is any reason to believe the taxpayer's situation may have significantly changed. That part 5.8.5.2.2 of the IRM provides:

(1) Collection Information Statements (CIS) submitted with an offer in compromise should reflect information no older than the prior six months. If during the processing of the offer, the financial information becomes older than 12 months, contact should be made with the taxpayer to update the information. However, in certain situations information may become outdated due to significant processing delays caused by the Service, through no fault of the taxpayer. In those cases, it may be appropriate to rely on the outdated information if there is no indication the taxpayer's overall situation has significantly changed. Judgment should be exercised to determine whether, and to what extent, updated information is necessary. If there is any reason to believe the taxpayer's situation may have significantly changed, secure a new CIS.

When petitioner submitted petitioner's September 29, 2004 offerin-compromise in early October 2004, his 2003 return and his 2004 return were not due to have been filed. When the settlement officer sent a letter to petitioner on May 24, 2005, with respect to petitioner's Form 12153, in which the settlement officer, inter alia, requested updated financial information from petitioner to be presented in a new Form 433-A, petitioner's 2003 return and his 2004 return were due to have been filed.

28 Sec. 301.7122-1(d)(2), Proced. & Admin. Regs., provides in pertinent part:

If an offer accepted for processing does not contain sufficient information to permit the IRS to evaluate whether the offer should be accepted, the IRS will request that the taxpayer provide the needed additional information. If the taxpayer does not submit the additional information that the IRS has requested within a reasonable time period after such a request, the IRS may return the offer to the taxpayer. The IRS may also return an offer to compromise a tax liability if it determines that the offer was submitted solely to delay collection or was otherwise nonprocessable. An offer returned following acceptance for processing is deemed pending only for the period between the date the offer is accepted for processing and the date the IRS returns the offer to the taxpayer. * * *

29 The record does not indicate whether Mr. Silverberg responded in Mr. Silverberg's October 1, 2004 letter to all of the requests that the first offer specialist made to Mr. Silverberg.

30 In contrast, petitioner's June 24, 2005 offer-in- compromise offered to compromise not only petitioner's unpaid liabilities for 1990, 1991, 1992, 1994, 1996, 1997, and 2002 but also the Federal excise tax for the tax periods ended Dec. 31, 1991, and Dec. 31, 1992.

31 Respondent's November 3, 2004 letter further stated:

We are returning your Form 656, Offer in Compromise for the following reasons(s):

All tax periods with a balance due must be included in your Offer in Compromise. Our records indicate the following period(s) was/were not included: Excise tax for 1991 and 1992 tax periods.

If a deposit was made with the offer, we will mail the refund separately in four to six weeks.

If you believe the return of your offer was made in error, or your failure to provide the information/ substantiation we requested was due to circumstances beyond your control (your serious illness, death or serious illness of your immediate family member, or disaster)[,] within 30 days from the date of this letter you may contact * * * [the first settlement officer] to request reconsideration of our decision to close your offer. You should be prepared to discuss specifics, provide verification of the circumstances beyond your control and provide the information previously requested.

32 In support of that argument, petitioner contends, and respondent does not dispute, that petitioner had the following wage income from his law practice for 1993 through 2004:

Year Wage Income
1993 $55,000
1994 52,000
1995 110,100
1996 85,000
1997 98,000
1998 -
1999 -
2000 -
2001 -
2002 200,000
2003 329,151
2004 71,842


Petitioner further contends that his average monthly wage income for the seven-year period 1998 through 2004 was $2,548 and that his average monthly wage income for the twelve-year period 1993 through 2004 was $5,435. We disagree. On the instant record, we find that petitioner incorrectly calculated his average monthly wage income for each of those periods. The respective average monthly wage income amounts that petitioner claims for the period 1998 through 2004 and the period 1993 through 2004 (as well as for the three-year period 2002 through 2004) are averages of cumulative averages of petitioner's monthly wage income for each of the years included in calculating those respective average monthly wage income amounts. See supra text accompanying notes 23 and 24. The use of those averages of cumulative averages for the seven-year period 1998 through 2004 and for the twelve-year period 1993 through 2004, which places significant emphasis on the years before 2002 that are included in the respective calculations, is improper. The correct amount of petitioner's average monthly wage income for 1998 through 2004 is $7,154.68. The correct amount of petitioner's average monthly wage income for 1993 through 2004 is $6,952.03.

33 The record does not disclose the basis for the second offer specialist's calculation of petitioner's average monthly wage income for 2002 through 2004 (i.e., $16,903). The monthly average of the wage income that petitioner claims for 2002 through 2004 is $16,694.25. The Court is unable to reconcile the difference between the monthly average of petitioner's wage income for 2002 through 2004 as calculated by the second offer specialist and the monthly average of the wage income that petitioner claims for 2002 through 2004. However, it is not necessary to reconcile that difference in order to dispose of respondent's motion.

34 The only reason that petitioner gave in petitioner's June 24, 2005 offer-in-compromise for the IRS to accept petitioner's offer was "Doubt as to Collectibility". Petitioner did not give as a reason "Doubt as to Collectibility with Special Circumstance" or "Effective Tax Administration". Consistent with the general rule of part 5.8.1.1.3(3) of the IRM (Nov. 15, 2004) for an offer-in-compromise based on "Doubt as to Collectibility", petitioner offered in petitioner's June 24, 2005 offer-in-compromise an amount ($139,776) that was greater than the amount of petitioner's RCP ($139,707) that petitioner claims the first offer specialist determined in September 2004. Assuming arguendo that petitioner had based petitioner's June 24, 2005 offer-in-compromise on "Doubt as to Collectibility with Special Circumstance" or "Effective Tax Administration", on the record before us, we find that the settlement officer did not abuse the settlement officer's discretion in concluding that that offer-in-compromise should be rejected on those grounds. Although petitioner was 70 years old in September 2005 when the settlement officer (and the second offer specialist) was considering petitioner's June 24, 2005 offer-in-compromise, petitioner was still practicing law and did not claim that he had any health issues.

35 See Murphy v. Commissioner, 125 T.C. 301, 309 (2005), affd. 469 F.3d 27 (1st Cir. 2006), where we stated:

Special circumstances are (1) circumstances demonstrating that the taxpayer would suffer economic hardship if the IRS were to collect from him an amount equal to the reasonable collection potential of the case or (2) if no demonstration of such suffering can be made, circumstances justifying acceptance of an amount less than the reasonable collection potential of the case based on public policy or equity considerations. IRM pt. 5.8.4.3.4 (Sept. 1, 2005) (Effective Tax Administration and Doubt as to Collectibility with Special Circumstances). To demonstrate that compelling public policy or equity considerations justify a compromise, the taxpayer must be able to demonstrate that, due to exceptional circumstances, collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner. Sec. 301.7122-1(b)(3)(ii), Proced. & Admin. Regs.

36 The monthly average of petitioner's wage income for 1998 through 2004 is $7,154.68. See supra note 32. Adding to that amount petitioner's other monthly income (i.e., $1,992) and subtracting petitioner's allowed monthly necessary living expenses (i.e., $6,243) results in "excess" monthly income of $2,903.68. That amount of "excess" monthly income multiplied by 48 months results in "future income" of $139,376.64. That amount of "future income" plus the amount that the settlement officer calculated as the "net realizable equity" component of petitioner's RCP (i.e., $798,088.20), which "net realizable equity" component petitioner does not dispute in petitioner's response, results in a reasonable collection potential for petitioner of $937,464.84. In this connection, we note that on Sept. 6, 2005, the second offer specialist sent petitioner a letter and enclosed with that letter a so-called Asset/Equity Table which showed a fair market value of real estate owned by petitioner of $995,714, a quick sale value of that real estate of the same amount, encumbrances on that real estate of $625,000, and "net realizable equity" with respect to that real estate of $370,714. However, in a footnote next to those amounts the second offer specialist indicated: "Encumbrances not documented - subject to further valuation." The notice of determination that the Appeals Office issued to petitioner on Feb. 8, 2006, indicated, inter alia, that petitioner had real estate with a fair market value of $995,714, that that real estate had a quick sale value of $796,571.20 (or 80 percent of that fair market value), that any encumbrances with respect to that real estate were "Not documented", and that petitioner's total "net realizable equity" was $798,088.20. In petitioner's response, petitioner does not dispute the determination in the notice of determination of petitioner's "net realizable equity" of $798,088.20.

37 The monthly average of petitioner's wage income for 1993 through 2004 is $6,952.03. See supra note 32. Adding to that amount petitioner's other monthly income (i.e., $1,992) and subtracting petitioner's allowed monthly necessary living expenses (i.e., $6,243) results in "excess" monthly income of $2,701.03. That amount of "excess" monthly income multiplied by 48 months results in "future income" of $129,649.44. That amount of "future income" plus the amount that the settlement officer calculated as the "net realizable equity" component of petitioner's reasonable collection potential (i.e., $798,088.20), which "net realizable equity" component petitioner does not dispute in petitioner's response, results in a reasonable collection potential for petitioner of $927,737.64. See supra note 36.

Code Sec. 6404 Abatement of Interest -

Congress amended sec. 6404(e) in 1996 to permit abatement of interest for "unreasonable" error and delay in performing a ministerial or "managerial" act. Taxpayer Bill of Rights 2, Pub. L. 104-168, sec. 301(a)(1) and (2), 110 Stat. 1457 (1996). That amendment applies to tax years beginning after July 30, 1996. Id. sec. 301(c), 110 Stat. 1457. It is rare for any taxpayer to meet this burden of proof.

The IRS's denial of an individual's request for full abatement of interest accruing on three years' unpaid taxes was not an abuse of discretion. After several years of interaction with the IRS relating to his unpaid taxes, the individual requested abatement of the interest on the deficiency, and, after receiving a partial abatement, requested full abatement of interest. Denial of the abatement request was proper as the individual was unable to establish a direct causal link between a claimed error or delay and a specific period during which interest accrued. Additionally, the individual was unable to provide evidence of a claimed incorrect report or transfer to another office that caused an unreasonable delay. --

Robert A. Franklin v. Commissioner, Dkt. No. 15113-05 , TC Memo. 2008-13, January 28, 2008.


MEMORANDUM OPINION

WELLS, Judge: Respondent determined that petitioner is not entitled to an abatement of interest pursuant to section 6404(e) 1 for 1998, 1999, and 2000. The issue for decision is whether respondent's refusal to abate interest constitutes an abuse of discretion.


Background

The parties' stipulations are incorporated into this Memorandum Opinion by reference and, accordingly, are found as facts in the instant case. At the time he filed his petition, petitioner resided in Tampa, Florida.

On August 22, 2001, Internal Revenue Service (IRS) Agent Julie A. Kelley (Agent Kelley) initiated examination of petitioner's 1999 return. On September 10, 2001, Agent Kelley initiated examination of petitioner's 1998 return. On September 25, 2001, Agent Kelley worked on notices of proposed adjustments to items reported on petitioner's income tax returns for 1998 and 1999.

On September 27, 2001, Agent Kelley sent petitioner a letter requesting an extension of the limitations period for assessing petitioner's taxes for 1998. Agent Kelley drew up a Revenue Agent Report on October 2, 2001. Petitioner discussed the Revenue Agent Report with Agent Kelley on October 5, 2001. Subsequently, petitioner discussed the Revenue Agent Report with his representative, Laymond Cloud (Mr. Cloud), and informed Agent Kelley on October 22, 2001, that he would not agree to sign a report until adjustments to all of his returns under audit were consolidated into one report. On October 24, 2001, Agent Kelley started the examination of petitioner's 2000 tax return. On October 31, 2001, Agent Kelley prepared notices of proposed adjustment to items reported on petitioner's return for that year.

Agent Kelley, her supervisor, Group Manager Patricia Carter (Group Manager Carter), petitioner, and Mr. Cloud held a telephone conference on November 7, 2001. The parties to the telephone conference agreed that Mr. Cloud had until November 23, 2001, to decide whether the case should be closed unagreed.

On November 14, 2001, petitioner retained Fred Schultz (Mr. Schultz) as his representative. On November 20, 2001, Mr. Schultz contacted Agent Kelley by phone and faxed her a power of attorney form.

On December 7, 2001, Agent Kelley prepared a notice of proposed adjustment regarding petitioner's return for 2000. On December 17, 2001, Agent Kelley continued working on the case. On December 18, 2001, Agent Kelley prepared notices of proposed adjustment to items reported on petitioner's returns for 1998 and 1999. During early January 2002, Agent Kelley faxed Mr. Schultz a revised Revenue Agent Report and scheduled a conference with Mr. Schultz for January 10, 2002. At the January 10, 2002, conference, Agent Kelley and Mr. Schultz could not reach an agreement. Consequently, Agent Kelley and Mr. Schultz scheduled a subsequent meeting, and Mr. Schultz agreed to provide additional information before that conference. On January 18, 2002, Mr. Schultz provided the additional information. On January 22, 2002, Agent Kelley, Mr. Schultz, petitioner, and Group Manager Carter attended a conference, at which they could not agree.

During February 2002, Agent Kelley was temporarily reassigned. On February 4 and 14, 2002, Agent Kelley informed Mr. Schultz of the temporary reassignment. Agent Kelley was temporarily reassigned during parts of February and March 2002. On March 4, 2002, Agent Kelley contacted Mr. Schultz and worked on petitioner's case. On April 17, 2002, respondent determined that the case should be closed unagreed. On April 23, 2002, respondent closed the case unagreed.

On May 2, 2002, respondent issued petitioner a Letter 950 (30-day letter) for 1998, 1999, and 2000. On May 31, 2002, Mr. Schultz requested consideration by respondent's Appeals Office. On June 17, 2002, respondent's Tampa Appeals Office received petitioner's file. On June 25, 2002, respondent assigned petitioner's case to Appeals Officer Roger Caruso (AO Caruso) and mailed petitioner a letter informing him of AO Caruso's receipt of the case.

On July 5, 2002, respondent sent petitioner a Form 872, Consent to Extend the Time to Assess Tax, for 1998 and 1999. Initially, Mr. Schultz informed respondent that petitioner did not want to extend the period of limitations. However, later in July, Mr. Schultz agreed to extend the period of limitations to March 31, 2003, and AO Caruso prepared a new Form 872. On August 2, 2002, AO Caruso received the Form 872 signed by petitioner, extending the period of limitations to March 31, 2003, for assessment of petitioner's 1998 income taxes.

From September 9 through 13, 2002, AO Caruso attended mediation training. On September 16, 2002, the parties agreed to hold an Appeals conference on November 7, 2002. On October 7, 2002, Appeals Officer Nelson Leduc (AO Leduc) replaced AO Caruso. Mr. Schultz and respondent each left a voicemail for the other in October. On October 31, 2002, AO Leduc prepared a form to extend the period of limitations for assessment until December 31, 2003. However, at the Appeals conference held on November 7, 2002, Mr. Schultz declined to extend the period of limitations for assessment and instead requested 2 weeks to review relevant tax law. Between November 25 and December 5, 2002, Mr. Schultz and AO Leduc discussed extending the period of limitations. Respondent received from petitioner a signed extension of the period of limitations on assessment on December 5, 2002, extending the limitations period to December 31, 2003, for 1998 and 1999.

AO Leduc was on annual leave from December 14, 2002, to January 13, 2003. On January 13 and 14, 2003, AO Leduc contacted petitioner to ascertain petitioner's position regarding an Appeals conference that had been scheduled for February 10, 2003. On January 16, 2003, AO Leduc received petitioner's written position. As scheduled, AO Leduc, petitioner and Mr. Schultz met for an Appeals conference on February 10, 2003. Mr. Schultz contacted AO Leduc on March 17, 2003, and stated that the requested documents would be mailed the next day. After receiving the documents on March 26, 2003, AO Leduc initiated review of the material on April 1, 2003. After reaching a decision on April 2, 2003, AO Leduc mailed the decision to Mr. Schultz and also sent the case to respondent's technical section for final computation.

On May 12, 2003, AO Leduc mailed to Mr. Schultz Form 870-AD, Offer to Waive Restrictions on Assessment and Collection of Tax Deficiency and to Accept Overassessment. After a telephone call from each party, AO Leduc received the signed Form 870-AD on June 5, 2003, signed it, and sent it to Appeals Team Manager Chester Kreidich (ATM Kreidich). On June 5, 2003, AO Leduc prepared an "Appeals Transmittal and Case Memo." On June 12, 2003, ATM Kreidich signed the Form 870-AD.

On July 7, 2003, the Tampa Appeals Office closed petitioner's case. The Tampa Appeals Office thereafter sent petitioner's case file to the Jacksonville Appeals Office to complete processing the case. On July 15, 2003, the Jacksonville Appeals Office received the file. On August 5, 2003, the assessment date was entered into the IRS's computer system.

On August 25, 2003, the IRS assessed deficiencies in petitioner's income tax, with interest, as follows: For 1998, a deficiency of $2,308 and $833.54 of accrued interest (interest calculated from April 16, 1999, to August 25, 2003); for 1999, a deficiency of $26,916 and $6,885.15 of accrued interest (interest calculated from April 16, 2000, to August 25, 2003); for 2000, a deficiency of $34,328 and $4,948.79 of accrued interest (interest calculated from April 16, 2001, to August 25, 2003).

On September 22, 2003, petitioner filed Form 843, Claim for Refund and Request for Abatement. Petitioner requested interest abatement as follows: For 1998, $312.55 of interest abatement; for 1999, $3,430.19 of interest abatement; and for 2000, $3,648.65 of interest abatement. Subsequently, the IRS sent petitioner a letter stating that petitioner's request for interest abatement had been forwarded to respondent's Memphis Office for review.

After assignment of the request for interest abatement to Revenue Agent Susan Harbin (Agent Harbin) in Jacksonville, Florida, on September 29, 2004, Agent Harbin suspended the interest which had accrued during a portion of the examination and otherwise proposed to deny petitioner's request for interest abatement. Agent Harbin informed petitioner of her decisions by letter on November 22, 2004. The IRS adjusted petitioner's account to reflect statutory suspension of interest of $342.37 for 1998 (for October 15, 2000, to May 22, 2002) and of $811.61 for 1999 (for October 15, 2001, to May 22, 2002). On December 4, 2004, petitioner sent the IRS a letter requesting abatement in full. The Jacksonville Appeals Office sent petitioner a letter on December 20, 2004, acknowledging receipt of petitioner's request for interest abatement.

On January 4, 2005, Mr. Schultz contacted the IRS to inquire about petitioner's request for interest abatement. On January 7, 2005, respondent informed Mr. Schultz that petitioner's request for interest abatement would be forwarded to the Area Director. After the IRS assigned petitioner's request for interest abatement on January 21, 2005, to Appeals Officer Charles Kelly (AO Kelly) in the Jacksonville Appeals Office, AO Kelly sent petitioner a letter dated January 27, 2005, acknowledging receipt of petitioner's request for interest abatement.

AO Kelly sent petitioner a letter dated March 31, 2005, summarizing petitioner's request for interest abatement. It included a timeline of petitioner's case and analyzed his request. In the letter, AO Kelly informed petitioner that respondent had determined that delays in petitioner's case were not unreasonable. AO Kelly also requested that petitioner provide contrary authority. After the aforementioned statutory suspension of interest, the IRS prepared an "Appeals Transmittal Memorandum and Case Memo" on May 18, 2005, and the IRS issued a Full Disallowance/Final Determination regarding petitioner's request for interest abatement, which incorporated by reference the March 31, 2005, letter to petitioner.


Discussion

Pursuant to section 6404(e)(1),2 the Commissioner may abate an assessment of interest on: (1) A deficiency attributable to an unreasonable error or delay by an IRS official in performing a ministerial or managerial act or (2) a payment of tax to the extent that an error or delay by the taxpayer in paying such tax is attributable to an IRS official being erroneous or dilatory in performing a managerial or ministerial act.

In deciding whether to grant relief, an error or delay by an officer or employee of the IRS shall be taken into account only if no significant aspect of such error or delay can be attributed to the taxpayer involved, and after the IRS has contacted the taxpayer in writing with respect to such deficiency or payment. Id. Section 6404(e) is not intended to be routinely used to avoid payment of interest. Rather, Congress intended abatement of interest only where failure to do so "would be widely perceived as grossly unfair." H. Rept. 99-426, at 844 (1985), 1986-3 C.B. (Vol. 2) 1, 844; S. Rept. 99-313, at 208 (1986), 1986-3 C.B. (Vol. 3) 1, 208.

The term "ministerial act" means a procedural or mechanical act that does not involve the exercise of judgment or discretion and that occurs during the processing of a taxpayer's case after all prerequisites to the act, such as conferences and review by supervisors, have taken place. See sec. 301.6404-2(b)(2), Proced. & Admin. Regs. A decision concerning the proper application of Federal tax law is not a ministerial act. See id.

The term "managerial act" means an administrative act that occurs during the processing of a taxpayer's case involving the temporary or permanent loss of records or the exercise of judgment or discretion relating to management of personnel. See sec. 301.6404-2(b)(1), Proced. & Admin. Regs. A decision concerning the proper application of Federal tax law is not a managerial act. See id.

The standard for reviewing the Commissioner's decision regarding abatement of interest is abuse of discretion. See sec. 6404(h); Camerato v. Commissioner, T.C. Memo. 2002-28. Generally, the taxpayer must show that, by denying an abatement of interest, the Commissioner exercised his discretion arbitrarily, capriciously, or without sound basis in fact or law. Lee v. Commmissioner, 113 T.C. 145, 149 (1999); Woodral v. Commissioner, 112 T.C. 19, 23 (1999). However, "The Commissioner is in the best position to know what actions were taken by IRS officers and employees during the period for which petitioners' abatement request was made and during any subsequent inquiry based upon that request." Jacobs v. Commissioner, T.C. Memo. 2000-123.

Petitioner alleges that the IRS committed unreasonable errors or delays in performing managerial or ministerial acts. In order to qualify for relief pursuant to section 6404(e), a taxpayer must generally establish a direct causal link between an unreasonable error or delay by the IRS in performing ministerial or managerial acts and a specific period during which interest accrued. Guerrero v. Commissioner, T.C. Memo. 2006-201; Braun v. Commissioner, T.C. Memo. 2005-221. Petitioner failed to establish a direct causal link between a claimed unreasonable error or delay by the IRS and a specific period during which interest accrued on his liabilities. Consequently, the Commissioner's final determination letter did not address that claim. Accordingly, petitioner's argument is without merit.

Additionally, petitioner alleges that there was an unreasonable error or delay "in the return of the case to the agent from review since the report was written incorrectly." However, we can find no evidence in the administrative record of any error or delay in the preparation of a report. Petitioner also alleges that there was an unreasonable error or delay in "the time [the case] was in the Appeals division and transferred to the Miami Office and then back to Tampa." However, we can find no evidence in the administrative record that petitioner's case was ever transferred to the Miami Appeals Office.

We conclude that petitioner has failed to show that any of respondent's employees or officers committed an unreasonable error or delay in performing ministerial or managerial acts. Accordingly, we hold that respondent's denial of petitioner's request for interest abatement was not arbitrary, capricious, or without sound basis in fact or law, and we uphold respondent's final determination not to abate interest.

In reaching all of our holdings herein, we have considered all arguments made by the parties, and to the extent not mentioned above, we find them to be irrelevant, moot or without merit.

To reflect the foregoing,

Decision will be entered for respondent.

1 Unless otherwise indicated, all section references are to the Internal Revenue Code as amended.

2 Congress amended sec. 6404(e) in 1996 to permit abatement of interest for "unreasonable" error and delay in performing a ministerial or "managerial" act. Taxpayer Bill of Rights 2, Pub. L. 104-168, sec. 301(a)(1) and (2), 110 Stat. 1457 (1996). That amendment applies to tax years beginning after July 30, 1996. Id. sec. 301(c), 110 Stat. 1457.


Abatements: Delays in resolving tax matters

A taxpayer who claimed losses from a tax shelter partnership was unable to prove that the IRS abused its discretion in denying his claim for abatement of interest. The passage of a considerable amount of time in the litigation phase of the tax dispute did not establish error or delay by the IRS in performing a ministerial act for purposes of Code Sec. 6404. The taxpayer's contention that the IRS committed ministerial errors when it allegedly failed to communicate relevant information and communicated misinformation to him was also rejected.

W.G. Lee, 113 TC 145, Dec. 53,508.

Similarly:

J. Momot, 92 TCM 303, Dec. 56,633(M), TC Memo. 2006-207.

A.M. Beagles, 85 TCM 995, Dec. 55,075(M), TC Memo. 2003-67.

W. Landvogt, 86 TCM 104, Dec. 55,237(M), T.C. Memo. 2003-217.

A pro se attorney who pled guilty to criminal tax evasion was not entitled to an abatement of interest that accrued on his tax deficiency as a result of the IRS's suspension of civil proceedings against him during its criminal investigation and prosecution. The refusal to continue the civil investigation was the result of a litigation strategy, not the result of a ministerial act.

J.R. Taylor, 113 TC 206, Dec. 53,541. Aff'd, CA-9 (unpublished opinion), 2001-1 USTC ¶50,441.

The IRS's denial of a request by a tax preparer and his wife to abate interest on their deficiency did not constitute an abuse of discretion. Although the taxpayers claimed that too much time had elapsed from the commencement of an audit until the IRS issued a deficiency notice nearly two years later, they failed to show that any agent of the IRS committed an error or delay in performing a ministerial act. Any delay in transferring the taxpayers' petition from the U.S. Embassy in Mexico City to the Tax Court had no effect on the pace of the settlement of the case and, thus, interest that accrued during that period was not subject to abatement. Further, there was no prohibited delay with respect to an IRS Appeals officer's issuance of a settlement offer to the taxpayers. The IRS properly refused to abate interest that accrued solely due to the taxpayer's failure to pay their agreed tax liability, and it did not have to apply a refund that arose in a subsequent tax year to pay the deficiency for the year at issue. Finally, since the taxpayers failed to maintain proper records, interest was not abated to offset expenses they incurred hiring an accountant and traveling to Mexico to obtain records.

G. Mankita, 78 TCM 1216, Dec. 53,673(M), TC Memo. 1999-420.

The IRS's failure to abate interest that accrued on married taxpayers' deficiencies was not an abuse of discretion since the taxpayers did not show that the interest was attributable to any error or delay of an IRS employee acting in an official capacity in performing a ministerial act. The taxpayers failed to support their claim that they attempted to schedule an earlier meeting with an Appeals officer than actually occurred. Thus, they were not entitled to abate interest that accrued from the date they received their first letter from the Appeals office until they reached a settlement with the IRS regarding the amount of their deficiencies. Moreover, their claim that the IRS took unreasonable legal positions did not implicate a ministerial act since decisions regarding whether to settle a case and the application of tax laws involve discretion and judgment.

R. Dundore, 79 TCM 1479, Dec. 53,747(M), TC Memo. 2000-45.

It was an abuse of discretion for the IRS to refuse to abate interest during the period in which the examination of a partnership's return was delayed by the IRS's Quality Review branch since the IRS failed to clearly explain its basis for refusal. The abuse of discretion standard requires the IRS to explain why it has exercised its discretion in a given manner, so that the court is not required to speculate as to the basis of its actions. However, the IRS did not abuse its discretion in refusing to abate interest that accrued during the initial and final stages of the examination while IRS agents were reviewing the partners' expense deductions and considering the imposition of penalties. Further, the IRS's decision not to reassign the case while the assigned Appeals Officer was in training, and the officer's subsequent decision to give precedence to cases on which the statute of limitations was near expiration, were not ministerial acts. Finally, the version of Code Sec. 6404 that was in effect for the tax year at issue did not provide for abatement of interest that accrued due to delays in performing managerial acts.

L.L. Jacobs, 79 TCM 1835, Dec. 53,840(M), TC Memo. 2000-123.

An individual was not entitled to an abatement of interest on his deficiency because he failed to prove that the interest accrued due to any ministerial acts on the part of IRS employees. The fact that his examination took several years to complete did not prove that an erroneous or dilatory act occurred, especially since delays were caused by the expansion of his case, his difficulty in supplying records, the IRS's suspicions of fraud, and the reopening of the examination at the taxpayer's request. A misaddressed letter from the IRS to one of his representatives also was not an error in performing a ministerial act because the letter was mailed to the address provided by the representative, and was remailed once the IRS determined the correct address.

R. Banat, 79 TCM 1941, Dec. 53,858(M), TC Memo. 2000-141. Aff'd, CA-2 (unpublished opinion), 2001-1 USTC ¶50,296.

The IRS's refusal to abate interest that had accrued on an individual's tax liability was not an abuse of discretion since any delay in the proceeding was not due to a ministerial act of the IRS. The Service responded in a timely manner to the taxpayer's correspondence in connection with his unpaid tax liability; however, the taxpayer canceled scheduled appointments and failed to supply requested information. Thus, any error or delay was attributable to the taxpayer. Moreover, his arguments that hardship prevented him from complying with tax laws, that the IRS failed to include vital information in the stipulation of facts and that the IRS's attorney attempted to coerce him into dropping his claim were not proper grounds on which to base an order to abate interest.

J.B. Cosgriff, 80 TCM 156, Dec. 53,983(M), TC Memo. 2000-241.

The IRS did not abuse its discretion in denying a request by a sole proprietor and his wife for an abatement of interest for tax deficiencies that arose, in part, as the result of disallowed business expense deductions and adjustments to the proprietorship's cost of goods sold. The taxpayers could not avail themselves of the exceptions that would otherwise entitle them to an interest abatement in the instant case. They did not identify any specific delay or conduct by the IRS that would constitute a ministerial act or support their claim. Moreover, the time that transpired during the examination, appeals and settlement processes did not constitute error or unreasonable delay in performing a ministerial act.

L.D. Scott, 80 TCM 800, Dec. 54,143(M), TC Memo. 2000-369.

The IRS did not abuse its discretion by denying a couple's request for an abatement of interest accrued on deficiencies assessed against the husband's wholly-owned travel agency. The IRS agent's inability to work on the taxpayers' file for more than six months due to his workload did not constitute a ministerial act.

R.A. Strang, 81 TCM 1566, Dec. 54,325(M), TC Memo. 2001-104.

A long civil and criminal investigation process, which spanned several years and included use of third-party summonses, did not establish error or delay in the government's performance of a ministerial act. Also, the revenue agent responsible for the civil examination did not fail to return to the taxpayer records obtained during the examination, as most of the documents were photocopies obtained by the use of third-party recordkeeper summonses and any original documents were returned.

K.D. Hanks, 82 TCM 1003, Dec. 54,574(M), TC Memo. 2001-319.

The IRS did not abuse its discretion in refusing to abate interest that accrued over several years during an investigation of a limited partnership's returns. The taxpayer's dissatisfaction with the length of time it took to resolve his case did not establish a correlation between a specific error or delay in the performance of a ministerial act and a specific time period for which interest should have been abated as a result of the error or delay.

W.B. Berry, 83 TCM 1013, Dec. 54,580(M), TC Memo. 2001-323.

An individual who was responsible for a significant part, if not all, of the delay in the determination of his tax liability was not entitled to an interest abatement in excess of the amount abated following the IRS's reconsideration of his assessed deficiencies. The individual had protracted the audit by demanding that it be delayed while he completed college and until he returned from a vacation, by failing to pursue review of the IRS's decisions in a timely manner, by refusing to cooperate with the IRS, and by making rude and insulting statements to IRS customer service representatives.

T.R. Camerato, 83 TCM 1147, Dec. 54,632(M), TC Memo. 2002-28.

A tax shelter investor's contention that the IRS exhibited unreasonable delay in signing a decision document pertaining to his case was not supported. Other theories also did not show that accrual of interest on his tax deficiency was attributable to an erroneous or dilatory performance of a ministerial duty by an IRS agent.

T.E. Vanstone, 83 TCM 1751, Dec. 54,762(M), TC Memo. 2002-133.

An IRS delay in assessing a married couple's interest due and owing was not unreasonable and did not justify abatement. A significant portion of the delay was due to various aspects of a related audit and the remainder was not a ministerial error, which required the abatement of additional amounts.

IRS Letter Ruling 200213009 (Technical Advice Memorandum), December 7, 2001.

The IRS did not abuse its discretion in failing to abate interest for specified periods with respect to married taxpayers' disallowed investment credits and losses arising out of a partnership in which they held a limited interest. The delays identified by the taxpayers were not attributable to the IRS's error or delay in performing any ministerial act; rather, they were attributable to the IRS's reasonable prioritization decisions with respect to its caseload. For a second period, however, the IRS conceded that it abused its discretion in failing to abate interest attributable to an unjustified delay. The delay appeared to have occurred in the performance of a ministerial act by the IRS, which was the IRS agent's signing of a stipulation and causing it to be delivered to the Tax Court.

J.G. Goettee, Jr., 85 TCM 867, Dec. 55,049(M), TC Memo. 2003-43. Motion for reconsideration denied in 87 TCM 808, Dec. 55,510(M), TC Memo. 2004-9, below. Aff'd per curiam, CA-4 (unpublished opinion), 2006-2 USTC ¶50,484, 192 FedAppx 212.

Married taxpayers who failed to establish the existence of unusual circumstances or substantial error in the Tax Court's decision involving their entitlement to interest abatements (Dec. 55,049(M), above) were not entitled to reconsideration of that ruling. Their allegation that the IRS erred in computing the amount of interest due was rejected because the prior opinion called for the correction of calculation errors. Also, reconsideration was not the appropriate forum for offering new legal theories or reiterating previously rejected arguments. Further, the record supported the IRS's prioritization decisions, and there was no delay in the assessment of liabilities because the taxpayers had waived restrictions on assessment.

J.G. Goettee, Jr.,, 87 TCM 808, Dec. 55,510(M), TC Memo. 2004-9. Aff'd per curiam, CA-4 (unpublished opinion), 2006-2 USTC ¶50,484, 192 FedAppx 212.

A taxpayer who claimed losses from a tax shelter partnership was unable to prove that the IRS abused its discretion in denying his claim for abatement of interest covering four tax years. The taxpayer's contention that the IRS delayed issuing two final partnership administrative adjustments (FPAAs) until several years after it had sufficient information to issue them did not establish error or delay by the IRS in performing a ministerial act. Further, the record revealed that the IRS's difficulty in obtaining accurate records during the audits hindered the audit process.

J.M. Mekulsia, 85 TCM 1303, Dec. 55,152(M), TC Memo. 2003-138.

Married taxpayers were not entitled to an abatement of interest that resulted from the denial of their deductions for donations of whale meat and whaling expenses. The taxpayers failed to establish that the accrual of interest was attributable to an error or delay by an official or employee of the IRS. In their opening brief, the taxpayers admitted that the delay resulted from a suspension of their case to allow for the enactment of pertinent proposed federal legislation. Moreover, a death in the family of the taxpayers' attorney did not provide a basis for an abatement of interest.

G.N. Ahmaogak, 86 TCM 124, Dec. 55,240(M), TC Memo. 2003-220.

The taxpayers failed to establish that any unreasonable error or delay in the performance of a ministerial duty by an IRS agent contributed to the nonpayment of interest on their tax deficiency. The record indicated that the interest accruals were merely the result of the taxpayers' failure to pay the entire balance owed, and not the result of an IRS employee's erroneous or dilatory performance of a ministerial or managerial act.

J.D. Hinterleitner, 86 TCM 206, Dec. 55,250(M), TC Memo. 2003-228. Aff'd, on another issue, CA-9 (unpublished opinion), 2006-1 USTC ¶50,346.

An abatement of interest was denied because the delay was significantly attributable to the taxpayer. Although the IRS agent working on their case was hospitalized and later died, the case was quickly reassigned, thus, any delay resulted from the taxpayers' continual failure to provide requested documentation.

R.M. Jean, 84 TCM 436, Dec. 54,902(M), TC Memo. 2002-256.

An IRS Appeals officer did not abuse his discretion in issuing a Collection Due Process (CDP) determination permitting the collection of the trust fund recovery penalty and interest from a corporate treasurer/responsible person. While the federal district court determined that it had jurisdiction under Code Sec. 6404(h) to review the IRS's refusal to abate interest on the trust fund recovery penalty, it found that the treasurer did not qualify for an abatement. The record did not show, and the treasurer did not identify, any specific acts attributable to the IRS that would constitute ministerial or managerial acts entitling him to an interest abatement. The mere passage of time did not establish that the IRS erred or delayed in performing a ministerial act.

J.A.P. Leiter, DC Kan., 2004-1 USTC ¶50,162.

A married couple, who invested in a multi-level tax shelter partnership, was entitled to an abatement of interest during the periods that the IRS's inaction delayed the resolution of their case. Since the IRS was unable to explain a six-month delay in sending out the taxpayer's settlement agreement, they were entitled to an abatement of interest for those months. Further, the IRS waited another 3-1/2 months to countersign the document, which was an unreasonable delay. Since the IRS drafted the settlement agreement, its countersignature on the document did not require an act of discretion; it was a ministerial act. Therefore, the taxpayers were entitled to an abatement of interest for those months also.

T.F. Dadian, 87 TCM 1344, Dec. 55,641(M), TC Memo. 2004-121.

The IRS did not abuse its discretion in denying a taxpayer's request for abatement of interest on his tax deficiencies. The taxpayer invested in a partnership that was a limited partner in a tax shelter and claimed losses with respect to his investments. Following an investigation of the tax shelter, the IRS reached a settlement agreement with it and with the taxpayer, resulting in adjustment of the taxpayer's returns, assessment of deficiencies, and payment of those deficiencies by the taxpayer. The IRS denied the taxpayer's request for abatement of interest accrued during the investigation, however, holding the statute of limitation for the assessment was not violated, and all of the delays in the case resulted from discretionary, rather than ministerial, acts by the IRS, and so abatement was not required by statute.

R.J. Jaffe,, 87 TCM 1349, Dec. 55,642(M), TC Memo. 2004-122. Aff'd, CA-9 (unpublished opinion), 2006-1 USTC ¶50,259.

The IRS did not abuse its discretion by rejecting taxpayer's interest abatement claim. IRS issued notice of deficiency determining fraud penalties. Delay caused by suspension of civil action to allow for the criminal prosecution of the taxpayer, including the delay in the issuance of the notice of deficiency, was not a delay in the performance of a ministerial act. Taxpayer's contention that IRS also abused its discretion by failing to disclose the basis for its denial of the claim for abatement was also rejected. Investigation of the taxpayer's case and the criminal proceedings were adequate reasons and did not constitute a delay in the performance of a ministerial act.

R.B. Kemp, Jr., 87 TCM 1406, Dec. 55,661(M), TC Memo. 2004-139.

Married owners of a scrap metal business were not entitled to an abatement of interest. The taxpayers failed to pay the tax liability reported on their tax return for the year at issue, and the liability was outstanding until a third party's bankruptcy trustee paid the IRS on the taxpayers' behalf. Moreover, the taxpayers failed to show that any interest that accrued after the bankruptcy trustee's payment was due to the IRS's error or delay.

J.F. Enos, 123 TC 284, Dec. 55,757.

The Tax Court properly denied taxpayers an abatement of interest. An abatement of interest is generally not available when the taxpayer files a return but does not pay the taxes due, regardless of how long the IRS takes to contact the taxpayer and demand payment. Abatement of interest is also not appropriate where the evidence shows that the taxpayers lacked the assets to pay the taxes, suggesting that their failure to pay was due to inability. In either case the delay in resolving the matter is not the fault of the IRS.

J.N. Wright, CA-5, 2005-1 USTC ¶50,223.

An individual taxpayer's request for abatement of interest accrued on unpaid liabilities was properly denied where the taxpayer provided no basis for a determination that the IRS had made an error or been dilatory in performing any ministerial or managerial act and, in fact, it appeared that the taxpayer was entirely responsible for the delay in payment.

C.A. Bell,, 89 TCM 1070, Dec. 55,998(M), TC Memo. 2005-87.

The IRS's decision not to abate interest imposed on a married couple during a time that the IRS failed to properly code the couple's file was an abuse of discretion. However, while the IRS's failure to properly code the couple's file was a ministerial act, the IRS could not consider the couple's offer-in-compromise during a portion of that time because they had unfiled tax returns. Therefore, the delay during this period was the couple's fault and the IRS's refusal to abate interest was not an abuse of discretion.

T. Bo, 89 TCM 1474, Dec. 56,068(M), TC Memo. 2005-150.

Taxpayer was not entitled to an abatement of interest under Code Sec. 6404(e) because there was no evidence that the agent for the IRS abused his discretion in failing to abate the interest. The errors alleged by the taxpayer (i.e.; conflicting requests for an information return and investment account information and a claim that the taxpayer did not respond to a phone inquiry) were not ministerial or managerial errors. Furthermore, the taxpayer did not link any of the alleged errors by the IRS to the taxpayer's delay in paying his taxes and did not demonstrate that, but for the IRS's actions, the taxpayer would have paid his tax liabilities earlier.

M.W. Braun, 90 TCM 311, Dec. 56,147(M), TC Memo. 2005-221.

The denial of a married couple's claim for abatement of interest accrued with respect to the taxpayers' income tax deficiency was not an abuse of discretion. It was the taxpayers' own mistakes that caused the delay in correctly calculating their income tax liability; and an abatement of interest can be made only when the interest is not attributable to error or delay by the taxpayers.

O.J. Guerrero, 92 TCM 288, Dec. 56,627(M), TC Memo. 2006-201.

An attorney failed to show that an IRS Appeals officer abused her discretion by refusing to abate accumulated interest and penalties for several tax years. The IRS's application of the taxpayer's installment payments to a certain year's tax liability was not a ministerial act under Code Sec. 6404. Moreover, much of the delay was caused by the taxpayer's failure to cooperate with the IRS's investigation.

B.A. Kansky, 93 TCM 921, Dec. 56,842(M), TC Memo. 2007-40.

The IRS properly refused to abate interest imposed on a married couple because they failed to demonstrate that any delay was caused by the unreasonableness of the IRS. In fact, the delay was caused by the taxpayers' failing to provide timely and accurate documentation despite being represented by an attorney.

D. Zisskind, 93 TCM 1037, Dec. 56,874(M), TC Memo. 2007-69.

section 6662 and 6694

Penalties, civil: Adequate disclosure: Accuracy-related penalty: Substantial understatement: Return preparer penalty: Unrealistic positions. --
The IRS has identified circumstances under which the disclosure on a taxpayer's return with respect to an item or position will be deemed adequate for purposes of: (1) reducing the Code Sec. 6662(d) accuracy-related penalty for substantial understatement of income tax and (2) avoiding the Code Sec. 6694(a) preparer penalty for understatements attributable to the taking of unrealistic positions. Additional disclosure of facts relevant to, or positions taken with respect to, issues involving certain specified items is unnecessary, provided that the applicable tax return forms and attachments are completed in a clear manner and in accordance with their instructions. The money amounts entered on the forms must be verifiable, and the information on the return must be properly disclosed. This procedure applies to any return filed on 2007 tax forms for a tax year beginning in 2007, and to any return filed on 2007 tax forms in 2008 for short tax years beginning in 2008. Rev. Proc. 2006-48, I.R.B. 2006-47, 934, is updated.




strong>Rev. Proc. 2008-14 , I.R.B. 2008-7, January 25, 2008.[ Code Secs. 6662 and 6694]






SECTION 1. PURPOSE

This revenue procedure updates Rev. Proc. 2006-48, 2006-47 I.R.B. 934, and identifies circumstances under which the disclosure on a taxpayer's return with respect to an item or a position is adequate for the purpose of reducing the understatement of income tax under section 6662(d) of the Internal Revenue Code (relating to the substantial understatement aspect of the accuracy-related penalty), and for the purpose of avoiding the preparer penalty under section 6694(a) (relating to understatements due to unreasonable positions) with respect to income tax returns. This revenue procedure does not apply with respect to any other penalty provisions (including the disregard provisions of the section 6662 accuracy-related penalty, which are subject to an exception for adequate disclosure). Also, under this revenue procedure, no disclosure on a return other than an income tax return will be adequate with respect to a preparer penalty under section 6694(a).

This revenue procedure applies to any income tax return filed on 2007 tax forms for a taxable year beginning in 2007, and to any income tax return filed on 2007 tax forms in 2008 for short taxable years beginning in 2008.



SECTION 2. CHANGES FROM REV. PROC. 2006-48

.01. Editorial changes and line reference changes to Form 1040, Schedule A, have been made in updating Rev. Proc. 2006-48.

02. This revenue procedure has been updated to reflect changes made to section 170(f) by Public Law 109-280, section 1217, and to section 6694 by Public Law 110-28, section 8246.02.

.03. Section 4.02(3)(f) concerning difference in book and income tax reporting is expanded by adding Form 1120-F. Schedule M-3 (Form 1120-F), Net Income (Loss) of Foreign Corporations With Total Assets of $10 Million or More : Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II, (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items).



SECTION. 3. BACKGROUND

.01 If section 6662 applies to any portion of an underpayment of tax required to be shown on a return, an amount equal to 20 percent of the portion of the underpayment to which the section applies is added to the tax. (The penalty rate is 40 percent in the case of gross valuation misstatements under section 6662(h).) Section 6662(b)(2) applies to the portion of an underpayment of tax that is attributable to a substantial understatement of income tax.

.02 Section 6662(d)(1) provides that there is a substantial understatement of income tax if the amount of the understatement exceeds the greater of 10 percent of the amount of tax required to be shown on the return for the taxable year or $5,000. Section 6662(d)(1)(B) provides special rules for corporations. A corporation (other than an S corporation or personal holding company) has a substantial understatement of income tax if the amount of the understatement exceeds the lesser of 10 percent of the tax required to be shown on the return for a taxable year (or, if greater, $10,000) or $10,000,000. Section 6662(d)(2) defines an understatement as the excess of the amount of tax required to be shown on the return for the taxable year over the amount of the tax that is shown on the return reduced by any rebate (within the meaning of section 6211(b)(2)).

.03 In the case of an item not attributable to a tax shelter, section 6662(d)(2)(B)(ii) provides that the amount of the understatement is reduced by the portion of the understatement attributable to any item with respect to which the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return, and there is a reasonable basis for the tax treatment of the item by the taxpayer.

.04 Section 6694(a) imposes a penalty on a tax return preparer for filing a return or claim for refund that results in an understatement of liability due to a position of which the preparer knew or should have known, if the preparer did not have a reasonable belief that the position would more likely than not be sustained on the merits and the position was not disclosed in accordance with section 6662(d)(2)(B)(ii). The penalty is equal to the greater of $1,000 or 50% of the income derived (or to be derived) by the preparer with respect to the return or claim.

.05 In general, this revenue procedure provides guidance for determining when disclosure is adequate for purposes of section 6662(d)(2)(B)(ii) and section 6694(a)(2)(C)(i). For purposes of this revenue procedure, the taxpayer must furnish all required information in accordance with the applicable forms and instructions, and the money amounts entered on these forms must be verifiable. Annual guidance under Treas. Reg. §1.6662-4(f)(2) and Treas. Reg. §1.6694-3(e)(1) and (2) for returns filed on 2006, 2005, and 2004 tax forms is provided in Rev. Proc. 2006-48, 26 I.R.B. 667, Rev. Proc. 2005-75, 50 I.R.B 1137, and Rev. Proc. 2004-73, 2004-2 C.B. 999, respectively.

.06 Fiscal and short tax year returns. (a) In general. This revenue procedure may apply to a return for a fiscal tax year that begins in 2007 and ends in 2008. This revenue procedure may also apply to a short year return for a period beginning in 2008 if the return is to be filed before the 2008 forms are available. (Note that individuals are generally not put in this position as a decedent's final return for a fractional part of a year is due the fifteenth day of the fourth month following the close of the12-month period which began with the first day of such fractional part of the year. See Treas. Reg. section 1.6072-1(b).) In the case of fiscal year and short year returns, the taxpayer must take into account any tax law changes that are effective for tax years beginning after December 31, 2007, even though these changes are not reflected on the form.

(b) Tax law changes effective after December 31, 2007. This document does not take into account the effect of tax law changes effective for tax years beginning after December 31, 2007. If a line referenced in this revenue procedure is affected by such a change and requires additional reporting, a taxpayer may have to file Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement until the Service prescribes criteria for complying with the requirement.



SECTION 4. PROCEDURE

.01 General.

(1) Additional disclosure of facts relevant to, or positions taken with respect to, issues involving any of the items set forth below is unnecessary for purposes of reducing any understatement of income tax under section 6662(d) (except as otherwise provided in section 4.02(3) concerning Schedules M-1 and M-3), provided that the forms and attachments are completed in a clear manner and in accordance with their instructions.

(2) The money amounts entered on the forms must be verifiable, and the information on the return must be disclosed in the manner described below. For purposes of this revenue procedure, a number is verifiable if, on audit, the taxpayer can demonstrate the origin of the number (even if that number is not ultimately accepted by the Internal Revenue Service) and the taxpayer can show good faith in entering that number on the applicable form.

(3) The disclosure of an amount as provided in section 4.02 below is not adequate when the understatement arises from a transaction between related parties. If an entry may present a legal issue or controversy because of a related party transaction, then that transaction and the relationship must be disclosed on a Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement.

(4) When the amount of an item is shown on a line that does not have a preprinted description identifying that item (such as on an unnamed line under an "Other Expense" category) the taxpayer must clearly identify the item by including the description on that line. For example, to disclose a bad debt for a sole proprietorship, the words "bad debt" must be written or typed on the line of Schedule C that shows the amount of the bad debt. Also, for Schedule M-3 (Form 1120), Part II, line 25, Other income (loss) items with differences, or Part III, line 35, Other expense/deduction items with differences, the entry must provide descriptive language; for example, "Cost of non-compete agreement deductible not capitalizable." If space limitations on a form do not allow for an adequate description, the description must be continued on an attachment.

(5) Although a taxpayer may literally meet the disclosure requirements of this revenue procedure, the disclosure will have no effect for purposes of the section 6662 accuracy-related penalty if the item or position on the return: (1) Does not have a reasonable basis as defined in Treas. Reg. §1.6662-3(b)(3); (2) Is attributable to a tax shelter item as defined in section 6662(d)(2) and Treas. Reg. §1.6662-4(g); or (3) Is not properly substantiated or the taxpayer failed to keep adequate books and records with respect to the item or position. See I.R.C. §6694(a), as amended by the Small Business and Work Opportunity Tax Act of 2007, Pub. L. No. 110-28, 121 Stat. 190, and any guidance published thereunder regarding limitations on the effectiveness of a disclosure on the applicability of the section 6694 return preparer penalty.

.02 Items.

(1) Form 1040, Schedule A, Itemized Deductions:


(a) Medical and Dental Expenses: Complete lines 1 through 4, supplying all required information.



(b) Taxes: Complete lines 5 through 9, supplying all required information. Line 8 must list each type of tax and the amount paid.



(c) Interest Expenses: Complete lines 10 through 15, supplying all required information. This section 4.02(1)(c) does not apply to (i) amounts disallowed under section 163(d) unless Form 4952, Investment Interest Expense Deduction, is completed, or (ii) amounts disallowed under section 265.



(d) Contributions: Complete lines 16 through 19, supplying all required information. Enter the amount of the contribution reduced by the value of any substantial benefit (goods or services) provided by the donee organization in consideration, in whole or in part. Entering the value of the contribution unreduced by the value of the benefit received will not constitute adequate disclosure. If a contribution of $250 or more is made, this section will not apply unless a contemporaneous written acknowledgment, as required by section 170(f)(8), is obtained from the donee organization. If contribution of cash of less than $250 is made, this section will not apply unless a bank record or written communication from the donee, as required by section 170(f)(17), is obtained from the donee organization. If a contribution of property other than cash is made and the amount claimed as a deduction exceeds $500, attach a properly completed Form 8283, Noncash Charitable Contributions, to the return. In addition to the Form 8283, if a contribution of a qualified motor vehicle, boat, or airplane has a value of more than $500, this section will not apply unless a contemporaneous written acknowledgment, as required by section 170(f)(12), is obtained from the donee organization and attached to the return. An acknowledgment under section 170(f)(8) is not required if an acknowledgment under section 170(f)(12) is required.



(e) Casualty and Theft Losses: Complete Form 4684, Casualties and Thefts, and attach to the return. Each item or article for which a casualty or theft loss is claimed must be listed on Form 4684.


(2) Certain Trade or Business Expenses (including, for purposes of this section, the following six expenses as they relate to the rental of property):


(a) Casualty and Theft Losses: The procedure outlined in section 4.02(1)(e) must be followed.



(b) Legal Expenses: The amount claimed must be stated. This section does not apply, however, to amounts properly characterized as capital expenditures, personal expenses, or non-deductible lobbying or political expenditures, including amounts that are required to be (or that are) amortized over a period of years.



(c) Specific Bad Debt Charge-off: The amount written off must be stated.



(d) Reasonableness of Officers' Compensation: Form 1120, Schedule E, Compensation of Officers, must be completed when required by its instructions. The time devoted to business must be expressed as a percentage as opposed to "part" or "as needed." This section does not apply to "golden parachute" payments, as defined under section 280G. This section will not apply to the extent that remuneration paid or incurred exceeds the $1 million-employee-remuneration limitation, if applicable.



(e) Repair Expenses: The amount claimed must be stated. This section does not apply, however, to any repair expenses properly characterized as capital expenditures or personal expenses.



(f) Taxes (other than foreign taxes): The amount claimed must be stated.


(3) Differences in book and income tax reporting.


(a) Form 1065. Schedule M-3 (Form 1065), Net Income (Loss) Reconciliation for Certain Partnerships : Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II, (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items).



(b) Form 1120. (i) Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return.



(ii) Schedule M-3 (Form 1120), Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More : Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II, (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items).



(c) Form 1120-L. Schedule M-3 (Form 1120-L), Net Income (Loss) Reconciliation for U.S. Life Insurance Companies With Total Assets of $10 Million or More : Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II, (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items).



(d) Form 1120-PC. Schedule M-3 (Form 1120-PC), Net Income (Loss) Reconciliation for U.S. Property and Casualty Insurance Companies With Total Assets of $10 Million or More : Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II, (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items).



(e) Form 1120S. Schedule M-3 (Form 1120S), Net Income (Loss) Reconciliation for S Corporations With Total Assets of $10 Million or More : Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II, (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items).



(f) Form 1120-F. Schedule M-3 (Form 1120-F), Net Income (Loss) for Foreign Corporations With Total Assets of $10 Million or More : Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II, (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items).


For Schedule M-1 and all Schedules M-3, the information provided reasonably must be expected to apprise the Service of the nature of the potential controversy concerning the tax treatment of the item. If the information provided does not so apprise the Service, a Form 8275 or Form 8275-R, must be used to adequately disclose the item (see Part II of the instructions for those forms).


Note: An item reported on a line with a pre-printed description, shown on an attached schedule, or "itemized" on Schedule M-1 may represent the aggregate amount of several transactions producing that item ( i.e., a group of similar items, such as amounts paid or incurred for supplies by a taxpayer engaged in business). In some instances, the potentially controversial item may involve a portion of the amount disclosed on the schedule. The Service will not be reasonably apprised of the potential controversy by the amount disclosed. In these instances, the taxpayer must use Form 8275 or Form 8275-R regarding that portion of the item.


The combining of unlike items, whether on Schedule M-1 or Schedule M-3 (or on an attachment when directed by the instructions), will not constitute an adequate disclosure.

(4) Foreign Tax Items:


(a) International Boycott Transactions: Transactions disclosed on Form 5713, International Boycott Report. Schedule A, International Boycott Factor ( Section 999(c)(1)); Schedule B, Specifically Attributable Taxes and Income ( Section 999(c)(2)); and Schedule C, Tax Effect of the International Boycott Provisions, must be completed when required by their instructions.



(b) Treaty-Based Return Position: Transactions and amounts under section 6114 or section 7701(b) as disclosed on Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).


(5) Other:


(a) Moving Expenses: Complete Form 3903, Moving Expenses, and attach to the return.



(b) Employee Business Expenses: Complete Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses, and attach to the return. This section does not apply to club dues, or to travel expenses for any non-employee accompanying the taxpayer on the trip.



(c) Fuels Credit: Complete Form 4136, Credit for Federal Tax Paid on Fuels, and attach to the return.



(d) Investment Credit: Complete Form 3468, Investment Credit, and attach to the return.




SECTION. 5. EFFECTIVE DATE

This revenue procedure applies to any income tax return filed on a 2007 tax form for a taxable year beginning in 2007, and to any income tax return filed on a 2007 tax form in 2008 for a short taxable year beginning in 2008.



SECTION 6. DRAFTING INFORMATION

The principal author of this revenue procedure is Jennifer Wagner of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this revenue procedure, contact Branch 2 of Procedure and Administration at (202) 622-4940 (not a toll-free call).

Gambling losses were substantiated

Slot machine gambling losses claimed by a pathological gambler were sufficiently substantiated by the presentation of contemporaneous and other documentary evidence and the testimony of the taxpayer, a girlfriend who accompanied him to casinos, his return preparer, an expert on gambling illnesses, and an expert on slot machine programming and the casino industry. The taxpayer did not maintain a contemporaneous gambling diary or log, as suggested in Rev. Proc. 77-29, 1977-2 CB 538, but retained all his receipts and records relating to his gambling, including ATM receipts, copies of checks cashed at the casinos, credit card and bank statements reflecting withdrawals made at the casinos, and Forms W-2G he received from the casinos (for winnings over $1,200 on a single play). --



Francis M. Gagliardi v. Commissioner.

Dkt. No. 23912-05 , TC Memo. 2008-10, January 24, 2008.



[Code Sec. 165]


[Code Sec. 6651]

Addition to tax: Failure to file a return. --
A pathological gambler was liable for a penalty for failing to file returns for two years. The taxpayer's decision to not file for the refunds due him for those years, as a method of forced savings, did not constitute an exercise of business care and prudence.

[Code Sec. 6662]
Civil penalties: Understatement of income: Reasonable cause: Reliance on accountant. --
A taxpayer was not liable for the accuracy-related penalty sought by the IRS because the taxpayer fully disclosed the facts and provided the supporting documents substantiating his gambling losses to his return preparer. The taxpayer reasonably and with good cause relied on his return preparer. --CCH.





MEMORANDUM FINDINGS OF FACT AND OPINION

VASQUEZ, Judge: Respondent determined the following deficiencies in, additions to, and penalties on petitioner's Federal income tax:



Additions to Tax Penalty Penalty

Sec. 6651(a)(1) Sec. 6651(a)(2)
Year Deficiency Sec. 6662

1999 $212,100 -- -- $42,420

2000 370,017 $45,848 --1 36,679

2001 429,787 -- -- 85,957

1 The sec. 6651(a)(2) addition to tax is 0.5 percent of the unpaid tax
liability that will be added to the tax for each month, or fraction thereof, of
nonpayment, up to a maximum of 25 percent, based upon the liability shown on the
sec. 6020(b) return, or the final determined liability, if less.




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.

In the answer, respondent conceded the section 6651(a)(2) addition to tax. Additionally, respondent alleged that the correct amounts of deficiencies in, additions to, and penalties on petitioner's Federal income tax are as follows:1



Addition to
Tax Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6662

1999 $207,244 -- $41,449

2000 300,102 $44,899 60,020

2001 429,487 69,908 85,897


The issues for decision are: (1) Whether petitioner substantiated the amounts of his claimed gambling losses for 1999, 2000, and 2001; (2) whether petitioner is liable for additions to tax pursuant to section 6651(a)(1) for 2000 and2001; and (3) whether petitioner is liable for penalties pursuant to section 6662(a) for 1999, 2000, and 2001.


FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts, the supplemental stipulation of facts, and the attached exhibits are incorporated herein by this reference. At the time he filed the petition, Francis M. Gagliardi (Mr. Gagliardi) resided in El Cajon, California.



Mr. Gagliardi's Life Before 1991
Mr. Gagliardi did not graduate from high school. The last year Mr. Gagliardi attended high school was 1979.

After high school, Mr. Gagliardi was employed as a machine operator by Buck Knives. Following his work at Buck Knives, from approximately 1984 to 1987 Mr. Gagliardi worked as a truck driver for his brother Dan Gagliardi.

In 1989, Mr. Gagliardi purchased an 18-wheel truck and thereafter ran his own trucking business, called American Redball, as a sole proprietorship. Mr. Gagliardi's duties for American Redball included running the business and driving the truck. Mr. Gagliardi hauled materials for military defense shows and trade shows.

While operating American Redball, Mr. Gagliardi did not keep a log of his income and expenses; instead he kept his receipts for the preparation of his income tax returns. Mr. Gagliardi knew that he had to substantiate his claimed deductions related to American Redball with receipts, and he provided his business receipts to his tax return preparer.

Eugene Hunner (Mr. Hunner) prepared Mr. Gagliardi's tax returns when Mr. Gagliardi owned American Redball. Mr. Hunner has a B.A. in accounting and is a certified public accountant. He worked 5 years at a national accounting firm, is two courses shy of his master's in tax at the University of Southern California, and has prepared tax returns for over 30 years. Ninety percent of Mr. Hunner's professional work is preparing tax returns. Mr. Hunner prepares between 120 and 160 returns per year.



1991: Mr. Gagliardi Wins the Lottery
In 1991, Mr. Gagliardi won approximately $26,660,000 from the California lottery (lottery proceeds). Mr. Gagliardi elected to receive payment of the lottery proceeds in 20 annual payments of approximately $1,333,000 each (original annual lottery payment).

At the time he won the lottery proceeds, Mr. Gagliardi was 29 years old, was married, and had two children. Since winning the lottery proceeds, Mr. Gagliardi has not been employed. After winning the lottery proceeds, and before 1996, Mr. Gagliardi purchased a new home and custom-built motorcycles and regularly went on vacations. With the exception of the above expenditures and other living costs, before 1996 Mr. Gagliardi generally saved most of his lottery winnings.



1994: Mr. Gagliardi and His Wife Divorce
During 1994, Mr. Gagliardi and his wife divorced. Pursuant to the property settlement in the divorce decree, Mr. Gagliardi and his ex-wife evenly split the original annual lottery payment. Accordingly, after the divorce, Mr. Gagliardi's gross annual lottery payment was $666,500 (gross annual lottery payment).

After Mr. Gagliardi divorced, his two children lived with his ex-wife in Marin County, California. Pursuant to the divorce decree, he received visitation rights with his children.



Mr. Gagliardi's Gambling From 1996 Through 1998
In or around 1996, Mr. Gagliardi had a friend who was dying of cancer. In 1996, Mr. Gagliardi's friend asked Mr. Gagliardi to be his companion on a trip to one of the casinos owned and operated by California Indian tribes in San Diego County (the casinos).

Mr. Gagliardi gambled infrequently before winning the lottery. After the trip with his friend, Mr. Gagliardi started playing the slot machines at the casinos2 frequently and became a"pathological gambler". Since becoming a pathological gambler, Mr. Gagliardi has liquidated most of his investments and savings to gamble. Mr. Gagliardi gambled heavily during 1997 and 1998.

Before winning the lottery proceeds, Mr. Gagliardi seldom bought lottery tickets. Since he began gambling at the casinos, Mr. Gagliardi has bought lottery tickets outside of the casinos every couple of days.



Mr. Gagliardi's Gambling During 1999, 2000, and 2001
Mr. Gagliardi spent most of his waking hours at the casinos.3 He had no outside interests, and generally if he was not at the casinos he was at home. A typical day for Mr. Gagliardi generally consisted of waking up, showering, going to a 7-Eleven, getting coffee, going to the casinos, gambling, returning home, sleeping, waking up, and returning to the casino immediately thereafter.4 Occasionally, Mr. Gagliardi spent up to 48 hours continuously in the casinos before returning home.

Mr. Gagliardi spent an average of 20 days per month at the casinos (at least 209 days, 260 days, and 257 days during 1999, 2000, and 2001, respectively). The following is a summary of the total numbers of documented days Mr. Gagliardi was at the casinos:5



Month 1999 2000 2001

January 13 26 24

February 4 18 21

March 8 22 24

April 19 20 27

May 16 24 19

June 12 25 21

July 22 22 15

August 18 23 19

September 25 22 23

October 25 22 24

November 26 11 20

December 21 25 20

Total 209 260 257


In addition to the documented days, which are supported by a summary calendar of Mr. Gagliardi's Forms W-2G, Certain Gambling Winnings, "jackpot" winnings, winnings of $1,200 or more, and cash withdrawals at various casinos (the gambling calendars),6 Mr. Gagliardi gambled at the casinos on days not reflected on the gambling calendars (i.e., in addition to the 209, 260, and 257 documented days for 1999, 2000, and 2001, respectively). Such"undocumented days" generally were days in which (1) Mr. Gagliardi had funds left over from the prior day to fund his current day's gambling, and/or (2) Mr. Gagliardi did not hit a jackpot (no Form W-2G was issued to him by the casino).

On those days when he was at the casinos, Mr. Gagliardi spent 8 to 48 hours continuously in the casinos, averaging approximately 10 hours per day. While at the casinos, Mr. Gagliardi exclusively wagered7 on slot machines, including a game called "Wildfire". After Mr. Gagliardi put cash into a slot machine, he never cashed out; he would always "play it off". While playing a slot machine, Mr. Gagliardi would place at a minimum four or five bets per minute. His average wager at a slot machine at a minimum was $9. A significant number of Mr. Gagliardi's wagers were $16 per slot machine spin, and some wagers cost $100 or $200 per slot machine spin.

The money that Mr. Gagliardi used to gamble at the casinos came from (1) cash from his prior trips to the casinos,8 (2) an automatic teller machine (ATM) at a 7-Eleven on his way to the casinos, (3) an ATM inside the casinos, (4) checks written at the casinos, (5) credit cards, and/or (6) any winnings from slot machine play that day.9 On the rare occasions when he left the casino with any money, Mr. Gagliardi would bring the money back to the casino the following day, and he would then gamble with, and eventually lose (either the next day or shortly thereafter), that money. On numerous days, Mr. Gagliardi would make multiple, sporadic cash withdrawals, rather than large cash withdrawals, at the casinos to fund his slot machine play. He took the money out in smaller sums, rather than large sums, because he did not plan on losing as much money as he eventually withdrew.

The following is a summary of the total numbers of documented cash withdrawals Mr. Gagliardi made at the casinos:



Month 1999 2000 2001

January 33 47 30

February 6 62 55

March 12 77 47

April 46 61 57

May 46 65 34

June 31 57 46

July 64 35 27

August 54 48 47

September 67 49 57

October 64 45 49

November 68 13 36

December 67 64 28

Total 558 623 513


In addition to these documented withdrawals at the casinos, which are supported by the gambling calendars, Mr. Gagliardi withdrew additional cash outside of the casinos' premises and used it to gamble at the casinos. Mr. Gagliardi used the documented cash withdrawals at the casinos for slot machine play and lost the cash gambling at the casinos except for the amounts spent on a few meals he purchased there.

Mr. Gagliardi won jackpots ($1,200 or more) that were reported on the Forms W-2G.10 When Mr. Gagliardi won a jackpot, the slot machine he was playing would "lock up" (the slot machine could not be wagered on) while a casino cashier would come to the machine, get a ticket out of the machine, get a Form W-2G, get Mr. Gagliardi's signature, and give Mr. Gagliardi the jackpot in cash. The time from when the slot machine locked up until Mr. Gagliardi could wager on that machine again could be anywhere from 5 minutes to an hour. When a slot machine locked up because he won a jackpot, Mr. Gagliardi often would go to an ATM to withdraw cash so that he could gamble on a different slot machine until the casino cashier delivered the jackpot money. The casinos paid Mr. Gagliardi any jackpot winnings of $1,200 or more in cash. Often, Mr. Gagliardi lost $1,200 or more on a different slot machine by the time the Form W-2G was prepared and he received the jackpot money. Mr. Gagliardi did not enjoy winning jackpots because the machine locked up and he had to spend time waiting for money to gamble (either from the casino or by having to go get money from an ATM).

Mr. Gagliardi did not get emotionally excited when he won at the slot machines. Mr. Gagliardi did not get excited when he won jackpots of $1,200 or greater because the slot machine would freeze or lock up until he was issued his slot machine winnings and a Form W-2G by the casino. Furthermore, Mr. Gagliardi knew that eventually he would lose any winnings playing the slot machines.

Mr. Gagliardi lived with his girlfriend, Susan Serum (Ms. Serum). Ms. Serum went with Mr. Gagliardi to the casinos and watched him gamble away his money. While watching Mr. Gagliardi gamble, Ms. Serum saw that he did not get excited and did not enjoy playing the slot machines. Initially, Ms. Serum and Mr. Gagliardi would drive to the casinos together. At some point, Ms. Serum began to take her own car because the ride home from the casinos was "no fun". When she rode with Mr. Gagliardi, she stayed at the casinos with him until he left. Often, Ms. Serum would just follow Mr. Gagliardi around and watch him gamble. In or around 2003, Ms. Serum ended her relationship with Mr. Gagliardi as he was never home because of his pathological gambling disorder. After she moved out of Mr. Gagliardi's home, he did not notice that she was gone until 2 or 3 days later.

Mr. Gagliardi did not take any vacations during the years in issue.11 Mr. Gagliardi did not have time for or live a lavish lifestyle as his life was playing slot machines at the casinos. Mr. Gagliardi had his home foreclosed upon on at least two occasions because he was too preoccupied gambling to make the necessary mortgage payments to the bank.

Mr. Gagliardi's children would fly down from Marin County "every couple weeks" to stay with Mr. Gagliardi. Mr. Gagliardi continued to gamble, even for long periods, while his children came to visit him.



Gambling Log and Mr. Gagliardi's Gambling Records
Mr. Gagliardi did not maintain a contemporaneous "gambling diary" or a "gambling log" that reflected his winnings and losses from gambling on the slot machines at the casinos. Mr. Hunner did not advise Mr. Gagliardi to maintain a contemporaneous gambling log or diary.

Mr. Gagliardi knew that all of the Forms W-2G issued by the casinos would be reported to the Internal Revenue Service (IRS). Occasionally the casinos made errors on the Forms W-2G issued to Mr. Gagliardi. When he noticed the errors, he would call the casinos and they would correct these errors.

Mr. Gagliardi retained all his receipts and records related to his gambling winnings and losses, including but not limited to: ATM receipts, copies of checks cashed at the casinos, bank and credit card statements reflecting withdrawals made at the casinos, and Forms W-2G he received from the casinos. Mr. Gagliardi provided his tax return preparer (Mr. Hunner) with all his receipts and records related to his gambling winnings and losses for use in preparing Mr. Gagliardi's income tax returns for the years in issue. This was the same method employed by Mr. Gagliardi and Mr. Hunner when Mr. Gagliardi owned American Redball (his trucking business), and Mr. Gagliardi provided the similar records and receipts to Mr. Hunner. Mr. Gagliardi believed that the records he provided to Mr. Hunner substantiated his expenses (i.e., gambling losses), just as with American Redball.



Mr. Gagliardi's Tax Returns and Respondent's Determinations for 1999, 2000, and 2001
Federal income tax of $186,621, $186,623, $183,431 (totaling $556,675) was withheld from the gross annual lottery payments made to Mr. Gagliardi during 1999, 2000, and 2001, respectively. Additionally, child support of approximately $6,500 per month was deducted from the gross annual lottery payments made to Mr. Gagliardi during the years in issue.

Mr. Hunner prepared Mr. Gagliardi's Federal income tax returns for 1997, 1998, and the years in issue. Mr. Hunner used the same method to prepare Mr. Gagliardi's returns for 1997 and 1998 as he did for the years in issue. Mr. Hunner never stated to Mr. Gagliardi that the records Mr. Gagliardi gave to him were inadequate to prepare his tax returns.

After receiving voluminous documentation and records from Mr. Gagliardi regarding his gambling during the years in issue, Mr. Hunner was comfortable preparing Mr. Gagliardi's returns for the years in issue, especially with regard to the gambling loss deductions claimed on the returns, given the nature and extent of Mr. Gagliardi's gambling. Mr. Hunner believed that Mr. Gagliardi's gambling losses were greater than the amounts of gambling loss deductions claimed on Mr. Gagliardi's returns. Mr. Gagliardi reported the following amounts on his returns:



Casino State Lottery
Year Winnings Winnings Casino Losses

1999 $127,073 $666,500 ($502,433)

2000 270,052 666,500 (802,921)

2001 631,629 666,500 (1,170,140)


In calculating the amounts of gambling loss deductions to claim on Mr. Gagliardi's returns, Mr. Hunner added all of Mr. Gagliardi's checks, charges, and withdrawals made at the casinos to the sum of the amounts shown as income on the Forms W-2G that Mr. Gagliardi received from the casinos. Additionally, for 1999, Mr. Hunner added $1,610 for losses from lottery scratchers. Mr. Hunner, to be conservative, did not include cash withdrawals Mr. Gagliardi made outside the casinos (thousands of dollars) --e.g., at 7-Eleven --in calculating the amounts of Mr. Gagliardi's gambling losses. Mr. Hunner calculated and reported the amounts of Mr. Gagliardi's gambling losses on Mr. Gagliardi's returns for the years in issue on the basis of the fact that Mr. Gagliardi left the casinos with no money or if he left with money, he returned the following day to the casino and lost it all. All gifts that Mr. Gagliardi made during the years in issue were accounted for in determining the reasonableness of the amounts of gambling losses claimed for the years in issue.

In 1999, Mr. Gagliardi received a Federal income tax refund of $153,669 for 1998. In 2000, Mr. Gagliardi received a Federal income tax refund of $104,655 for 1999. Petitioner lost his 1998 and 1999 refunds gambling at the casinos.

Mr. Gagliardi timely filed his Federal individual income tax return for 1999. In May 2003, Mr. Gagliardi submitted his 2000 and 2001 Forms 1040, U.S. Individual Income Tax Return (2000 and 2001 returns). Mr. Gagliardi did not timely file his 2000 and 2001 returns because: (1) He was entitled to a refund for each year; (2) he thought if he did not file returns, then the refunds would serve as a "forced savings account"; and (3) he did not want the refunds for the years 2000 and 2001 because he thought he would spend the tax refunds on gambling at the casinos. Mr. Gagliardi "wanted to save that money for later when I run out of money."

Respondent determined that Mr. Gagliardi failed to report $24,340, $270,052, and $4,521 of gambling income for 1999, 2000, and 2001, respectively. The parties agree that respondent's aforementioned determinations for 1999 and 2000 should be reduced by $21,732 to $2,608 for 1999 and by $53,785 to $216,267 for 2000. Petitioner did not contest, at trial or on brief, respondent's determination that he failed to report $4,521 of gambling income for 2001. We conclude that petitioner has conceded or abandoned this item. See Petzoldt v. Commissioner, 92 T.C. 661, 683 (1989); Money v. Commissioner, 89 T.C. 46, 48 (1987).

Respondent concedes that Mr. Gagliardi is entitled to gambling loss deductions (i.e., that his casino losses exceeded his casino winnings) of $2,181, $24,473, and $59,151 for 1999, 2000, and 2001, respectively.


ULTIMATE FINDINGS OF FACT

Mr. Gagliardi gambled on slot machines and lost at the casinos (1) all of the money listed as withdrawals on the gambling calendars --$366,455, $509,719, and $499,729 for 1999, 2000, and 2001, respectively,12 (2) all of the jackpots that he won (as shown on Forms W-2G) gambling, and (3) all gross gambling winnings won at the casinos not reported on the Forms W-2G. Mr. Gagliardi's gambling losses for each of the years in issue exceeded the amounts of gambling losses respondent disallowed for 1999, 2000, and 2001.


OPINION




I. Deficiencies
A. Applicable Law

Section 165(a) provides the general rule that there shall be allowed as a deduction any loss sustained during the taxable year and not compensated by insurance or otherwise. Section 165(d) limits the loss deduction of section 165(a), providing: "Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions."

This is a substantiation case: the issue is whether petitioner has substantiated the amounts of his gambling losses to the extent disallowed by respondent. We note that the amount of gambling losses petitioner claimed and respondent disallowed does not exceed the amount of gambling income reported by petitioner, conceded by petitioner, or determined by respondent for 1999, 2000, or 2001, respectively. Commissioner v. Groetzinger, 480 U.S. 23, 32 n.11 (1987) (characterizing a State lottery as "public gambling" in a case treating gambling earnings as ordinary income); United States v. Maginnis, 356 F.3d 1179, 1183 & n.6 (9th Cir. 2004) (taxpayer's lottery winnings enter into the section 165(d) calculation as wagering gains that taxpayer's gambling losses at the casinos can be applied to in addition to taxpayer's gambling winnings at the casinos).

Our resolution of this dispute turns mainly on a determination of the credibility of the evidence presented. The determination of the truth of a matter on the basis of the oral and documentary evidence "epitomizes the ultimate task of a trier of the facts --the distillation of truth from falsehood which is the daily grist of judicial life." See Diaz v. Commissioner, 58 T.C. 560, 564 (1972). We "must be careful to avoid making the courtroom a haven for the skillful liar or a quagmire in which the honest litigant is swallowed up. Truth itself is never in doubt, but it often has an elusive quality which makes the search for it fraught with difficulty." Id. ; Hawkins v. Commissioner, T.C. Memo. 1993-517, affd. without published opinion 66 F.3d 325 (6th Cir. 1995).

We determine the credibility of each witness, weigh each piece of evidence, draw appropriate inferences, and choose between conflicting inferences. See Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 84 (2000), affd. 299 F.3d 221 (3d Cir. 2002); see also Gallick v. Baltimore & O.R. Co., 372 U.S. 108, 114-115 (1963); Boehm v. Commissioner, 326 U.S. 287, 293 (1945); Wilmington Trust Co. v. Helvering, 316 U.S. 164, 167-168 (1942). We decide whether evidence is credible on the basis of objective facts, the reasonableness of the testimony, and the demeanor of the witness. Quock Ting v. United States, 140 U.S. 417, 420-421 (1891); Wood v. Commissioner, 338 F.2d 602, 605 (9th Cir. 1964), affg. 41 T.C. 593 (1964); Pinder v. United States, 330 F.2d 119, 124-125 (5th Cir. 1964); Concord Consumers Hous. Coop. v. Commissioner, 89 T.C. 105, 124 n.21 (1987). We have evaluated each witness's testimony by observing his or her candor, sincerity, and demeanor and by assigning weight to the elicited testimony. See Neonatology Associates, P.A. v. Commissioner, supra at 84.

If the taxpayer substantiates the deductions claimed, this satisfies the taxpayer's burden of proof under Rule 142. Accordingly, section 7491(a), regarding the shifting of the burden of proof with respect to the deficiencies in tax, is of little importance because if the taxpayer fails to substantiate an item, the burden of proof does not shift to the Commissioner. Sec. 7491(a)(2)(A).

B. The Documentary Evidence

Petitioner submitted documents entitled "1999 Summary of Gaming Activities", "2000 Summary of Gaming Activities", and "2001 Summary of Gaming Activities" which included: (1) Supporting exhibits evidencing Mr. Gagliardi's Form W-2G jackpot winnings, (2) supporting exhibits evidencing cash withdrawals made by Mr. Gagliardi at various casinos, and (3) the gambling calendars.13 The summaries of gaming activities list living expenses of $331,341, $251,943, $210,334 for 1999, 2000, and 2001, respectively.14 The summaries of gaming activities were prepared using original, contemporaneous records from 1999, 2000, and 2001.

Petitioner submitted as evidence his bank statements, including various canceled checks, covering 1999, 2000, and 2001. Cash withdrawals he made during the years at issue at the various casinos were marked on the bank statements. Also included were checks he cashed at the various casinos.

Petitioner submitted as evidence his credit card statements for 1999, 2000, and 2001. Cash withdrawals he made during the years at issue at the various casinos via his credit cards were marked on the credit card statements.

Mr. Gagliardi and his brother assisted Mr. Hunner in preparing: (1) The gambling calendars showing most of Mr. Gagliardi's gambling activities for 1999 through 2001, (2) summaries of Mr. Gagliardi's living expenses for 1999 through 2001, and (3) net worth analyses of Mr. Gagliardi for 1999 through 2001 (based on records from those years). Mr. Gagliardi reviewed the summaries of living expenses and net worth statements to ensure they were complete and accurate.

Mr. Gagliardi and his brother assisted Mr. Hunner in preparing a cashflow analysis with supporting documents for each line item, including a related summary of living expenses for Mr. Gagliardi, for 1999, 2000, and 2001 using records from the respective tax years (cashflow analysis). The cashflow analysis showed the following:



1999 2000 2001 Total

California lottery $666,500 $666,500 $666,500 $1,999,500

Less: Federal income tax (186,621) (186,623) (183,431) (556,675)

479,879 479,877 483,069 1,442,825

Sale of America funds 160,014 330,000 191,198 681,212

Interest and dividends 1,420 688 639 2,747

Prior year Federal none
income tax refund 153,669 104,655 received 258,324

Form W-2G cash (casinos 127,073 270,052 631,629 1,028,754

Net cash available 922,055 1,185,272 1,306,535 3,413,862

Living expenses (331,341) (251,943) (210,334) (793,618)

(1,170,140) (2,475,494)
Gambling losses claimed (502,433) (802,921)

Cash remaining 88,281 130,408 (73,939) 144,750


Mr. Hunner prepared net worth statements with supporting documents for each line item for Mr. Gagliardi as of December 31, 1998 through 2001 (net worth statements). The net worth statements were prepared using records from 1998, 1999, 2000, and 2001. The net worth statements reflect that Mr. Gagliardi did not have any unaccounted-for increase in his net worth from gambling activities for the years at issue.

Respondent claims that the summaries of living expenses do not include expenses Mr. Gagliardi incurred. Respondent objected to the documents listing petitioner's living expenses, stating:

This is a document that respondent would have no way of corroborating whether it's true or not. We simply have to rely on the testimony of Mr. Gagliardi. Again, this is not the way the government can do business is [sic] simply relying on people's words. * * * [T]here's just absolutely no way I could know whether that was a complete list or an incomplete list, whether that was true or not true. I certainly wasn't with Mr. Gagliardi during that time period.15

We find petitioner's summaries of living expenses to be credible. Respondent did not establish the amounts of any such expenses that were not included in the summaries of living expenses, and respondent failed to present evidence to rebut petitioner's summaries of living expenses.

C. No "Increased Deficiency"

At trial and on brief, respondent alleges that Mr. Gagliardi did not report all of his gambling winnings from the years in issue (i.e., that he reported only the gambling winnings reflected on Forms W-2G). Respondent did not determine in the notice of deficiency, assert in the answer, or pursuant to Rule 41 move to amend the pleadings to assert that Mr. Gagliardi had any unreported gambling winnings for the years in issue. Generally, we will not consider issues that are raised for the first time at trial or on brief. See Foil v. Commissioner, 92 T.C. 376, 418 (1989), affd. 920 F.2d 1196 (5th Cir. 1990); Markwardt v. Commissioner, 64 T.C. 989, 997 (1975).

Accordingly, respondent's proposed findings of fact regarding whether Mr. Gagliardi underreported his gambling winnings in amounts greater than those determined in the notice of deficiency for the years in issue are specious.16

D. The Expert Witnesses

Respondent also attempted to discredit the two expert witnesses that testified at trial.

1. Dr. Suzanne Pike

Dr. Suzanne Pike, a clinical psychologist with over 25 years' experience who specializes and has extensive experience in treating patients with gambling disorders (over 500 such patients), testified as an expert witness on behalf of petitioner. Dr. Pike has been qualified to testify in both Federal and local courts as an expert witness on pathological gambling. Dr. Pike is a member of the National Council on Problem Gambling, the California Council on Problem Gambling, and the American Psychological Association.

Pursuant to a clinical interview and mental assessment of Mr. Gagliardi, including the use of two widely accepted assessment procedures (a.k.a. gambling screens) in the medical field --the South Oaks Gambling Screen and the Diagnostic Statistical Manual of Mental Disorders, Fourth Edition (DSM-IV)17 Pathological Gambler Criteria --Dr. Pike concluded that Mr. Gagliardi suffered from a pathological gambling disorder during the tax years at issue. A pathological gambling disorder is a type of impulse control disorder and mental illness, not an "addiction". This disorder is accepted by the scientific community and is in a category with kleptomania (the impulse to steal stemming from emotional disturbance rather than economic need) and trichotillomania (pulling hair). Dr. Pike concluded that Mr. Gagliardi suffered "from the almost delusional belief that if he gambled long enough, he'd win everything back or break even."

Respondent attempted to discredit Dr. Pike by claiming her definition of "gambler's fallacy" was incorrect. Respondent relies on a definition of "gambler's fallacy" he obtained from Wikipedia. Respondent did not call any witness, or expert witness, to counter Dr. Pike's conclusions. Respondent's reliance on a definition of "gambler's fallacy" found in Wikipedia18 is not persuasive. Dr. Pike and Mr. Nicely, a second expert witness whose testimony and opinions are discussed in greater detail infra, credibly explained that there is a difference in the definition of "gambler's fallacy" depending on the field of study --e.g., psychology versus mathematics. We find Dr. Pike to be credible and rely on her expert opinion.19

Dr. Pike corroborated Mr. Gagliardi's and Ms. Serum's testimony that if Mr. Gagliardi walked out of the casinos with money, he would return the next day or shortly thereafter and lose it. Dr. Pike stated that a pathological gambler, such as Mr. Gagliardi, who walks away from a casino with money will, with an extremely high probability, go back to a casino the next day with the money.

2. Mark Nicely

Mark Nicely (Mr. Nicely), a casino gaming industry and math expert with an expertise in math and slot machines, testified as an expert witness on behalf of petitioner. Mr. Nicely has a bachelor's degree from Rensselear Polytechnic Institute (which he attended on a full academic scholarship) from the Honors Program of the Electrical, Computer, and Systems Engineering Department. He has taken postgraduate classes at Stanford University and the University of California at Berkeley in software, software technology, and math (including statistics, probability, and financial analysis). Before working in casino gaming, Mr. Nicely had over 10 years' experience as a computer software engineer and in math and algorithm development.

At the time of trial, Mr. Nicely had worked in the gaming industry for 9 years. He received direct training from the director of slot operations at the Mirage in Las Vegas, Nevada. Mr. Nicely was vice president of marketing and promotion, and led the math department, at Silicon Gaming --a slot machine manufacturer. Mr. Nicely was responsible for the development of games and gaming math, testing equipment, working with regulators, and training employees on how to design games for casinos. After that, he was president and CEO of Wager Works and later was executive vice president of marketing for Wynn Properties. For a time, Mr. Nicely offered consulting services to gaming industry clients in six States and three foreign countries. At the time of trial, he was the director of gaming and design at International Game Technology (IGT) --the largest slot machine manufacturer in the world.

Mr. Nicely knows and understands the gaming rules of different jurisdictions. He has extensive dealings with regulators, slot floor operators, directors of slot operations, and vice presidents of operations in order to understand from them directly how the slot machines are working. Mr. Nicely works with various jurisdictional bodies including the Great Britain Gaming Board, Alderney Gaming and Isle of Man, and officials from Montana and other States.

Mr. Nicely has worked on "class 3 slot machines",20 "class 2 games",21 online gaming, and table games. He has access to casino operations data and performs analyses to determine whether various machines have been overpaying or underpaying gamblers. Mr. Nicely used the same analyses and techniques in this case. These analyses and techniques are used by all major slot machine manufacturers.

Mr. Nicely has no published articles because in his industry anything worthy of publication is a trade secret. There is a code of silence with respect to sharing information --publishing would amount to giving secrets away to the competition. For example, Mr. Nicely has solved a very difficult math problem associated with a process called "gambler's ruin". His associates do not have this analytical technique at their disposal, so they have to use simulators. Mr. Nicely's analytical solution is very powerful, and he would never publish it because it would be "spilling the beans" to his competitors.

Mr. Nicely is required to gamble on slot machines for market research. It is very important for him to gamble for "real" money so that he can feel the gambler's emotions. Accordingly, he gambles with his own money and is not reimbursed for his losses, which is industry policy, so that he feels what the machine is like. In every year that he has gambled on slot machines as part of his job, he has lost money (net).

Mr. Nicely credibly explained the simple five-step purely mechanical formula he used to calculate the likelihood and extent of Mr. Gagliardi's gambling losses at slot machines during the years in issue. Mr. Nicely had no discretion when calculating the results using the aforementioned formula. We find the methodology and assumptions made by Mr. Nicely to calculate the likelihood and extent of Mr. Gagliardi's gambling losses at slot machines during the years in issue to be reasonable.

Mr. Nicely opined on the basis of the extent of Mr. Gagliardi's gambling activity that (1) Mr. Gagliardi's breaking even from slot machine play was astronomically unlikely (substantially greater than 1 in 1 trillion);22 and (2) the estimated net losses from slot machine play for the tax years 1999, 2000, and 2001 were most likely approximately $637,000, $678,000, and $507,000, respectively, with an error range of plus or minus $65,000, $72,000, and $83,000, respectively.

Mr. Nicely's estimate of Mr. Gagliardi's total net losses from slot machine play for the years at issue, $1,822,000 (with an error range of a maximum net loss of $2,042,00 and a minimum net loss of $1,602,000), is consistent and greater than Mr. Gagliardi's total claimed net gambling losses from slot machine play for the tax years at issue ($1,446,740).23 Additionally, the net gambling losses from slot machine play Mr. Gagliardi claimed for 1999 and 2000 were significantly lower than the amount calculated by Mr. Nicely, and the amount claimed for 2001 was within the error range calculated by Mr. Nicely.

Respondent attempted to discredit Mr. Nicely by questioning the formula Mr. Nicely used and Mr. Nicely's assumptions24 by which he determined, in his expert opinion, that there was only an infinitesimal probability that Mr. Gagliardi won money (i.e., net) gambling on slot machines during the years in issue. Respondent did not call any witness, or expert witness, to counter Mr. Nicely's conclusions. We find Mr. Nicely to be credible and rely on his expert opinion.

Mr. Nicely credibly explained why he used the figures for return to player (RTP) set forth in his report. Mr. Nicely stated that the machines petitioner played are "class 2 electronic pull tab machines" which have an RTP of between 55 and 90 percent. The operating manual for such machines states that the default setting is 80 percent RTP.

We conclude that Mr. Nicely's "best case scenario" of 90 percent RTP (the figure normally used in the gaming industry) for Mr. Gagliardi's expected wins or losses was reasonable, given his research,25 his expert opinion that the casinos at which Mr.

Respondent attempted to discredit Mr. Nicely by claiming that Mr. Nicely incorrectly calculated that Mr. Gagliardi played slot machines at a frequency of six times per minute, which was more often than Mr. Gagliardi actually played. Mr. Gagliardi played the slot machines at the casinos at a frequency of at least four to five times per minute during the years in issue. In his expert report, Mr. Nicely used a figure of 250 bets per hour for his calculations. This amounts to approximately 4.17 bets per minute (250 divided by 60). Accordingly, we find that Mr. Nicely used a conservative, and reasonable, number of bets in his calculations to determine that there was only an infinitesimal chance that Mr. Gagliardi won money (i.e., net) gambling on slot machines during the years in issue.

Furthermore, Mr. Nicely testified that regardless of his calculations and methodology for determining Mr. Gagliardi's gambling losses, if Mr. Gagliardi spent all of his slot machine winnings and cash withdrawals at the casinos on slot machine play, the best methodology to accurately determine Mr. Gagliardi's gambling losses for the years in issue would be to determine the total amount of money wagered on slot machine play. This methodology is substantially similar to the method Mr. Hunner used to compute Mr. Gagliardi's gambling losses.

E. Lay Witness Testimonial Evidence

Mr. Hunner credibly testified that on the unique facts in this case the methodology for determining and reporting gambling losses was accurate.

Ms. Serum corroborated the amount of time Mr. Gagliardi spent gambling at the casino slot machines during the years in issue. Ms. Serum corroborated that Mr. Gagliardi did not live a lavish lifestyle during the years in issue.

F. Conclusion

At trial, respondent argued: "When all of the facts of this case are presented, only one thing is going to be certain --that Mr. Gagliardi wants the Court to believe that his claimed losses * * * were incurred because he says so." 26 (Emphasis added.) We disagree. The voluminous contemporaneous and other documentary evidence, the corroborating testimonial evidence of an eyewitness to petitioner's gambling and daily activities during the years in issue and of petitioner's return preparer, and the testimonial evidence of two experts in addition to petitioner's testimony substantiate and establish that petitioner incurred the disallowed gambling losses.

We conclude that petitioner substantiated the amount of disallowed gambling deductions in issue (i.e., in excess of the amount respondent conceded --see supra pp. 16-17). Accordingly, we do not sustain respondent's disallowance of the gambling loss deductions Mr. Gagliardi claimed for 1999, 2000, and 2001. See also Jackson v. Commissioner, T.C. Memo. 2007-373 ("At trial, respondent conceded that petitioner had presented sufficient documentation to substantiate $127,165 in gambling losses"; "This documentation consisted of casino ATM receipts, canceled checks made payable to casinos, carbon copies of checks made payable to casinos, and credit card statements stating that cash was advanced at the casinos."). But see, e.g., Hardwick v. Commissioner, T.C. Memo. 2007-359 (distinguishable from the case at bar because gambling losses disallowed because evidence was inadequate to substantiate the claimed losses); Lutz v. Commissioner, T.C. Memo. 2002-89 (same).



II. Addition to Tax and Penalty
Petitioner conceded underreporting certain amounts of gambling income for 1999, 2000, 2001. See supra p. 16; see also Petzoldt v. Commissioner, 92 T.C. at 683; Money v. Commissioner, 89 T.C. at 48. Even though we "upheld" the gambling loss deductions Mr. Gagliardi claimed for 1999, 2000, and 2001 --i.e., did not sustain respondent's disallowance of the loss deductions and concluded that petitioner substantiated the amounts of the loss deductions respondent disallowed, on account of this additional unreported income we must decide whether petitioner is liable for additions to tax pursuant to section 6651(a)(1) for 2000 and 2001 and whether petitioner is liable for penalties pursuant to section 6662(a) for 1999, 2000, and 2001.

A. Burden of Production: Section 7491(c)

Section 7491(c) provides that the Commissioner will bear the burden of production with respect to the liability of any individual for additions to tax and penalties. "The Commissioner's burden of production under section 7491(c) is to produce evidence that it is appropriate to impose the relevant penalty, addition to tax, or additional amount". Swain v. Commissioner, 118 T.C. 358, 363 (2002); see also Higbee v. Commissioner, 116 T.C. 438, 446 (2001). The Commissioner, however, does not have the obligation to introduce evidence regarding reasonable cause or substantial authority. Higbee v. Commissioner, supra at 446-447.

B. Section 6651(a)(1)

Respondent asserts that petitioner is liable for the addition to tax pursuant to section 6651(a)(1) for 2000 and 2001. Section 6651(a)(1) imposes an addition to tax for failure to file a return on the date prescribed (determined with regard to any extension of time for filing), unless such failure is due to reasonable cause and not due to willful neglect. Section 6651(a)(1) imposes a charge, for each month or fraction thereof that a return is late, equal to 5 percent of the amount of tax that should have been shown on the return, subject to a maximum charge of 25 percent. The taxpayer must show that he/she exercised business care and prudence but nevertheless was unable to file the return within the specified time. See United States v. Boyle, 469 U.S. 241, 245 (1985); sec. 301.6651-1(c)(1), Proced. & Admin. Regs. Willful neglect means a conscious, intentional failure, or reckless indifference. United States v. Boyle, supra at 245. Generally, factors that constitute "reasonable cause" include unavoidable postal delays, death or serious illness of the taxpayer or a member of his immediate family, or reliance on the mistaken legal opinion of a competent tax adviser, lawyer, or accountant that it was not necessary to file a return. McMahan v. Commissioner, 114 F.3d 366, 369 (2d Cir. 1997), affg. T.C. Memo. 1995-547.

Petitioner admitted that he did not timely file his tax returns for 2000 and 2001. Accordingly, respondent has met his burden of production for the section 6651(a)(1) addition to tax for 2000. Respondent, however, bears the burden of proof for the section 6651(a)(1) addition to tax for 2001 as he raised this issue for the first time in the answer. See Rule 142(a)(1); Sanderling, Inc. v. Commissioner, 66 T.C. 743, 756-760 (1976), affd. in part and revd. in part on other grounds 571 F.2d 174 (3d Cir. 1978); Snyder v. Commissioner, T.C. Memo. 2006-92; Paleveda v. Commissioner, T.C. Memo. 1997-416, affd. without published opinion 178 F.3d 1303 (11th Cir. 1999). Our resolution of this issue, however, does not depend on who bears the burden of proof. See Snyder v. Commissioner, supra; see also Bhattacharyya v. Commissioner, T.C. Memo. 2007-19 n.19.

Petitioner admitted that he did not timely file his returns for 2000 and 2001. Petitioner timely filed his returns for the immediately previous years (1998 and 1999). Petitioner knew his returns for 2000 and 2001 were due on April 15 of the following years. Petitioner did not exercise business care and prudence in not timely filing his returns for 2000 and 2001. See United States v. Boyle, supra at 245. Accordingly, petitioner is liable for the section 6651(a)(1) addition to tax for 2000 and 2001.

C. Section 6662

Respondent argues that petitioner is liable for the section 6662 penalty for 1999, 2000, and 2001. Pursuant to section 6662(a), a taxpayer may be liable for a penalty of 20 percent on the portion of an underpayment of tax due to negligence or disregard of rules or regulations or a substantial understatement of income tax. Sec. 6662(b). An "understatement" is the difference between the amount of tax required to be shown on the return and the amount of tax actually shown on the return. Sec. 6662(d)(2)(A). A "substantial understatement" exists if the understatement exceeds the greater of (1) 10 percent of the tax required to be shown on the return for a taxable year or (2) $5,000. See sec. 6662(d)(1)(A).

The accuracy-related penalty is not imposed with respect to any portion of the underpayment as to which the taxpayer acted with reasonable cause and in good faith. Sec. 6664(c)(1). The decision as to whether the taxpayer acted with reasonable cause and in good faith depends upon all the pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Relevant factors include the taxpayer's efforts to assess his proper tax liability, including the taxpayer's reasonable and good faith reliance on the advice of a professional. See id.

Regardless of whether respondent satisfied his burden of production,27 the record establishes that petitioner reasonably and in good faith relied on his return preparer. Petitioner fully disclosed the facts and provided documents supporting his gambling income (and losses) to his return preparer. Consequently, we conclude that petitioner had reasonable cause and acted in good faith as to any underpayment for 1999, 2000, and 2001. Accordingly, we hold that petitioner is not liable for the penalty pursuant to section 6662(a).



III. Conclusion
In reaching all of our holdings herein, we have considered all arguments made by the parties, and to the extent not mentioned above, we find them to be irrelevant or without merit. On account of the parties' concessions at trial and on brief, Rule 155 computations will be necessary.

To reflect the foregoing,

Decision will be entered under Rule 155.

1 Amounts are rounded to the nearest dollar.

2 Some of the casinos that Mr. Gagliardi gambled at included Sycuan, Viejas, Barona, and Pala. Sycuan is approximately 8 to 10 miles from Mr. Gagliardi's house, Viejas is approximately 20 miles from Mr. Gagliardi's house, and Barona is approximately 15 miles from Mr. Gagliardi's house. He gambled most frequently at Sycuan because it is the casino closest to his house.

3 During January, February, and March of 1999, Mr. Gagliardi was admitted into Sober Living by the Sea for his gambling disorder. However, Mr. Gagliardi sneaked out of the facility to gamble.

4 On the day of trial, Mr. Gagliardi was gambling at one of the casinos until 5 a.m. (trial started at approximately 9:30 a.m.) and in his testimony implied that he would return to the casinos to gamble after the trial was over.

5 During January, February, and March of 1999, Mr. Gagliardi was admitted into Sober Living by the Sea for his gambling disorder. This accounts for the lower number of days gambled during this period.

6 Petitioner attached gambling calendars as an appendix to his opening brief. Attachments to a brief are not evidence. See Rules 143(b), 151(e). The parties, however, stipulated the gambling calendars, and the Court received them into evidence at trial. Accordingly, we rely on the gambling calendars admitted into evidence at trial and not the documents attached to petitioner's brief.

7 For convenience, we use the terms "wagered", "bet", "wager", "betting", "wagering", etc. interchangeably.

8 The only time Mr. Gagliardi left a casino with any money was when he won a jackpot.

9 Mr. Gagliardi opined that he "could wallpaper my bathrooms with just the ATM receipts for millions of dollars."

10 Mr. Gagliardi also won amounts of less than $1,200, the amount that triggers the requirement for the casino to issue a Form W-2G.

11 At one point during the years in issue, however, Mr. Gagliardi and Ms. Serum were going to go to Las Vegas, Nevada. While driving to Las Vegas, Mr. Gagliardi told Ms. Serum that he had to go to the bathroom and they could stop at one of the casinos so he could use the bathroom. Ms. Serum objected, but they stopped at one of the casinos approximately 90 miles from San Diego. Mr. Gagliardi quickly lost $10,000. After losing the $10,000, and without using the bathroom, Mr. Gagliardi got back in the car and he and Ms. Serum drove home.

On one Valentine's Day, Mr. Gagliardi told Ms. Serum that he rented a room at a five-star hotel for the weekend with the Valentine's Day package. Ms. Serum picked up Mr. Gagliardi, and the next thing she knew he was driving towards San Diego to go to one of the casinos to gamble.

12 The cash withdrawals reflected in the gambling calendars do not include the service charge per withdrawal incurred by Mr. Gagliardi.

13 Mr. Hunner testified that the casinos are not cooperative in providing records about players' gambling, that the casino personnel stated that they do not keep much documentation regarding a player's gambling, and that the casinos do not retain the videos they shoot.

14 Additionally, during the years in issue, approximately $145,000 from Mr. Gagliardi's lottery proceeds, his Federal tax refunds, and the proceeds from the sale of his investments were available to Mr. Gagliardi to gamble with or use for living expenses. See cashflow analysis, infra p. 21.

15 15 Ironically, the same could be said for a gambling log.

Additionally, respondent's counsel claimed that the Government cannot shoulder the burden of doing a net worth analysis in a case such as this. The Commissioner is not required to use indirect methods of proof to establish the amount of a gambler's losses. The evidence the Commissioner wishes to present and the expense and effort the Commissioner wishes to spend on any given case lie with the Commissioner. We note, however, that the Commissioner routinely uses the net worth method to reconstruct income in unreported income cases. See Holland v. United States, 348 U.S. 121 (1954).

Furthermore, respondent's counsel did not understand the difference between games of skill and games of chance and could not answer whether Rev. Proc. 77-29, 1977-2 C.B. 538 (the revenue procedure), contains guidance aimed at games of chance, such as slot machines. But see Rev. Proc. 77-29, sec. 3.02, 1977-2 C.B. at 539. At trial respondent's counsel had great difficulty explaining exactly what a "gambling log" is and what petitioner should have recorded in a gambling log. Respondent's counsel stated that it was not realistic for someone to keep track of every bet and that the revenue procedure does not require taxpayers to keep track of every bet (i.e., the revenue procedure does not require a taxpayer to list how much he/she bet for each slot machine "pull"). Respondent's counsel contended that to keep a log for slot machine play, per the revenue procedure, a taxpayer must know how much was wagered and how much was lost and record it contemporaneously. But see id.

We also note that the revenue procedure provides that "Verifiable documentation for gambling transactions includes but is not limited to" Forms W-2G, wagering tickets, canceled checks, credit records, and bank withdrawals --all of which are present here. Id. sec. 3, 1977-2 C.B. at 538. Additionally, the revenue procedure provides a method, keeping a gambling log, that the IRS will consider as acceptable evidence for substantiation of wagering winnings and losses. Id. It does not contain the exclusive method for substantiating gambling losses. Id. sec. 1, 1977-2 C.B. at 538 ("The purpose of this revenue procedure is to provide guidelines to taxpayers concerning the treatment of wagering gains and losses for Federal income tax purposes and the related responsibility for maintaining adequate records in support of winnings and losses.").

16 To the extent that respondent's briefs might be construed as respondent's arguing for an increased deficiency, we will not consider such arguments even if they are raised in respondent's briefs. See Foil v. Commissioner, 92 T.C. 376, 418 (1989), affd. 920 F.2d 1196 (5th Cir. 1990); Markwardt v. Commissioner, 64 T.C. 989, 997 (1975).<

17 The DSM-IV, published by the American Psychiatric Association, is the "diagnostic bible" used for diagnosing any and every mental illness.

18 Although we conclude that the information respondent obtained from Wikipedia was not wholly reliable and not persuasive in the instant case, we make no findings regarding the reliability, persuasiveness, or use of Wikipedia in general.

19 We note that Dr. Pike testified that, unlike recreational and problem gamblers, pathological gamblers take the "gambler's fallacy" to a delusional level --they believe if they gamble long enough, they will win back all their losses and even more. Dr. Pike also opined that, unless treated for his illness, Mr. Gagliardi will gamble until he dies or loses all his money.

20 "Class 3" slot machines are Nevada-style games where every outcome is completely independent.

21 "Class 2" machines have a pull tab --like a "scratcher" --or are bingo-like games. The outcomes on a class 2 machine are all predetermined for pull tabs. Class 2 machines are analogous to a standard deck of 52 cards --if the four aces are removed from the deck, there is no chance of getting an ace on the next card. This continues until "the deal completes" (the culmination of all outcomes in a given set), and then it starts over again (like a fresh deck of 52 cards).

22 Mr. Nicely explained that "7.5G" equals 1 in 13 trillion. (Sigma (G) is also designated by "Z" and called a "Z score" or "Z factor".) His calculations revealed that the possibility of Mr. Gagliardi's breaking even was "19G" which is infinitesimal (it is so small that the amount technically is incalculable and assigning a number to it is not practical).

23 Petitioner reported casino winnings of $127,073, $270,052, and $631,629 in 1999, 2000, and 2001, respectively. See supra p. 14. Petitioner reported casino losses of $502,433, $802,921, and $1,170,140 in 1999, 2000, and 2001, respectively. See supra p. 14. Accordingly, Mr. Gagliardi's net losses from gambling at the casinos on slot machines totaled $1,446,740 ($375,360, $532,869, and $538,511 for 1999, 2000, and 2001, respectively). This, however, does not include the $666,500 of State lottery winnings petitioner received each year during the years in issue. Commissioner v. Groetzinger, 480 U.S. 23, 32 n.11 (1987) (characterizing a State lottery as "public gambling" in a case treating gambling earnings as ordinary income); United States v. Maginnis, 356 F.3d 1179, 1183 & n.6 (9th Cir. 2004) (taxpayer's lottery winnings enter into the sec. 165(d) calculation as wagering gains that taxpayer's gambling losses at the casinos can be applied to in addition to taxpayer's gambling winnings at the casinos); see supra p. 14.

24 For example, respondent took issue with the fact that Mr. Nicely assumed that Mr. Gagliardi played on average 7 hours per day on days Mr. Gagliardi gambled. We found that on days when he was at the casinos, Mr. Gagliardi spent at a minimum an average of 10 hours per day at the casinos. Accordingly, Mr. Nicely's assumptions were conservative and reasonable. Using a lower number resulted in a greater likelihood that Mr. Gagliardi won money (i.e., net) gambling on slot machines --i.e., if Mr. Nicely had used 10 hours per day the figure he would have come up with would have made it even more improbable that Mr. Gagliardi won money (i.e., net) gambling on slot machines during the years in issue.

25 Mr. Nicely never worked for any of the casinos where Mr. Gagliardi gambled. The casinos are under no obligation to publish their RTP. Mr. Nicely researched the expected RTP at the casinos in such publications as the Wall Street Journal (70 percent RTP); the Sacramento Bee (90 percent RTP), which quoted Bill Eadington (the director of Study for Center of Gambling and Commercial Gaming at the University of Nevada Reno); and the Orange County Register (90 percent RTP). These news articles all were about RTP at California Indian Nation casinos.

Industry contacts of Mr. Nicely thought the casinos' RTP was in the low 80 percent range. Mr. Nicely also testified that Washington State promotes its Indian Nation gaming as having the best RTP in the United States and lists the RTP as between 70 percent and 90 percent.

Mr. Nicely also explained that on some slot machines a player can win a certain payout only if the player gambles the maximum amount --known as "buy a bet", "buy a pay", or "buy a bonus". The maximum expected RTP is obtained only by playing the maximum bet on this type of machine. Gagliardi played reportedly had less than 90 percent RTP on their slot machines and the amount of RTP from the casinos varied, and that the maximum RTP on the "class 2" slot machines Mr. Gagliardi played was 90 percent. Furthermore, on the basis of Mr. Nicely's report and testimony, we find that it is more likely that Mr. Gagliardi's expected wins or losses were accurately reflected by either the 83 percent or 70 percent RTP figures Mr. Nicely used rather than the 90 percent RTP calculation.

26 Mr. Nicely stated that because Mr. Gagliardi gambled at Indian Nation casinos, which are less uniform than casinos elsewhere, it is uncertain whether using a Players' Club card on a "class 2 machine", or at an Indian Nation casino, could track all of a player's gambling.

27 Pursuant to the parties' concessions, our findings, and our conclusions, it is unclear at this time whether there is a substantial understatement.

We note that respondent bears the burden of proof for the increased amount of the sec. 6662 penalty for 2000 that he raised for the first time in the answer. See Rule 142(a)(1); Sanderling, Inc. v. Commissioner, 66 T.C. 743, 756-760 (1976), affd. in part and revd. in part on other grounds 571 F.2d 174 (3d Cir. 1978); Snyder v. Commissioner, T.C. Memo. 2006-92; Paleveda v. Commissioner, T.C. Memo. 1997-416, affd. without published opinion 178 F.3d 1303 (11th Cir. 1999). Our resolution of this issue, however, does not depend on who bears the burden of proof. See Snyder v. Commissioner, supra.


Wagering Losses: Losses exceeding gains

Gambling gains must be reported even though losses exceed gains.

F.L. McClanahan, CA-5, 60-1 USTC ¶9117, 272 F2d 663; 61-2 USTC ¶9550, 292 F2d 630. Cert. denied, 368 US 913, 82 SCt 193.

H.H. Heidelberg, 36 TCM 566, Dec. 34,392(M), TC Memo. 1977-133.

C.L. Powell, 18 TCM 170, Dec. 23,472(M), TC Memo. 1959-36.

A married couple was not entitled to deduct expenses connected with the playing of slot machines in excess of gross receipts from the wagering activities. The Code Sec. 165(d) limitation on losses from wagering did not violate their right to equal protection.

B.F. Kochevar, Sr., 70 TCM 1627, Dec. 51,071(M), TC Memo. 1996-607.

A professional gambler was allowed to deduct losing wagers and related expenses only up to the amount of his gains from wagering transactions.

W.T. Praytor, 80 TCM 332, Dec. 54,034(M), TC Memo. 2000-282.

A couple engaged in the business of wagering on horse races was not entitled to deduct wagering losses in excess of wagering gains for the tax years in issue because Code Sec. 165(d) specifically limited the deduction for such losses to the amount of wagering gains.

P.C. Valenti, 68 TCM 838, Dec. 50,147(M), TC Memo. 1994-483.

Where a taxpayer failed to report her gambling winnings and her income was reconstructed under the net worth method, no gambling loss deduction was allowed.

C. O'Conner, 13 TCM 51, Dec. 20,120(M).

A taxpayer's claimed itemized deductions for net gambling losses were disallowed since he failed to report any gambling winnings.

T.E. Butler, 76 TCM 601, Dec. 52,901(M), TC Memo. 1998-355.

An individual was not entitled to use her gambling losses to offset her gambling winnings. The gambling losses were only allowable as an itemized deduction, to the extent of gambling winnings, because the individual was not engaged in the trade or business of gambling. However, since the individual had elected to take the standard deduction because it resulted in a larger deduction, she could not also take an itemized deduction for the gambling losses.

A. McQuarrie, 91 TCM 1127, Dec. 56,505(M), TC Memo. 2006-93.

A teacher was not entitled to deduct gambling losses in excess of his reported gambling income.

J.A. Lyle, 77 TCM 2106, Dec. 53,405(M), TC Memo. 1999-184.

Sweepstakes winnings were not gains from wagering transactions and, therefore, could not be used to offset wagering losses. A transaction is considered a wager if there is a prize, a chance and consideration. In this case, the taxpayer did not pay any consideration because the sweepstakes did not require a purchase to enter. Moreover, the taxpayer did not make a purchase to enter the sweepstakes. Instead, he sent self-addressed stamped envelopes to obtain the necessary items to enter the sweepstakes. The cost of the self-addressed stamped envelopes was nominal and did not amount to consideration.

Technical Advice Memorandum 200417004, December 5, 2003.

Section 165(e) Theft Loss Deduction. Married taxpayers, who were victims of a fraud scheme involving the purchase of gems and jewelry, were entitled to theft loss deductions for the year at issue for amounts they ascertained with reasonable certainty that they had no prospect of recovering. Several lawsuits they filed to recover the funds were resolved by the end of that year either through settlement, adjudication or abandonment, and their remaining claims sought fixed and identifiable amounts.
Aben E. Johnson and Joan G. Johnson, Plaintiffs, v. The United States, Defendant.

U.S. Court of Federal Claims; 01-428T, 03-2803T, 05-1265T, January 9, 2008.



[ Code Sec. 165]

Losses: Theft loss deduction: Estimate: Recovery: Reasonable certainty. --
Patrick K. Rode, for plaintiffs; Richard T. Morrison, Acting Assistant Attorney General, Chief David Gustafson, George L. Squires, Department of Justice, for defendant.


OPINION


FIRESTONE, Judge: This case comes before the court on cross-motions for summary judgment. This is the third motion for summary judgment the court has considered in these consolidated cases, which were filed by the plaintiffs, Aben E. Johnson ("Mr. Johnson") and Joan G. Johnson (collectively, "plaintiffs" or "Johnsons"), in an effort to recover taxes they incurred in relation to losses they suffered as the victims of fraud. In July 2006, the government filed a motion for partial summary judgment in Case No. 03-2803, contending that, as a matter of law, the plaintiffs were not entitled to take a theft loss deduction for any portion of their loss until they had resolved all of their claims for recovery of the stolen money. In Johnson v. United States, 74 Fed. Cl. 360 (2006) ("Johnson I"), the court granted the government's motion, holding that the plaintiffs could not assert a theft loss deduction in 1998 because they were actively pursuing recovery of their losses from Mr. Hasson at that time and had not ascertained with reasonable certainty how much they would recover. Id. at 366. The court concluded that, "while a taxpayer may in the year of discovery take a loss where there is not a 'reasonable prospect of recovery,' if there is a 'reasonable prospect of recovery' the taxpayer must wait to take the theft loss deduction until the recovery process is finalized, either through an adjudication or a settlement, until the taxpayer abandons her collection efforts, or until the claim for reimbursement is resolved in some other way." Id. Accordingly, the court determined that, in any year after the year of discovery of the loss, the standard to be applied in evaluating the propriety of a theft loss deduction is whether the amount to be recovered could be ascertained with reasonable certainty in that year. 1

In their current motion for summary judgment, the plaintiffs contend that they were entitled to a theft loss deduction in 1998, or, in the alternative, in 2001, for the amount of the loss they suffered, arguing that by the end of 1998, or alternatively by the end of 2001, they had determined the maximum amount of the loss they would be able to recover. The plaintiffs seek a theft loss deduction for the amount they contend they determined would never be recovered.

The defendant, the United States ("defendant" or "government"), contends that the plaintiffs were not entitled to a theft loss deduction in either 1998 or 2001 because the plaintiffs' recovery efforts were still ongoing at that time, and therefore the plaintiffs could not have ascertained with reasonable certainty the total amounts that they would recover as a result of their efforts. The government asserts that the plaintiffs were not entitled to a theft loss deduction for any portion of their loss until their recovery efforts were complete and until they knew, with certainty, how much of their loss they would recover. For the reasons set forth below, the plaintiffs' motion is GRANTED-IN-PART and DENIED-IN-PART and the government's motion is GRANTED-IN-PART and DENIED-IN-PART.


BACKGROUND


The following facts are taken from the Plaintiffs' Proposed Findings of Uncontroverted Fact and are undisputed unless otherwise noted. Between 1988 and 1997, the plaintiffs were victims of a fraud scheme perpetrated by John Robert ("Jack") Hasson ("Mr. Hasson") and his associates involving gems, jewelry, and collectibles. In 1997, the plaintiffs discovered that they had been victimized by Mr. Hasson and undertook an investigation to determine the extent of their loss and the likelihood of recovery from Mr. Hasson. The total loss suffered by the plaintiffs at the hands of Mr. Hasson as a result of the fraud scheme was $78,160,409.00. 2 Since 1998, the plaintiffs have been involved in litigation against numerous parties in an attempt to recover their losses. Their litigation efforts are summarized below.



I. The Plaintiffs' 1998 Litigation

On February 11, 1998, Mr. Hasson and two corporations he controlled - Jack Hasson, Inc., doing business as Jewels by Hasson, and Hasson and Sons, Inc. - filed a complaint in the 15th Judicial Circuit Court, Palm Beach County, Florida, asserting a defamation claim against Mr. Johnson. This complaint alleged (among other things) that Mr. Johnson had wrongly stated that Mr. Hasson had misrepresented the quality and value of the gems the plaintiffs had purchased from him, that Mr. Hasson had cheated the plaintiffs, and that Mr. Hasson had stolen from the plaintiffs. On April 10, 1998, Mr. Johnson filed an answer, counterclaim and third-party complaint. The counterclaim was asserted against all of the plaintiffs (Mr. Hasson and his two corporations named above). The third-party claim added three third-party defendants: K.T.B., Inc. and International Gem Society, Inc. (additional corporations controlled by Mr. Hasson) and Leopold Woolf. Mr. Woolf was an appraiser whose appraisals were provided to the plaintiffs in connection with their purchase of gems. Extensive discovery was conducted in this case through the end of 1998. Among other things, Mr. Johnson obtained financial records showing the assets owned by Mr. Hasson and entities controlled by him, banking records showing the transactions he and the entities controlled by him performed, and records of litigation Mr. Hasson was or had been involved in, including Mr. Hasson's personal divorce proceedings. All of Mr. Hasson's assets of any significance had been discovered by the end of 1998. During discovery in 1998, it was learned that Mr. Hasson, through various entities he controlled, had taken steps to launder the funds he had obtained by fraud from the plaintiffs.

In particular, Mr. Johnson learned in 1998 that:
a. Between July and September 1997, Mr. Hasson had wire transferred approximately $26,100,000.00 to an account in the name of Malham Enterprises, Ltd. at the National Westminster Bank on the Isle of Man in the United Kingdom;

b. Shortly after each transfer to the Malham account, virtually identical transfers totaling approximately $26,000,000.00 were made from the Malham account to a Smith Barney account in the name of the Joseph C. Stein Trust; and

c. $50,000.00 was transferred from the Malham account to Mr. Hasson's lawyer, Scott Colton;

d. Of the approximately $26,000,000.00 placed in the Joseph C. Stein Trust Smith Barney account, the following transfers were made:

a. $800,000.00 was transferred in January 1998 to an account in the name of Cromwell, Pfaffenberger, Barner, Griffin & Colton, P.A, a law firm in which Scott Colton was a partner and shareholder;

b. $100,000.00 was transferred in June and July 1998 to an account at the Mellon Bank in the name of Boyes & Farina, P.A., a law firm in which John Farina, Scott Colton's lawyer, was a member;

c. Approximately $20,000,000.00 was transferred in July 1998 to a Smith Barney account in the name of the Peter Westbrook Irrevocable Trust, of which Scott Colton was the trustee;

d. $3,700,000.00 was transferred in July 1998 to a Smith Barney account in the name of the Scott Colton Trust, of which Scott Colton was the trustee; and

e. $2,300,000.00 was transferred in July 1998 to a Smith Barney account in the name of the John Farina Trust, of which John Farina was the trustee;

e. Of the approximately $20,000,000.00 placed in the Peter Westbrook Irrevocable Trust Smith Barney account in July 1998, the following transfers were made:

i. $50,000.00 was transferred in July 1998 to a Bank One account in New Orleans, Louisiana in the name of the Peter Westbrook Irrevocable Trust; and

ii. $20,345,031.44 was transferred in December 1998 to an account in the Discount Bank in Paris, France in the name of the Peter Westbrook Irrevocable Trust;

f. $100,000.00 was transferred in July 1998 to the John Farina Trust Smith Barney account from the Scott Colton Trust Smith Barney account;

g. The following transfers were made from the $2,300,000.00 and $100,000.00 previously transferred to the John Farina Trust Smith Barney account:

i. $787,000.00 was transferred to the Boyes & Farina Mellon Bank account; and

ii. $250,000.00 was transferred to Ted Klein, another lawyer representing Scott Colton.

In addition, in 1998 Mr. Johnson discovered the assets owned or formerly owned by Mr. Hasson and entities controlled by him, including several parcels of real estate (located in Jupiter, Florida, Breckenridge, Colorado, Big Pine Key, Florida, and Palm Beach Gardens, Florida), a Lockheed Jet Star airplane, several boats, several automobiles, a Harley-Davidson motorcycle dealership and other assets. Finally, the plaintiffs learned in 1998 that Mr. Hasson had transferred $700,000.00 to Lois Robertson, Mr. Hasson's former bookkeeper.

No allegations were made in Mr. Johnson's counterclaim against Jack Hasson, Inc., Hasson and Sons, Inc., K.T.B., Inc. or the International Gem Society, Inc. separate from the allegations made against Mr. Hasson. All of the corporations were used as fronts to defraud Mr. Johnson, and all were considered to be identical with Mr. Hasson for purposes of prosecuting the claim. As a result of their own investigation and the information provided to them by the plaintiffs, federal investigators seized the following assets in the possession of Mr. Hasson and others in December 1998: (1) the Smith Barney brokerage account in the name of the Scott Colton Trust; (2) the Smith Barney brokerage account in the name of the John Farina Trust; and (3) the Mellon Bank account in the name of Boyes & Farina. Furthermore, on November 26, 1998, Mr. Johnson obtained an order from the High Court of Justice of the Isle of Man freezing funds held there in the name of Malham Enterprises, Ltd. In addition, pursuant to a request for mutual legal assistance from the United States, a Paris Discount Bank account in the name of Heloneti Galera, trustee of the Peter Westbrook Irrevocable Trust, was frozen by the government of France on December 15, 1998. Finally, by agreement of counsel, $250,000.00 in an account of Ted Klein, an attorney, was placed in escrow in December 1998 pending the outcome of the litigation.

According to the plaintiffs, their investigation in 1998 demonstrated that the maximum net assets available for recovery on the claims against Mr. Hasson and his enterprises were worth $45,240,386.00 in late 1998, including all of the assets identified above. The plaintiffs assert, however, that they did not have a reasonable prospect of recovering the full $45,240,386.00 in net assets, due to Mr. Hasson's efforts to launder funds and anticipated difficulties in recovering funds that were in accounts in foreign countries. Accordingly, as of December 31, 1998, the plaintiffs contend that they had a reasonable likelihood of recovering only $19,919,718.00 on their claims against Mr. Hasson and his associates, even if they prevailed in full.



A. Resolution of the Plaintiffs' Claims Against Mr. Hasson

On March 28, 2000, the Plaintiffs obtained a default judgment against K.T.B., Inc. and International Gem Society, Inc. On July 17, 2000, the Plaintiffs obtained a default judgment against Mr. Hasson, Jack Hasson, Inc. and Hasson and Sons, Inc. The plaintiffs' default final judgments against Mr. Hasson totaled $233,198,433.00. On December 6, 2000, a writ of garnishment was issued to First Union National Bank requiring it to disclose any indebtedness to Hasson and Sons, Inc., among others. In response, First Union disclosed it was indebted to Hasson and Sons in the amount of $735.64. On February 8, 2001, the court entered a judgment ordering First Union to pay $735.64 to Mr. Johnson, and payment was made on March 28, 2001. In March 2005, Mr. Johnson's attorney was informed that the proceeds of a class action settlement in which Mr. Hasson was a claimant had been paid to an account at Wachovia Bank. On March 5, 2005, a writ of garnishment was issued to Wachovia Bank requiring it to disclose any indebtedness to Mr. Hasson. In response, Wachovia disclosed it was indebted to "Jack Hasson Agency" in the amount of $18,050.60. On June 22, 2005, the court entered a judgment ordering Wachovia to pay $18,050.60 to Mr. Johnson, and payment was made on July 7, 2005.



B. Resolution of the Plaintiffs' Claims Against Mr. Woolf

Through discovery in 1998, the plaintiffs learned that Mr. Woolf was retired and was suffering from end-stage renal failure. He owned two homes, but they were held jointly with his wife, so they were not subject to execution. In November 1998, Mr. Woolf made an offer of judgment to Mr. Johnson in the amount of $10,000.00, which Mr. Johnson did not accept. On January 26, 1999, Mr. Woolf's attorney moved to withdraw because Mr. Woolf could not afford to pay him. An order granting that motion was entered on February 17, 1999. Mr. Woolf represented himself for the remainder of the litigation. On February 6, 2001, Mr. Woolf entered into a settlement agreement with the plaintiffs under which Mr. Woolf paid $25,000.00 to settle the claim against him. An order dismissing that claim was entered on February 22, 2001.



II. Criminal Proceedings Against Mr. Hasson

On April 10, 1999, a federal criminal complaint was issued against Mr. Hasson, and he was arrested on April 12, 1999. He has remained incarcerated since his arrest. On April 20, 1999, Mr. Hasson was indicted in the United States District Court for the Southern District of Florida ("U.S. District Court") for wire fraud, mail fraud, money laundering and other charges. James A. Speiser, a former employee of Mr. Hasson, was also indicted. A superseding indictment was issued in May 1999, and Clifford Sloan, another former employee of Mr. Hasson, was added as a criminal defendant. As part of the indictment, the United States included a forfeiture claim against Mr. Hasson's assets, including several of the assets identified above. On June 10, 1999, the United States Attorney fielded a bill of particulars designating a number of Mr. Hasson's assets for forfeiture, including the assets identified above.

Mr. Hasson's attorneys filed a motion on June 11, 1999 seeking authorization to use the assets identified in the indictment and bill of particulars for the payment of Mr. Hasson's attorney fees. In its response, the government indicated that Mr. Hasson had already sold a number of the assets, including a Lockheed Jetstar airplane for just under $2,000,000.00, a lot located in Big Pine Key, Florida for $425,324.00, a 110' Broward yacht for $3,500,000.00, a 70' Jim Smith yacht for an unknown amount, and a 65' Jim Smith yacht for $1,839,700.00. The government also indicated that Mr. Hasson was actively attempting to sell another lot in Big Pine Key, Florida, a home in Palm Beach Gardens, Florida, and a ranch in Martin County, Florida. Finally, the government indicated that Mr. Hasson had recently gifted several assets to his estranged wife Suzanne, including a ranch in Jupiter, FL, a ski chalet in Breckenridge, Colorado, a 1995 Porsche automobile, a 1998 Volvo automobile, a 1997 Ford Explorer automobile, and a 1998 Coachman motorhome.

In an order entered on August 18, 1999, pursuant to a stipulation between the U.S. Attorney and Mr. Hasson's criminal defense attorneys, Mr. Hasson was authorized to use certain assets identified in the government's bill of particulars for the payment of his attorneys' fees. In the stipulation, Mr. Hasson's attorneys' fees were estimated at $1,750,000.00. On February 25, 2000, a jury returned a guilty verdict against Mr. Hasson on four of the six counts in the indictment. On June 8, 2000, Mr. Hasson was sentenced to forty years' imprisonment and was ordered to pay restitution to the plaintiffs in the amount of $78,408,691.00. Pursuant to orders of forfeiture, the ranch lots, the ski property in Breckenridge, and the real estate in Big Pine Key were sold by the U.S. Marshal, and the proceeds were deposited into the registry of the U.S. District Court.

On May 29, 2001, the United States moved the U.S. District Court to enter a final judgment in Mr. Hasson's criminal case and to issue an order providing for the restoration of forfeited funds to Mr. Johnson and other victims. In its motion, the United States stated:
The United States has determined that the known assets of the convicted criminal defendant [Mr. Hasson] are insufficient to satisfy the $78,408,691.00 order of restitution entered in this case. Although the estimated amount of forfeited assets will be insufficient to make the victims whole in this case, the United States ... intends to make the forfeited property available for restitution to the victim of the criminal activity in this case.

Pls.' Ex. 48 at 7. On June 8, 2001, the U.S. District Court entered a Final Judgment and Order Providing for Restoration of Victims, which ordered that most of the assets held in the registry be paid to the plaintiffs. Pls.' Ex. 34 at 6. After delays due to Mr. Hasson's appeal of his conviction and other challenges to the court's findings, on February 13, 2004, the U.S. District Court entered an order authorizing the release of forfeited funds to the plaintiffs. Pls.' Ex. 125. On February 17, 2004, $13,976,605.63 was paid to the plaintiffs by the clerk of the court. These funds constituted the plaintiffs' share of the funds seized by the federal government from the Scott Colton Trust, the John Farina Trust, Boyes & Farina, Ted Klein, the proceeds from the sale of the ranch lots, the proceeds from the sale of the Breckenridge lots, the proceeds from the sale of the Big Pine Key lot, the proceeds of the sale of Treasure Coast, and an account with Bear Stearns in the name of Reading Management.



III. The Plaintiffs' Claims Initiated in 1999

On May 5, 1999, Johnson filed an amended counterclaim and third-party complaint in the Hasson civil case. The amended pleading added forty-one new third-party defendants. 3 The new defendants against whom Mr. Johnson asserted claims, other than the entities controlled by Mr. Hasson, were persons who were transferees of assets from Mr. Hasson or were involved in the attempt to launder the fraud proceeds after the fraud was committed. The claims against these defendants sought the recovery of funds transferred to them by Mr. Hasson for which they were not good faith transferees for value. Although Mr. Johnson asserted broad claims against these defendants, the plaintiffs contend that Mr. Johnson could only recover from these defendants what they received, directly or indirectly, from Mr. Hasson, and even then only to the extent they were not good faith transferees for value.



A. Claim Against Jack Hasson as Trustee of the Jack Hasson Revocable Trust

The Jack Hasson Revocable Trust was a trust of which Mr. Hasson and/or his nominees were the principals and beneficiaries. Mr. Johnson's sole allegation against the Jack Hasson Revocable Trust was that it was the owner of real estate in Florida and Colorado purchased with the proceeds of the fraud committed against the plaintiffs. A default judgment was entered against the Jack Hasson Revocable Trust on January 11, 2001.



B. Claim Against Treasure Coast Harley-Davidson, Inc.

Treasure Coast Harley-Davidson, Inc. ("Treasure Coast") was a corporation formed in 1998 that was controlled by Mr. Hasson. It was formed in connection with Mr. Hasson's purchase of a Harley-Davidson motorcycle dealership. The sole allegation against Treasure Coast was that it was purchased with the proceeds of the fraud committed against the plaintiffs. Mr. Hasson's interest in Treasure Coast was sold in 1999 for $3,245,179.11. Pursuant to a stipulation between the U.S. Attorney and Mr. Hasson's criminal defense attorneys, proceeds from the sale of Treasure Coast in excess of $2,200,000.00 were designated for the payment of Mr. Hasson's attorneys. Proceeds in the amount of $2,365,536.93 were eventually deposited in the registry of the U.S. District Court. That amount was eventually forfeited by the government in the criminal proceeding against Mr. Hasson and included in the amount awarded to the plaintiffs by the U.S. District Court. A default judgment was entered against Treasure Coast on June 11, 2000. On December 6, 2000, a writ of garnishment was issued to First Union National Bank requiring it to disclose any indebtedness to Treasure Coast, among others. In response, First Union disclosed it was indebted to Treasure Coast in the amount of $26,158.00. On February 8, 2001, the court entered a judgment ordering First Union to pay the $26,158.00 to Mr. Johnson, and payment was made on March 28, 2001.



C. Claim Against Blake of P.B., Inc.

Blake of P.B., Inc. ("Blake") was a corporation formed in 1985 that was controlled by Mr. Hasson. The sole allegation against Blake was that boats held in its name were purchased with the proceeds of the fraud committed against the plaintiffs. A default judgment was entered against Blake on July 17, 2000. On August 2, 2000, a writ of execution was issued against assets of Blake, among others. On August 24, 2000, a 17' Mako boat belonging to Blake was seized pursuant to that writ. On October 17, 2000, the boat was sold at auction, and Mr. Johnson bid in $7,100.00 of his judgment against Blake which, net of expenses of the sale of $1,409.61, reduced Mr. Johnson's judgment claim by $5,690.39.



D. Claim Against Diamond H Ranch, Inc.

Diamond H Ranch, Inc. was a corporation formed in 1995 that was controlled by Mr. Hasson. No other specific allegations were made against Diamond H Ranch, Inc. in the Amended Counterclaim. A default judgment was entered against Diamond H Ranch, Inc. on November 15, 2000. No funds were ever collected from Diamond H Ranch, Inc.



E. Claim Against Heloneti Galera and the Peter Westbrook Irrevocable Trust

________Heloneti Galera was a fictitious individual created by Mr. Hasson and the Peter Westbrook Irrevocable Trust was a sham trust created by Mr. Hasson, of which Heloneti Galera was the named trustee. The sole allegation against Heloneti Galera and the Peter Westbrook Irrevocable Trust was that they were used by Mr. Hasson in the attempt to launder $26,100,000.00 through the Isle of Man to Paris, France. A partial summary judgment as to Count IX (Constructive Trust) was entered against Heloneti Galera and the Peter Westbrook Irrevocable Trust on November 22, 1999. The remaining claims against Heloneti Galera and the Peter Westbrook Irrevocable Trust were dismissed on July 21, 2000. On July 4, 2002, the Paris Tribunal of First Instance entered a judgment ordering restitution to the plaintiffs of the funds in the Paris Discount Bank in the name of Heloneti Galera and the Peter Westbrook Irrevocable Trust. On November 16, 2005, after all appeals had been exhausted, $20,346,361.71 was transferred from the Paris Discount Bank to the plaintiffs, together with $500,000.00 in fees awarded by the court.



F. Claim Against Peter Westbrook and the Joseph C. Stein Trust

Peter Westbrook was a fictitious individual created by Mr. Hasson and the Joseph C. Stein Trust was a sham trust created by Mr. Hasson, of which the fictitious Peter Westbrook was the trustee and of which Mr. Hasson was the initial beneficiary and Peter Westbrook was the subsequent beneficiary. The sole allegation against Peter Westbrook and the Joseph C. Stein Trust was that his name was used by Mr. Hasson in the attempt to launder $26,100,000.00 through the Isle of Man. An order dismissing Peter Westbrook individually and as trustee of the Joseph C. Stein Trust was entered on July 21, 2000.



G. Claim Against Malham Enterprises, Ltd.

Malham Enterprises, Ltd. ("Malham") was an Isle of Man company controlled by Mr. Hasson. The sole allegation against Malham was that it was used by Mr. Hasson in the attempt to launder $26,100,000.00 through the Isle of Man. In November 1998, Malham's bank account in the Isle of Man was frozen. A default judgment was entered in the Hasson case against Malham on March 22, 2000. On June 20, 2000, the plaintiffs' attorneys in the Isle of Man received £17,327.15 from the bank account in Malham's name, which is equivalent to $25,476.16. 4



H. Claims Against Jack Hasson as Trustee of the Blake Hasson Trust, the Tiffany Hasson Trust, the Kyle Hasson Trust, the Kimaree Hasson Trust, and the Ryan Hasson Trust

The Blake Hasson Trust, Tiffany Hasson Trust, Kyle Hasson Trust, Kimaree Hasson Trust, and Ryan Hasson Trust were trusts created by Mr. Hasson for his children and of which Mr. Hasson was the trustee. The sole allegations against the children's trusts were that they were used by Mr. Hasson to launder funds and that they received funds from Mr. Hasson that were stolen from the plaintiffs. On February 27, 2001, Mr. Johnson filed an impleader claim against the Hasson children's trusts, as described more particularly infra. Other than the assets pursued in the impleader claim, no other assets derived from the fraud on the plaintiffs were found in the possession of the children's trusts established on their behalf, so no other collection efforts were undertaken against the trusts. The claims against the Kimaree Hasson Trust, Tiffany Hasson Trust, Blake Hasson Trust, Kyle Hasson Trust and Ryan Hasson Trust were dismissed on October 1, 2003.



I. Claim Against Scott Colton and the Scott Colton Trust

Scott Colton was an attorney in North Palm Beach, Florida. He created the Peter Westbrook Irrevocable Trust and the Joseph C. Stein Trust, both of which were shams, for use in laundering funds. He also purchased Malham Enterprises, Ltd. for use in laundering funds. The Scott Colton Trust was a trust of which Mr. Colton was the trustee. Mr. Colton assisted Mr. Hasson in his attempt to launder $26,100,000.00 and he was the recipient of funds obtained from the plaintiffs through fraud. From July through September 1997, Mr. Colton assisted Mr. Hasson in transferring approximately $26,100,000.00 to the Isle of Man and transferring approximately $26,000,000.00 back to the Joseph C. Stein Trust, as described supra. $50,000.00 was also transferred from the Isle of Man directly to Mr. Colton. Upon being subpoenaed to testify in the Hasson case, Mr. Colton engineered the transfer of $20,000,000.00 from the Joseph C. Stein Trust to the Peter Westbrook Irrevocable Trust. He also arranged the transfer of approximately $3,700,000.00 to the Scott Colton Trust and approximately $2,300,000.00 to the John Farina Trust from the Joseph C. Stein Trust. Mr. Colton also engineered the transfer of $775,000.00 of the $26,100,000.00 to Mr. Hasson. Finally, Mr. Colton engineered the transfer of the approximately $20,000,000.00 in the Peter Westbrook Irrevocable Trust to the Paris Discount Bank in France. On or about December 14, 1998, the federal government seized the assets, totaling $3,427,411.43, of the Scott Colton Trust. On November 29, 1999, a federal criminal information was filed against Scott Colton. The contents of the account of the Scott Colton Trust were also identified for forfeiture in that information. Mr. Colton pled guilty to the information. The amount recovered from Mr. Colton by way of seizure was less than the amount forfeited and was less than the amount included in the plaintiffs' net asset analysis performed in 1998. Thus, Mr. Johnson continued to prosecute the claim against Mr. Colton in the Hasson civil case. On September 22, 2000, Mr. Colton voluntarily remitted $75,000.00 to the plaintiffs. Mr. Johnson and Mr. Colton reached a settlement on May 14, 2003, under which Mr. Colton paid Mr. Johnson an additional $28,000.00, and the claim against Mr. Colton was dismissed.



J. Claim Against the J.A.S. Irrevocable Trust

The J.A.S. Irrevocable Trust was a trust created by Mr. Colton and of which Mr. Colton was the trustee. James Speiser was the nominal beneficiary of the trust. The sole allegation against the J.A.S. Irrevocable Trust was that it was used by Mr. Hasson as a conduit for the transfer of funds fraudulently obtained from the plaintiffs. In 1997, at least $750,000.00 was transferred by Mr. Hasson to the J.A.S. Irrevocable Trust. Of that amount, $350,000.00 was transferred to Diamond Emerald Isle, Inc. to be used by James Speiser to purchase a bar, and $250,000.00 was transferred to an attorney representing James Speiser for use by Chianti's PBG, Inc. to purchase a restaurant. The claim against the J.A.S. Irrevocable Trust was dismissed as part of the settlement with Mr. Colton referred to above.



K. Claim Against the Irene Lois Robertson Trust

The Irene Lois Robertson Trust was a trust of which Colton was a trustee. The sole allegation against the Irene Lois Robertson Trust was that it was the recipient of $700,000.00 fraudulently obtained from the plaintiffs. The claim against the Irene Lois Robertson Trust was abandoned in April 2000 when it was not included in the Second Amended Answer, Counterclaim and Third-Party Complaint. The claim was replaced by the claim against the Pascal D. Robertson and Irene Lois Robertson Revocable Living Trust, discussed below.



L. Claim Against Cromwell, Pfaffenberger, Barner, Griffin & Colton, P.A.

Cromwell, Pfaffenberger, Barner, Griffin & Colton, P.A. ("Cromwell") was a law firm in which Mr. Colton was a partner. The claims against Cromwell were based on a theory of vicarious liability for the actions of Mr. Colton and on the fact that its trust account was used by Mr. Colton to help launder $800,000.00 fraudulently obtained from the plaintiffs. The $800,000.00 transferred to the Cromwell trust account was derived from the $26,000,000.00 transferred to the Joseph C. Stein Trust Account, which in turn came from the $26,100,000.00 funneled through the Isle of Man. Mr. Johnson and Cromwell reached a settlement on April 16, 2001, under which Cromwell paid Mr. Johnson $285,000.00, and the claim against Cromwell was dismissed.



M. Claims Against John Farina, the John Farina Trust, and Boyes & Farina, P.A.

John Farina was an attorney in West Palm Beach, Florida. The claims against Mr. Farina were based on the assertions that he had assisted Mr. Hasson in the attempt to launder $26,100,000.00 and that he was the recipient of funds fraudulently obtained from the plaintiffs. The John Farina Trust was a trust of which Mr. Farina was the trustee. On July 7, 1998, $2,300,000.00 was transferred to the John Farina Trust from the Joseph C. Stein Trust. Boyes & Farina, P.A., was a law firm of which Mr. Farina was a member. $100,000.00 was transferred to Boyes & Farina from the Joseph C. Stein Trust. $1,113,000.00 was transferred to Boyes & Farina from the John Farina Trust. From that money, $250,000.00 was transferred to Ted Klein, a criminal defense attorney representing Mr. Colton. The federal government seized $1,310,713.72 in assets from the John Farina Trust. The $250,000.00 in the account of Mr. Klein was held in escrow by agreement of counsel pending the outcome of the Hasson litigation, and was subsequently seized by the federal government. On or about December 14, 1998, $745,524.74 in funds held by Boyes & Farina were also seized by the federal government. The amounts held by Mr. Farina and Mr. Klein were forfeited by the government in the Hasson criminal proceeding.

The amount recovered from Mr. Farina by way of seizure was less than the amount forfeited and was less than the amount included in the plaintiffs' 1998 net asset analysis. Thus, Mr. Johnson continued to prosecute the claim against Mr. Farina in the Hasson case. The plaintiffs calculated that the difference between the amount received by Mr. Farina derived from funds obtained from the plaintiffs by fraud and the amount actually seized was $233,325.31, after a deduction of fees actually earned by Mr. Farina. Proceedings were stayed against Mr. Farina for a substantial period of time due to the insolvency of Boyes & Farina's malpractice carrier. Farina, the Farina Trust and Boyes & Farina reached a settlement with the plaintiffs on August 30, 2004, under which Mr. Farina paid Mr. Johnson $50,000.00, and the claims were dismissed.



N. Claims Against James Speiser, Diamond Emerald Isle, Inc., and Chianti's PBG, Inc.

James Speiser was a former employee of Mr. Hasson. He was the nominal beneficiary of the J.A.S. Irrevocable Trust. One allegation against Mr. Speiser was that he helped organize an elaborate charade to convince Mr. Johnson that the Sultan of Brunei, one of the world's richest persons, was interested in buying the gems the plaintiffs had purchased. Mr. Speiser also was alleged to have been a participant in Mr. Hasson's money-laundering activities. In 1997, the J.A.S. Irrevocable Trust received at least $750,000.00 from Mr. Hasson. Diamond Emerald Isle, Inc. was a corporation owned by Mr. Speiser. It was alleged that $350,000.00 was transferred from the J.A.S. Irrevocable Trust to Diamond Emerald Isle, Inc. for the purchase of a bar. Chianti's PBG, Inc. was a corporation owned by Mr. Speiser. It was alleged that $250,000.00 was transferred from the J.A.S. Irrevocable Trust to an attorney representing Mr. Speiser for Chianti's PBG, Inc. for the purchase of a restaurant. The plaintiffs conducted an asset search of Mr. Speiser in November 1998, which revealed limited assets in his name. Mr. Speiser was indicted on April 20, 1999 and pled guilty, and on June 15, 2000 was sentenced to eighteen months' imprisonment and ordered to pay the plaintiffs $50,000,000.00 in restitution.

On July 14, 2000, the plaintiffs registered the criminal judgment against Mr. Speiser with the Palm Beach County Circuit Court and commenced execution proceedings. Two assets were seized in execution: real property located at 241 Cortez Road, West Palm Beach, Florida and a 16' 7" Boston Whaler boat. The plaintiffs purchased the 241 Cortez Road property at a Sheriff's auction on January 3, 2001 and subsequently sold the property on March 23, 2001 for $105,761.63. After payment of the mortgage and closing costs, the plaintiffs received net proceeds of $45,016.32. The boat was not sold by the Sheriff, as Boston Whaler Financial Services had a priority secured interest in the property, and the boat was surrendered to the financing company. No further assets were available for collection, and no collection efforts were undertaken after 2001. An order dismissing the plaintiffs' claim against Mr. Speiser was entered on November 5, 2002.

The plaintiffs' investigators conducted an investigation of Diamond Emerald Isle, Inc. and Chianti's PBG, Inc. in November 1998. The bar, restaurant and the corporations were found to be of no significant value. Default judgments were entered against Diamond Emerald Isle, Inc. and Chianti's PBG, Inc. on November 2, 2000.



O. Claim Against Harry Speiser

Harry Speiser was James Speiser's brother. The sole allegation against Harry Speiser was that he participated in the Sultan of Brunei charade described above. Harry Speiser's role in the charade was not known until 1999. An asset search was conducted on Harry Speiser on October 2, 1998. He was also questioned concerning his assets at his deposition on November 10, 1998. It appeared he had only nominal, non-exempt assets. Mr. Johnson and Harry Speiser entered into a settlement agreement on August 6, 1999, under which Harry Speiser paid Mr. Johnson $10,000.00, the amount he had received from Mr. Hasson, and the plaintiffs' claim against him was dismissed.



P. Claims Against Blake Hasson, Tiffany Hasson, Kyle Hasson, John Hasson, Kimaree Hasson and Ryan Hasson

Blake Hasson, Tiffany Hasson, Kyle Hasson, John Hasson, Kimaree Hasson and Ryan Hasson were Mr. Hasson's children. The sole allegation against the children was that they received funds from Mr. Hasson that were stolen from the plaintiffs. All of the children except Kimaree Hasson were minors. A separate impleader claim was commenced against Kimaree Hasson on December 11, 2000. That claim was based on the receipt by her of $12,500.00 from the sale of an automobile owned by Mr. Hasson and is described below. Mr. Johnson entered a settlement agreement with Kimaree Hasson on July 27, 2001, under which Kimaree Hasson paid the Plaintiffs $5,000.00, and the claim against her was dismissed on August 13, 2001. No other assets derived from the fraud against the plaintiffs were found in the possession of the Hasson children, so no other collection efforts were undertaken against the children after 2001. The claims against Blake Hasson and Tiffany Hasson were voluntarily dismissed on August 22, 2003. The claims against Kyle Hasson, John Hasson and Ryan Hasson were abandoned in 2001. An order dismissing the claims against them was inadvertently not entered.



Q. Claim Against Clifford Sloan

Clifford Sloan was a former employee of Mr. Hasson. The allegations against Mr. Sloan were that he attempted to influence the testimony of a witness and that he may have received stolen funds from Mr. Hasson. Mr. Sloan was indicted in May 1999. The criminal claims against him were that he helped to forge some signatures, testified falsely at a deposition, helped to cash a check during the money-laundering activities and attempted to influence the testimony of a witness. Mr. Sloan was acquitted in the trial in the Hasson criminal case.

Mr. Sloan was deposed in August 1998. He testified that he had come out of retirement to work for Mr. Hasson and was paid $600 per week by Mr. Hasson. He did not appear to have any collectible assets. No collection efforts were ever undertaken against Mr. Sloan. The cost of obtaining a judgment and then trying to collect on it was judged to outweigh any possible recovery. The claim against Mr. Sloan was voluntarily dismissed on August 22, 2003.



R. Claim Against Robert Hinton

Robert Hinton was a former employee of Mr. Hasson who assisted Mr. Hasson in defrauding the plaintiffs. In the Second Amended Counterclaim filed by the plaintiffs in 2000, they alleged that Mr. Hinton had received extensive non-salary payments from Mr. Hasson. An asset search was conducted on Mr. Hinton on December 9, 1998, which revealed that Mr. Hinton was essentially judgment-proof. He owned a few vehicles of low value and a home held in joint name that was not subject to execution. No collection efforts were ever undertaken against Mr. Hinton as the cost of obtaining a judgment and then trying to collect on it was judged to outweigh any possible recovery. The plaintiffs' claim against Mr. Hinton was voluntarily dismissed on December 17, 2002.



S. Claim Against Sean O'Neill

Sean O'Neill was an employee of Mr. Hasson. The sole allegation against Mr. O'Neill was that he impersonated a bodyguard in the Sultan of Brunei charade described above. Mr. O'Neill's role in the charade was not known until 1999. After interviewing Mr. O'Neill on May 26, 1999, it was determined he had no quality knowledge in the matter such that a claim could be pursued against him. The claim against Mr. O'Neill was dismissed on June 16, 1999.



T. Claim Against Irene Lois Robertson

Irene Lois Robertson was Mr. Hasson's former bookkeeper. The sole claim against Ms. Robertson was that she received $700,000.00 in stolen funds from Mr. Hasson. In 1999, after the amended counterclaim was filed, the plaintiffs discovered additional transfers to Ms. Robertson. In the Second Amended Counterclaim, the plaintiffs' claim against Ms. Robertson was that she had received over $1,000,000.00 in non-salary payments from Mr. Hasson. On November 8, 2000, Mr. Johnson filed an impleader claim against Ms. Robertson, as described more particularly supra. On May 17, 2001, Mr. Johnson entered into a settlement with Ms. Robertson in which she stipulated to a judgment in the amount of $825,000.00, which included the $700,000.00 transfer alleged in the Amended Counterclaim. The settlement was to be funded out of a Merrill Lynch trust account and four parcels of real estate purchased with part of the proceeds received by Ms. Robertson from Mr. Hasson. In connection with the settlement, the plaintiffs received a total of $649,801.32 from Ms. Robertson, directly or indirectly, as follows:
1. $212,877.00 received on June 12, 2001 from a Merrill Lynch account controlled by Ms. Robertson;

2. $207,438.45 received on July 21, 2001 from an annuity controlled by Ms. Robertson;

3. $141,132.88 received on November 30, 2001 from the sale of two of the lots referred to in the settlement;

4. $84,704.67 received on July 19, 2002 from the sale of the other two lots referred to in the settlement;

5. $2,303.72 received in October 2002 from the sale of two vehicles owned by Ms. Robertson; and

6. $1,344.60 received between November 1, 2002 and May 22, 2003 from garnishments of Ms. Robertson's bank account and wages.



U. Claim Against Suzanne Hopkins

Suzanne Hopkins, also known as Suzanne Hasson, was Mr. Hasson's wife. The claims against Ms. Hopkins were that she had received real property and an unknown amount of cash, believed to total approximately $1,000,000.00, from Mr. Hasson that was the product of the theft from the plaintiffs. The real property consisted of property in Jupiter, Florida, Breckenridge, Colorado, and Palm Beach Gardens, Florida. The cash transferred to Ms. Hopkins came from the proceeds from the sale of a yacht controlled by Mr. Hasson and titled in the name of Blake. On March 15, 2001, Johnson filed an impleader claim against Ms. Hopkins, as described more particularly infra. No assets derived from the fraud on the plaintiffs were found in the possession of Ms. Hopkins other than the funds sought through the impleader, so no other collection efforts were undertaken against Ms. Hopkins after 2001.



V. Claim Against Mark Russell Hopkins and Sally Ann Hopkins

Mark Russell Hopkins was Suzanne Hopkins' brother and Mr. Hasson's brotherin-law. Sally Ann Hopkins was Mark Russell Hopkins' wife. The sole allegation against Mark Russell Hopkins and Sally Ann Hopkins was that they were the transferees of a ranch lot from Mr. Hasson. That lot was seized by the federal government and sold, and the proceeds were included in the distribution made to the plaintiffs by the U.S. District Court. The plaintiffs' claim against Mark Russell Hopkins and Sally Ann Hopkins was voluntarily dismissed on January 29, 2001.



W. Claim against Gem Appraiser's Laboratory, Ltd.

Gem Appraiser's Laboratory, Ltd. was a corporation that was dissolved in 1995 and had been controlled by Leopold Woolf. The sole allegation against Gem Appraiser's Laboratory was that it was vicariously liable for Mr. Woolf's actions. The claim against Gem Appraiser's Laboratory was dismissed as part of the settlement with Mr. Woolf described supra.



IV. The Plaintiffs' Claims Initiated in 2000

On April 28, 2000, Johnson filed a second amended counterclaim and third-party complaint in the Hasson case. The amended pleading added fifteen third-party defendants, the claims against each of which will be discussed in more detail below. 5



A. Claim Against Pascal D. Robertson, and Irene Lois Robertson and Pascal D. Robertson as Co-Trustees of the Irene Lois Robertson and Pascal D. Robertson Revocable Living Trust

Pascal D. Robertson was Irene Lois Robertson's husband. Mr. Johnson also filed an impleader claim against Pascal Robertson on November 17, 2001, as described infra. The Irene Lois Robertson and Pascal D. Robertson Revocable Living Trust ("Robertson Trust") was a trust of which Irene Lois Robertson and Pascal D. Robertson were co-trustees and which was used by them in connection with the receipt of funds from Mr. Hasson that were stolen from the plaintiffs. Mr. Johnson also filed an impleader claim against Irene Lois Robertson and Pascal D. Robertson as trustees of the Robertson Trust on November 8, 2001, as described infra. The sole claim against Pascal Robertson and the Robertson Trust was that they were the recipients or beneficiaries of the transfer of funds to Irene Lois Robertson. The claim was identical to the claim asserted individually against Irene Lois Robertson. The claim against Pascal Robertson and the Robertson Trust was settled on May 17, 2001 as part of the settlement with Irene Lois Robertson described supra.



B. Claim Against Barbara Hasson

Barbara Hasson was Mr. Hasson's sister, and she assisted Hasson in concealing and liquidating assets. The sole allegation against Ms. Hasson was that she assisted Mr. Hasson in liquidating his assets after his arrest. No allegation was made that identified any assets she received from Mr. Hasson that were derived from the fraud on the plaintiffs. No collection efforts were ever undertaken against Ms. Hasson as the cost of obtaining a judgment and then trying to collect on it was judged to outweigh any possible recovery. The claim against Ms. Hasson was voluntarily dismissed by the plaintiffs on April 28, 2002.



C. Claim Against Sharon Eaton

Sharon Eaton was a Palm Beach County resident who was paid by Mr. Hasson to participate in the Sultan of Brunei charade described above. An asset search was conducted on Ms. Eaton in 1998, but it revealed no significant collectible assets. The plaintiffs subsequently learned that Eaton had recently gone through bankruptcy. At her deposition in 1998, Ms. Eaton pled the Fifth Amendment and Mr. Johnson was unable to learn about her role in the charade and whether she had been paid. At the Hasson criminal trial in 2000, she testified that she had been paid $12,000.00 by Mr. Hasson for participating in the charade. Mr. Johnson settled with Ms. Eaton on May 8, 2001, and she paid the plaintiffs $12,000.00, which was the amount she received from Mr. Hasson.



D. Claim Against Sondra Pillion

Sondra Pillion was a licensed notary public in Florida. The sole claim against Ms. Pillion was that she notarized fake signatures in connection with transferring funds to France. The claim against Ms. Pillion was voluntarily dismissed by the plaintiffs on January 29, 2001.



E. Claim Against Avraham Tal

Avraham Tal was a resident of Paris, who was also known as Avi Herson. Mr. Tal helped launder the funds obtained from the plaintiffs that were deposited in the Discount Bank in Paris. Mr. Tal asserted a right to the funds held in the Discount Bank. Mr. Tal also filed a collusive suit against Mr. Hasson in Miami, Florida, for non-payment for gems allegedly purchased by Mr. Hasson from Mr. Tal. The suit attributed Hasson's non-payment to the freezing of the funds held in the Discount Bank. The Paris Court of First Instance convicted Mr. Tal of fraud in connection with the transfer of funds obtained from the plaintiffs to the Discount Bank and ordered the funds released to Mr. Johnson. A default judgment was entered against Mr. Tal in the Hasson civil case on October 16, 2000, but no money was ever collected from Mr. Tal.



F. Claim Against Luther Jeffries

Luther Jeffries was a resident of Martin County, Florida, who allegedly assisted Mr. Hasson in laundering funds stolen from the plaintiffs by helping to transfer $6,324,000.00 to the Bahamas. Mr. Jeffries was paid $110,000.00 out of those funds, which he used to buy a cabin in Alaska. The funds transferred to the Bahamas, which were the source of the payment to Mr. Jeffries, were derived from the sale by Mr. Hasson of his Jetstar jet aircraft, a parcel of real estate on Big Pine Key, and three boats as described above. On August 21, 2000, Mr. Johnson filed an impleader claim against Mr. Jeffries, as described more particularly below. Mr. Johnson entered a settlement agreement with Mr. Jeffries on May 9, 2001, under which Mr. Jeffries paid the plaintiffs $82,000.00.



G. Claim Against Reading Management Ltd.

Reading Management Ltd. was a Bahamian Company used by Mr. Hasson to launder funds stolen from the plaintiffs. Of the $6,324,000.00 transferred by Mr. Hasson to the Bahamas, $2,500,000.00 was subsequently transferred to an account in the name of Reading Management Ltd. at Bear Stearns Securities Corp. The funds transferred to the Bahamas were derived from the sale by Mr. Hasson of his Jetstar jet aircraft, a parcel of real estate on Big Pine Key, and three boats. Funds in the amount of $2,607,521.15 in the Reading Management Bear Stearns account were seized by the federal government in the Hasson criminal case and forfeited to the government. Mr. Johnson voluntarily dismissed the claim against Reading Management on May 14, 2001. The funds seized from Reading Management were included in the amount awarded to the plaintiffs by the U.S. District Court on February 17, 2004.



H. Claim Against Atlantic Recreation, Ltd.

Atlantic Recreation, Ltd. was British Virgin Islands company formed in 1997 by Mr. Hasson. It was under the control of Mr. Hasson and was used to launder the funds stolen from the plaintiffs. The claim against Atlantic Recreation was that Mr. Hasson had registered his 110' yacht with Atlantic Recreation under a new name in an effort to hide the asset. The boat had been acquired by Mr. Hasson with funds stolen from the plaintiffs. The 110' yacht was sold by Mr. Hasson and the proceeds were part of the funds transferred to the Bahamas. A default judgment was entered against Atlantic Recreation on August 3, 2000, but no funds were recovered from Atlantic Recreation.



I. Claim Against Norbert Gartmann

Norbert Gartmann was a Swiss national who lived in the French Riviera. He allowed his address and telephone number to be used to set up the accounts at the Paris Discount Bank and at Smith Barney in Florida in the name of the fictional Heloneti Galera and Peter Westbrook. Mr. Gartmann received $50,000.00 from the $26,000,000.00 laundered through the Isle of Man and to the Paris Discount Bank. The plaintiffs' claim against Mr. Gartmann was settled on June 26, 2001 with Mr. Gartmann paying $4,800.00 to the plaintiffs, which net of fees provided the plaintiffs with $4,783.20.



J. Claim Against Aaron Patrick

Aaron Patrick was the general manager of Treasure Coast, Mr. Hasson's motorcycle dealership. Following the sale of the dealership, $100,500.00 of the proceeds was transferred to Mr. Patrick purportedly in payment of an antecedent debt. The claim against Mr. Patrick was for the funds transferred to him contrary to orders entered by the U.S. District Court in the Hasson criminal case, which had forfeited the proceeds of the sale of the dealership to the government and had only authorized the payment of legitimate closing costs. The claim against Mr. Patrick was voluntarily dismissed on September 26, 2000. On December 1, 2000, Mr. Johnson filed an impleader claim against Mr. Patrick, as is more particularly described infra.



K. Claim Against Mindy Romer

Mindy Romer was Mr. Hasson's former wife. Mr. Hasson and Ms. Romer were divorced in 1994. Only a small portion of the funds Mr. Hasson obtained from the plaintiffs by fraud and theft had been paid to Mr. Hasson by that time. The claim against Ms. Romer expressly disclaimed an interest in the marital assets of Ms. Romer and Mr. Hasson, which did not constitute assets obtained from the plaintiffs as a matter of law. However, Ms. Romer was seeking to recover additional funds in post-divorce proceedings and was asserting claims against the funds seized and forfeited by the federal government in the Hasson criminal proceeding. The claim asserted by the plaintiffs against Ms. Romer merely sought to assert Mr. Johnson's superior claim to the additional funds Ms. Romer was seeking. No claim was ever made against assets in Ms. Romer's possession, so no collection efforts were undertaken against Ms. Romer. The claim against Ms. Romer was voluntarily dismissed on August 22, 2003.



L. Claims Against William Stuart Cross, William Stuart Cross, P.A., and Doumar, Allsworth, Curtis, Cross, Laystrom, Perloff, Voight, Wachs & MacIver

William Stuart Cross was an attorney in Broward County, Florida who represented Mr. Hasson in the sale of Treasure Coast. William Stuart Cross, P.A. was a professional association in which Mr. Cross was a principal. Doumar, Allsworth, Curtis, Cross, Laystrom, Perloff, Voight, Wachs & MacIver was a professional association, in which Mr. Cross was a principal, that received the proceeds of the sale of Treasure Coast. The claims against these defendants were based on the fact that Mr. Cross had diverted proceeds from the sale of Treasure Coast, contrary to the order of the U.S. District Court, which required that proceeds from the sale, after payment of closing costs, were to be applied to the payment of Mr. Hasson's criminal defense attorneys, in part, with the remainder to be deposited with the court as part of the forfeiture proceedings. The claims against these defendants were voluntarily dismissed without prejudice on July 28, 2000. On February 6, 2001, an impleader action was commenced against these defendants, as is described below.



V. The Impleader Claims Filed by the Plaintiffs in 2000 and 2001



A. Impleader of Luther Jeffries and Ruth Teichert

On August 21, 2000, an order was entered impleading Luther Jeffries and ordering him to show cause why the $110,000.00 transferred to Mr. Jeffries by Mr. Hasson should not be subject to execution by Mr. Johnson. Ruth Teichert was the wife of Mr. Jeffries. On October 30, 2000, an order was entered impleading Ms. Teichert and ordering her to show cause why the $110,000.00 transferred to Mr. Jeffries by Mr. Hasson should not be subject to execution by Mr. Johnson. The funds transferred by Mr. Hasson to the Bahamas, which were the source of the payment to Mr. Jeffries, were derived from the sale by Mr. Hasson of his Jetstar jet aircraft, a parcel of real estate on Big Pine Key, and three boats. The impleader claims against Mr. Jeffries and Ms. Teichert were dismissed as part of the settlement with Mr. Jeffries described above.



B. Impleader of Sharon Eaton

On September 19, 2000, an order was entered impleading Sharon Eaton and ordering her to show cause why the $12,000.00 paid to her by Mr. Hasson should not be subject to execution by Mr. Johnson. Ms. Eaton was already a defendant in the Hasson case. The impleader claim against Ms. Eaton was dismissed as part of the settlement with Ms. Eaton described above.



C. Impleader of Irene Lois Robertson, Pascal D. Robertson, Irene Lois Robertson and Pascal D. Robertson as Co-Trustees of the Robertson Trust, Chet Weinbaum, and Atterbury, Goldberger & Richardson, P.A.

In November 2000, an order was entered impleading Irene Lois Robertson and Pascal D. Robinson, individually and as co-trustees of the Robertson Trust, Chet Weinbaum, and Atterbury, Goldberger & Richardson, P.A., and ordering them to show cause why the funds received by them, directly or indirectly, from Mr. Hasson should not be subject to execution by Mr. Johnson. Chet Weinbaum was an attorney who represented the Robertsons and the Robertson Trust. The claim against him was for legal fees paid to him by the Robertsons out of the funds derived from fraud. Atterbury, Goldberger & Richardson, P.A. was a law firm that represented the Robertsons and the Robertson Trust. The claim against it was for legal fees paid to it by the Robertsons out of the funds derived from fraud. The impleader claims against the Robertsons and the Robertson Trust were dismissed as part of the settlement with the Robertsons described above. The impleader claim against Mr. Weinbaum was settled on July 17, 2001, and under that settlement the plaintiffs received $12,000.00 from Mr. Weinbaum. The impleader claim against Atterbury, Goldberger & Richardson, P.A. was settled on June 1, 2001, and under that settlement the plaintiffs received $32,000.00 from Atterbury, Goldberger & Richardson, P.A.



D. Impleader of Aaron Patrick

On December 1, 2000, an order was entered impleading Aaron Patrick, ordering him to show cause why the $100,500.00 paid to him out of the proceeds of the sale of Treasure Coast should not be subject to execution by Mr. Johnson. Mr. Patrick was a defendant in the Hasson case, but the claim against him was voluntarily dismissed. The impleader claim against Mr. Patrick was settled on August 14, 2001, and under that settlement the plaintiffs received $25,000.00 from Mr. Patrick.



E. Impleader of Cynthia Lehman and Kimaree Hasson

On December 11, 2000, an order was entered impleading Cynthia Lehman and Kimaree Hasson, ordering them to show cause why the $12,500.00 paid to them out of the proceeds of the sale of a Chevy Astro Van owned by Mr. Hasson should not be subject to execution by Mr. Johnson. Cynthia Lehman was a former girlfriend of Mr. Hasson. She had taken possession of a Chevy Astro Van owned by Mr. Hasson and subsequently sold the vehicle for $12,500.00. The impleader claim against Ms. Lehman was settled on July 2, 2001, and under that settlement the plaintiffs received $5,000.00 from Ms. Lehman. The impleader claim against Kimaree Hasson was dismissed as part of the settlement with Ms. Hasson described above.



F. Impleader of William Stuart Cross and William Stuart Cross, P.A.

On February 6, 2001, an order was entered impleading William Stuart Cross and William Stuart Cross, P.A. ordering them to show cause why the proceeds from the sale of Treasure Coast he had diverted contrary to the order of the U.S. District Court in the Hasson criminal case should not be subject to execution by Mr. Johnson. On October 31, 2001, a magistrate judge entered an Order and Report and Recommendation that Mr. Cross be held in contempt for improperly diverting funds from the sale of Treasure Coast. In that order, the magistrate judge found that $258,283.57 had been improperly diverted. Of that sum, $88,261.47 was owed to Mr. Hasson's criminal attorneys. The remainder, $170,022.10, was to be paid into the U.S. District Court registry. The impleader claims asserted against these defendants and the contempt proceedings were settled on April 16, 2002, and under that settlement the plaintiffs received $50,000.00 from these defendants.



G. Impleader of Suzanne Hopkins

On March 15, 2001, an order was entered impleading Suzanne Hopkins ordering her to show cause why the $900,000.00 she received from the proceeds of the sale of a yacht belonging to Mr. Hasson should not be subject to execution by Mr. Johnson. A trial was held on the claims against Ms. Hopkins, and on November 18, 2004, a judgment in the amount of $900,000.00 was entered against her. In collecting on the judgment, the plaintiffs received a total of $475,143.22 from Ms. Hopkins, directly or indirectly, as follows:
1. $5,500.00 received on December 9, 2004 from the sale of a Subaru automobile owned by Suzanne Hopkins;

2. $90,031.01 received (net of taxes) in 2005 and 2006 from a GE annuity owned by Suzanne Hopkins;

3. $55,239.83 received from a "College of Illinois" account for the benefit of Suzanne Hopkins' children;

4. $90,436.22 received (net of taxes) in 2005 and 2006 from a Zurich annuity owned by Suzanne Hopkins; and

5. $233,936.16 received net of expenses and closing costs from the sale of a home in Illinois owned by Suzanne Hopkins.



H. Impleader of Jack Hasson as Trustee of the Blake Hasson Trust, the Tiffany Hasson Trust, the Kyle Hasson Trust, the Kimaree Hasson Trust, and the Ryan Hasson Trust

On March 15, 2001, an order was entered impleading Mr. Hasson as trustee of the Blake Hasson Trust, the Tiffany Hasson Trust, the Kyle Hasson Trust, the Kimaree Hasson Trust, and the Ryan Hasson Trust, ordering him to show cause why Hartford Life Insurance Company annuities purchased by Mr. Hasson and placed in those trusts should not be subject to execution by Mr. Johnson. The existence and value of the annuities were not discovered until 2000. On July 12, 2001, an amended default judgment nunc pro tunc was entered against Mr. Hasson as trustee of the Kyle Hasson Trust and the Ryan Hasson Trust, which ordered payment of 100 percent of the net value of the annuities held by those trusts to Mr. Johnson. On August 14, 2001, $54,736.42, the total value of the annuities, was paid to the plaintiffs from the proceeds of the annuities held by the Kyle Hasson Trust and the Ryan Hasson Trust. On October 12, 2001, summary judgment was entered against Mr. Hasson as trustee of the Blake Hasson Trust, the Tiffany Hasson Trust and the Kimaree Hasson Trust, which ordered payment of $6,397.00 from each of the annuities held by those trusts to the plaintiffs. On November 13, 2001, $19,191.00 was paid to the plaintiffs from the annuities held by the Blake Hasson Trust, the Tiffany Hasson Trust and the Kimaree Hasson Trust. No other assets were found in the possession of the children's trusts that was derived from the fraud on the plaintiffs.



I. Impleader of Robert Hinton

On March 29, 2001, an order was entered impleading Robert Hinton ordering him to show cause why the $218,346.92 in non-salary payments he received from Treasure Coast should not be subject to execution by Mr. Johnson. The impleader proceeding against Mr. Hinton was dismissed on December 17, 2002 with the dismissal of the direct claim against him, as described above.



J. Proposed Impleader of the North Palm Beach Aquatic Foundation

In 1999, the plaintiffs discovered that, on February 5, 1998, Mr. Colton had caused $5,000.00 to be transferred from an account in the name of the Joseph C. Stein Trust to the North Palm Beach Aquatic Foundation ("Foundation"). The $5,000.00 was derived from the $800,000.00 transferred to the account of Mr. Colton's law firm as described above. When notified that the $5,000.00 were the proceeds of fraud, counsel for the Foundation moved to deposit the funds in the registry of the Palm Beach Circuit Court. On August 11, 2000, counsel for the plaintiffs gave notice to counsel for the Foundation of their intention to seek to implead the Foundation if it did not agree to release the funds to the plaintiffs. On September 14, 2000, an order was entered allowing the release of the funds to the plaintiffs. After deduction of a processing fee by the court clerk, the plaintiffs received a payment of $4,945.00.



K. Proposed Impleader of Darla Simons

In 1999, the plaintiffs discovered that, on February 5, 1998, Mr. Colton had caused $5,000.00 to be transferred from an account in the name of the Joseph C. Stein Trust to Darla Simons. The $5,000.00 was derived from the $800,000.00 transferred to the account of Mr. Colton's law firm as described above. When notified that the $5,000.00 were the proceeds of fraud, counsel for Ms. Simons agreed to hold the funds pending further order of the court. On August 11, 2000, counsel for the plaintiffs gave notice to counsel for Ms. Simons of their intention to seek to implead Ms. Simons if she did not agree to release the funds to the plaintiffs. On October 24, 2000, Ms. Simons voluntarily remitted the $5,000.00 to the plaintiffs.



VI. The Plaintiffs' Claim in the Bahamas

In March 1999, Mr. Hasson transferred $6,324,000.00 to E. P. Toothe, as trustee of a bank account, in the Bahamas. Out of those funds, $2,500,000.00 was subsequently transferred to an account in the name of Reading Management Ltd. at Bear Stearns Securities Corp. in Palm Beach County. The funds transferred to the Bahamas were derived from the sale by Mr. Hasson of his Jetstar aircraft, a parcel of real estate on Big Pine Key, and three boats. In March 2000, Mr. Johnson commenced an action in the Bahamas against Mr. Hasson and Reading Management for the recovery of the funds remaining in the possession of E. P. Toothe. On February 24, 2003, the parties to the Bahamian action reached a settlement. After the deduction of payments to the Hasson children, the payment of bank charges, and a holdback of $150,000.00 for trustee's fees, $2,787,302.45 was paid to the plaintiffs, of which $178,867.36 was paid to Mr. Johnson's Bahamian attorneys, for a net payment of $2,608,435.09 to Mr. Johnson. On March 30, 2004, $147,082.09 was paid to the plaintiffs out of the funds held back for the payment of trustee's fees, of which $19,241.97 was applied to the plaintiffs' attorneys' fees. In total, the plaintiffs received $2,736,275.21 as a result of the litigation in the Bahamas.



VII. Total Recovery by the Plaintiffs

The total amount recovered by the plaintiffs to date in their claims against Mr. Hasson and related persons and entities is $39,288,079.15, as detailed below:

The plaintiffs' recoveries through December 31, 2001:


Amount Amount
Date Source Available Recovered

_____________________________________________________________________________________
08/06/99 Harry Speiser settlement $10,000.00

06/20/00 Malham account seizure $25,476.16

09/02/00 Scott Colton $75,000.00

North Palm Beach Aquatic
09/14/00 Foundation $4,945.00

10/17/00 Blake, execution of Mako boat $5,690.39

10/24/00 Darla Simons $5,000.00

02/06/01 Leopold Woolf settlement $25,000.00

First Union garnishment, Hasson &
02/08/01 Sons $735.64

03/23/01 James Speiser, execution of home $45,016.32

First Union garnishment, Treasure
03/28/01 Coast $26,158.00

04/16/01 Cromwell et al. settlement $285,000.00

05/08/01 Sharon Eaton settlement $12,000.00

05/09/01 Luther Jeffries settlement $82,000.00

06/01/01 Atterbury et al. settlement $32,000.00

06/12/01 Robertsons settlement $649,801.32

06/26/01 Norbert Gartmann settlement $4,783.20

07/02/01 Cindy Lehman settlement $5,000.00

07/17/01 Chet Weinbaum settlement $12,000.00

07/27/01 Kimaree Hasson settlement $5,000.00

08/14/01 Kyle and Ryan Hasson trusts $54,736.42

08/14/01 Aaron Patrick settlement $25,000.00

11/13/01 Blake, Tiffany, and Kimaree
Hasson trusts $19,191.00



The plaintiffs' recoveries after December 31, 2001:


04/16/02 William Cross settlement $170,022.10 $50,000.00

02/24/03 Bahamas settlement $3,824,660.00 $2,787,302.45

05/14/03 Scott Colton settlement $97,588.57 $28,000.00

02/17/04 Jack Hasson, criminal restitution $13,976,605.63 $13,976,605.63

03/30/04 Bahamas escrow payment see above $147,082.09

08/30/04 Boyes & Farina settlement $233,325.31 $50,000.00

11/18/04 Suzanne Hopkins judgment $900,000.00 $475,143.22

06/22/05 Wachovia garnishment, Jack Hasson not known 6 $18,050.60

11/16/05 Paris Discount Bank funds $20,346,361.71 $20,346,361.71

Total Received $39,288,079.15


_____________________________ _________________
6 The plaintiffs assert that neither they nor anyone else was aware of this
Wachovia account until 2005. The account, in the name of "Jack Hasson Agency" for
the "Trustee of Living Trust dated 12/7/95 Investment Advisory Account," held the
proceeds of a class action settlement in which Mr. Hasson was a claimant. Once the
plaintiffs were made aware of the account, they immediately initiated legal action
to garnish the account. However, the plaintiffs contend that they were reasonably
certain in 2001 that they would not recover the $18,050.60 held in the account
because they were not aware of the account's existence in 2001.





VIII. The Present Litigation

The motions currently pending before the court involve two of the three complaints the plaintiffs have filed in this court related to the losses they suffered at the hands of Mr. Hasson. 7 On December 10, 2003, the plaintiffs filed a complaint in Case No. 03-2803, which was amended on December 12, 2005. In this complaint, the plaintiffs argue that they were entitled to a theft loss deduction for the 1998 tax year, which would allow them a refund of $1,404,549.00 in taxes paid for 1998 and a net operating loss carryback to previous years. In the alternative, the plaintiffs assert that a theft loss deduction would have been proper in 1997, which would allow them a refund of $17,221,078.00 in taxes paid for that year.

On December 7, 2005, the plaintiffs filed a complaint in Case No. 05-1265, seeking, in the alternative, theft loss deductions in 1999, 2000, or 2001. The plaintiffs assert that, if neither 1997 nor 1998 is the proper year to take a theft loss deduction, then 1999 is the proper year, and they are entitled to a refund of $50,919.00 in 1999 and a net operating loss carryback to previous years. The plaintiffs contend that if 1999 is not the proper year, then 2000 is the proper year, and they are entitled to a refund of $444,478.00 and a net operating loss carryback. Finally, the plaintiffs assert that if 2000 is not the proper year, then 2001 is the proper year, and they are entitled to a refund of $740,742.00 and a net operating loss carryback. A net operating loss carryback from any of these years (1999, 2000, 2001) would, according to the plaintiffs, entitle them to a refund for the 1996 and 1997 tax years as well.

Following the court's 2006 decision in Johnson I, which dealt with Cases No. 03- 2803 and 05-1265, the parties agreed to file cross-motions for summary judgment in an effort to determine the appropriate year for the plaintiffs to take a theft loss deduction. The plaintiffs filed a motion for summary judgment on June 20, 2007, and the government filed a cross-motion for summary judgment on August 17, 2007. Oral argument was held on December 17, 2007.


DISCUSSION




I. Standard of Review

The parties have filed cross-motions for summary judgment under Rule 56 of the Rules of the United States Court of Federal Claims ("RCFC"). Summary judgment is appropriate when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." RCFC 56(c); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). In considering a motion for summary judgment, the court's role is not to "weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Liberty Lobby, 477 U.S. at 249. The party seeking summary judgment must first demonstrate the absence of a genuine issue of material fact; once this burden is met, in order to defeat summary judgment, the non-moving party must present evidence which demonstrates such a genuine issue. Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986); Long Island Sav. Bank, FSB v. United States, 503 F.3d 1234, 1244 (Fed. Cir. 2007).

In determining whether a genuine issue of material fact exists, the court must consider the evidence and resolve all doubts in the light most favorable to the non-moving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-88 (1986); Am. Pelagic Fishing Co. v. United States, 379 F.3d 1363, 1371 (Fed. Cir. 2004). A dispute of material fact is genuine "if the evidence is such that a reasonable finder of fact could return a verdict for the nonmoving party." Liberty Lobby, 477 U.S. at 248. Cross-motions for summary judgment do not constitute an admission that no genuine issues of material fact remain. See Massey v. Del Labs., Inc., 118 F.3d 1568, 1573 (Fed. Cir. 1997). "Each party carries the burden on its own motion to show entitlement to judgment as a matter of law after demonstrating the absence of any genuine disputes over material facts." Id. (citations omitted).

The standard of review for a motion for summary judgment premised on the proper interpretation of a regulation is well-settled. Where, as here, all of the parties' factual assertions are taken as true, summary judgment on the legal issue is appropriate. See, e.g., Santa Fe Pacific R. Co. v. United States, 294 F.3d 1336, 1340 (Fed. Cir. 2002) ("Issues of statutory interpretation and other matters of law may be decided on motion for summary judgment."); Costain Coal, Inc. v. United States, 126 F.3d 1437, 1440 (Fed. Cir. 1997); Reese v. United States, 24 F.3d 228, 230 (Fed. Cir. 1994).



II. The Plaintiffs Were Entitled to Take A Theft Loss Deduction for A Portion of Their Loss Once They Had Ascertained With Reasonable Certainty That They Would Not Recover That Portion.

A taxpayer's ability to take a theft loss deduction is governed by Internal Revenue Code ("IRC") §§ 165(a) & (e). IRC § 165(a) generally requires a taxpayer to take "as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise." IRC § 165(e), which specifically pertains to theft losses, states that "[f]or purposes of subsection (a), any loss arising from theft shall be treated as sustained during the taxable year in which the taxpayer discovers such loss." Treasury Regulation ("Treas. Reg.") § 1.165-8(a)(2) further explains:
A loss arising from theft shall be treated under section 165(a) as sustained during the taxable year in which the taxpayer discovers the loss. See section 165(e). Thus, a theft loss is not deductible under section 165(a) for the taxable year in which the theft actually occurs unless that is also the year in which the taxpayer discovers the loss. However, if in the year of discovery there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, see § 1.165-1(d).

Treas. Reg. § 1.165-1(d)(2), in turn, provides in relevant part:
If a casualty or other event occurs which may result in a loss and, in the year of such casualty or event, there exists a claim for reimbursement to which there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be received is sustained, for the purposes of section 165, until it can be ascertained with reasonable certainty whether or not such reimbursement will be received.

(emphasis added). As this court held in Johnson I, the net effect of these regulations, when read together, is as follows:
If a taxpayer does not take a theft loss deduction for the entire loss in the year of discovery, but instead has a reasonable prospect of recovering all or a portion of the loss and thus postpones all or a portion of the theft loss deduction, then, under Treas. Reg. § 1.165-1(d)(2), the taxpayer may not take a theft loss deduction for that portion for which reimbursement may be received until the taxpayer can ascertain with reasonable certainty whether such reimbursement will in fact be received. Treas. Reg. § 1.165-1(d)(2)(i) provides that a taxpayer may ascertain with reasonable certainty whether she will be reimbursed "for example, by a settlement of the claim, by an adjudication of the claim, or by an abandonment of the claim."

74 Fed. Cl. at 363.

Here, the plaintiffs contend that they should be entitled to take a theft loss deduction in 1998, or, in the alternative, in 2001, for the losses they determined they were not likely to recover through litigation against Mr. Hasson and his associates. Notwithstanding this court's holding in Johnson I, the plaintiffs assert that they should be entitled to take a theft loss deduction for any portion of their loss in the year that they determined that they did not have a reasonable prospect of recovering that portion. Specifically, the plaintiffs contend that, as of December 31, 1998, they had a reasonable prospect of recovering no more than $19,919,718.00 of the loss they suffered, and accordingly should be entitled to a theft loss deduction of $58,240,691.00 for the 1998 tax year. Alternatively, the plaintiffs assert that, by December 31, 2001, many of the plaintiffs' claims against Mr. Hasson and his associates had been settled, resolved by judgment, or abandoned, and that the plaintiffs are therefore entitled to a theft loss deduction in 2001 for the portions of the loss for which they were no longer pursuing recovery. Specifically, the plaintiffs contend that, as of December 31, 2001, they had a reasonable prospect of recovering no more than $19,202,201.61 of the loss they suffered, and accordingly should be entitled to a theft loss deduction of $57,562,744.75 for the 2001 tax year. The plaintiffs further assert that, if the court determines that the plaintiffs had a reasonable prospect of recovering the funds held in Paris in 2001, the plaintiffs should still be entitled to a theft loss deduction in 2001 of $37,216,383.04. 8

The government argues that the plaintiffs were not entitled to a theft loss deduction in any amount in either 1998 or 2001 but instead that the plaintiffs were entitled to a theft loss deduction in the year in which all of their claims for reimbursement were resolved. The government contends that the plaintiffs cannot claim a theft loss deduction in 1998 because none of their claims for reimbursement were resolved at that time. In addition, the government argues that because the plaintiffs were still pursuing some claims for reimbursement after 2001, and could not ascertain with reasonable certainty the total amount that they would ultimately recover, as a matter of law the plaintiffs could not take a theft loss deduction for any portion of their loss in 2001. Instead, the government asserts that the plaintiffs were not entitled to a theft loss deduction until, at the earliest, 2005, when the plaintiffs' last recovery efforts had concluded.

Neither of the positions asserted by the parties in this dispute is entirely accurate given the court's holding in Johnson I. The plaintiffs' continued reliance on the "reasonable prospect of recovery" standard is misplaced. This court has held, under its interpretation of the IRC and related Treasury Regulations in Johnson I, that the "reasonable prospect of recovery" standard is only applicable in the year a taxpayer discovers a theft loss. As Treas. Reg. § 1.165-1(d)(2) states, if "in the year of such casualty or event, there exists a claim for reimbursement to which there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be received is sustained ... until it can be ascertained with reasonable certainty whether or not such reimbursement will be received." (emphasis added). In the year the plaintiffs discovered the theft loss, 1997, the plaintiffs determined that they had a reasonable prospect of recovering all or a portion of the loss and elected to pursue claims against Mr. Hasson and his associates to recover their losses. Accordingly, the plaintiffs were permitted to take a theft loss deduction for a portion of their loss only once they were able to ascertain with reasonable certainty that they would not recover that portion of the loss. See Johnson I, 74 Fed. Cl. at 363 (holding that a taxpayer "may not take a theft loss deduction for that portion for which reimbursement may be received until the taxpayer can ascertain with reasonable certainty whether such reimbursement will in fact be received"). Therefore, the court will evaluate the plaintiffs' contentions by determining whether in 1998, or alternatively whether in 2001, the plaintiffs were able to ascertain with reasonable certainty whether they would recover on their claims against Mr. Hasson and his associates. 9

Treas. Reg. § 1.165-1(d)(2)(i) states with regard to the "reasonable certainty" inquiry that "whether or not such reimbursement will be received may be ascertained with reasonable certainty, for example, by a settlement of the claim, or by an adjudication of the claim, or by an abandonment of the claim." "[U]nder Treas. Reg. § 1.165-1(d), the requirement that a taxpayer 'ascertain with reasonable certainty' means that a taxpayer must obtain a verifiable determination of the amount she will receive based on a resolution of the reimbursement claim before taking a theft loss deduction." Johnson I, 74 Fed. Cl. at 365. Therefore, if the plaintiffs can demonstrate that some or all of their claims were resolved as of a given year, in accordance with the language of and examples set forth in Treas. Reg. § 1.165-1(d), then they will be entitled to a theft loss deduction in that year for the resolved portion of their claims.



A. As of December 31, 1998, the Plaintiffs Had Not Ascertained With Reasonable Certainty the Amount of the Theft Loss They Would Recover.

The plaintiffs first argue that they were entitled to a theft loss deduction in 1998 for the portion of their claims for which they determined they had no reasonable prospect of recovery. The court has already considered this argument and held that, unless the plaintiffs could demonstrate that they ascertained with reasonable certainty, in 1998, that they would not recover a portion of their loss, the plaintiffs were not entitled to a theft loss deduction for any amount in 1998. Johnson I, 74 Fed. Cl. at 366. The plaintiffs have offered no additional evidence to demonstrate that, in 1998, they did anything other than "estimate" their anticipated recovery in pending litigation against Mr. Hasson and his associates. See id. ("By their own admission, plaintiffs state that they made an 'estimate' of the amount of recovery. Def.'s Ex. 2 at 6, 8 ('Plaintiffs state that, when they filed their claims for a refund at issue here, they estimated that they would recover $20 million and excluded that amount from their claim for refund. That estimate was a conservative estimate made by [lawyers and accountants] based on their experience in litigation, collection and valuation.').") (emphasis in original). In 1998, the plaintiffs were still clearly engaged in efforts to determine how best to pursue their legal claims, as demonstrated by the fact that, in 1999, the plaintiffs added forty-one additional third-party defendants to their claim against Mr. Hasson, and in 2000, the plaintiffs added fifteen additional third-party defendants. The plaintiffs did not, in 1998, ascertain with reasonable certainty whether or not reimbursement would be received with regard to any of their claims, as required by Treas. Reg. § 1.165-1(d)(2). Accordingly, the plaintiffs were not entitled to a theft loss deduction in 1998 for any portion of their loss.



B. As of December 31, 2001, the Plaintiffs Had Ascertained With Reasonable Certainty That They Would Not Recover a Portion of the Theft Loss.

In the alternative, the plaintiffs contend that they were entitled to a theft loss deduction in 2001 for a portion of the loss they sustained at the hands of Mr. Hasson. The plaintiffs assert that, as of December 31, 2001, the only claims that still existed were claims for a known, fixed sum or were claims that had been abandoned. Through 2001, the plaintiffs had recovered $1,395,462.64 from Mr. Hasson and his associates, leaving them with a total unrecovered loss of $76,764,946.36. The plaintiffs maintain that, as of the end of 2001, they only had a reasonable prospect of recovering $19,202,201.61 through their remaining claims, 10 as follows:
(1) $97,588.57 from Scott Colton, in his individual capacity and as a trustee of the Scott Colton Trust, the J.A.S. Irrevocable Trust, and the Joseph C. Stein Trust;

(2) $233,325.31 from John Farina, in his individual capacity, as a trustee of the John Farina Trust, and as a representative of Boyes & Farina, P.A.;

(3) $900,000.00 from Suzanne Hopkins;

(4) $170,022.10 from William Stuart Cross, in his individual capacity and as a representative of William Stuart Cross, P.A.;

(5) $3,824,660.00 from litigation in the Bahamas; and

(6) $13,976,605.63 in forfeited funds that were held in the U.S. District Court registry. 11

Therefore, the plaintiffs assert that they were entitled to a theft loss deduction in 2001 of $57,562,744.75. 12

The government asserts that the plaintiffs were not entitled to a theft loss deduction for any portion of their loss in 2001 because there was "no resolution of the claim for reimbursement as the Johnsons continued in their collection efforts for at least another four years." Def.'s Reply at 10. The government contends that, because the plaintiffs could not, in 2001, definitively determine how much they would recover from their pending claims, the plaintiffs were not entitled to take any theft loss deduction in that year. The government asserts that the plain language of Treas. Reg. § 1.165-1(d)(2) supports its position. Treas. Reg. § 1.165-1(d)(2) states that "no portion of the loss with respect to which reimbursement may be received is sustained ... until it can be ascertained with reasonable certainty whether or not such reimbursement will be received." (emphasis added). The government reads the phrase "no portion of the loss" to mean that the regulation requires that a taxpayer refrain from taking any portion of a theft loss deduction until the taxpayer has determined exactly how much of the entire loss the taxpayer will recover. In the case of the plaintiffs, the government contends that Treas. Reg. § 1.165- 1(d)(2) requires that the plaintiffs take a theft loss deduction in 2005, the year in which they knew, with certainty, how much of their loss they would recover.

While, as discussed above, the plaintiffs' reliance on the "reasonable prospect of recovery" standard is not appropriate, the court generally agrees with the plaintiffs that they were entitled to a theft loss deduction for a portion of their loss in 2001. The plaintiffs have demonstrated, and the government does not dispute, that many of the plaintiffs' claims against Mr. Hasson and his associates were resolved by the end of 2001, either through settlement, adjudication, or abandonment, and that the plaintiffs' remaining claims were seeking fixed and identifiable amounts. The government's reading of Treas. Reg. § 1.165- 1(d)(2) is not supported by the examples contained in Treas. Reg. § 1.165-1(d)(2)(ii). Specifically, the following example is particularly relevant to the plaintiffs' case:
If in the year of the casualty or other event a portion of the loss is not covered by a claim of reimbursement with respect to which there is a reasonable prospect of recovery, then such portion of the loss is sustained during the taxable year in which the casualty or other event occurs. For example ... if the taxpayer's automobile is completely destroyed in 1961 as a result of the negligence of another person and there exists a reasonable prospect of recovery on a claim for the full value of the automobile against such person, the taxpayer does not sustain any loss until the taxable year in which the claim is adjudicated or otherwise settled. If the automobile had an adjusted basis of $5,000 and the taxpayer secures a judgment of $4,000 in 1962, $1,000 is deductible for the taxable year 1962. If in 1963 it becomes reasonably certain that only $3,500 can ever be collected on such judgment, $500 is deductible for the taxable year 1963.

Treas. Reg. § 1.165-1(d)(2)(ii) (emphasis added). Under this example, once a taxpayer has secured a judgment, if the taxpayer ascertains with reasonable certainty that he or she will only recover a portion of the amount secured by the judgment, the taxpayer may, at that time, take a theft loss deduction for the portion of the loss he or she will not recover.

The government asserts that the plaintiffs were required by the regulations to wait until 2005 to take a theft loss deduction, because it was not until that time that the total amount the plaintiffs would actually recover was determined. However, contrary to the government's contention, the plaintiffs were not required to wait until the total amount of recovery from every source was established to take a theft loss deduction for a portion of their loss. The above-quoted example from the regulations does not support the government's position. In the example, the taxpayer was able to take a deduction in the year the taxpayer secured a judgment for the amount of the loss not included in the judgment, and was able to take another deduction in a subsequent year once the taxpayer determined, with reasonable certainty, that the entire amount of the judgment would not be collected. The regulation and the example therefore confirm the plaintiffs' contention that once a "portion" of the recovery was established, they were entitled to take a theft loss deduction for the "portion" that they were reasonably certain they would not recover.

The plaintiffs in this case have established with reasonable certainty that portions of their loss would not be recovered. As of the end of 2001, the plaintiffs' remaining claims against Mr. Hasson and his associates were valued, at most, at $39,548,563.32 (the sum of the plaintiffs' claims in the United States and the Bahamas and the value of the bank account in France). After December 31, 2001, the plaintiffs could have potentially received the following:
(1) $97,588.57 from Scott Colton, which was the total amount remaining in Mr. Colton's accounts after the government's seizures;

(2) $233,325.31 from John Farina, which was the difference between the total amount received by Mr. Farina and his law firm from Mr. Hasson and the total amount seized by the government;

(3) $900,000.00 from Suzanne Hopkins, the total amount of the impleader claim filed against her;

(4) $170,022.10 from William Stuart Cross, which was the total amount of funds that Mr. Cross had improperly diverted that the plaintiffs were eligible to receive per the U.S. District Court's order in the Hasson criminal trial;

(5) $3,824,660.00, the total amount of funds held in the Bahamas;

(6) $13,976,605.63, the total amount of funds available to the plaintiffs in the U.S. District Court registry; and

(7) $20,346,361.71, the total amount of funds held in France.

The plaintiffs assert that they never anticipated recovering the funds from the bank account in France, claiming that the United States and France do not have a treaty in place regarding the enforcement of American civil judgments, and that the test for the enforcement of judgments by France is difficult to satisfy. The plaintiffs state that "there was a low likelihood" of ever recovering the funds from France. Pls.' Mot. for Summ. J. at 10. However, the plaintiffs continued to pursue their claim in France, and ultimately, in 2005, recovered $20,346,361.71 from the bank account there. While the plaintiffs might have doubted their ability to enforce their judgment against Mr. Hasson in France, the plaintiffs did not ascertain with reasonable certainty by the end of 2001 that they would not recover the money held there, and the plaintiffs concede that they continued to pursue their claim in France until they ultimately recovered on the judgment in 2005. See Oral Arg. Tr. 26:20-25, Dec. 17, 2007. Accordingly, the value of the bank account in France may not be included in the plaintiffs' theft loss deduction for 2001.

In 2001, both the government's attorneys and the U.S. District Court made a determination that no additional assets had been identified from which the plaintiffs could recover and estimated the maximum total amount the plaintiffs would ever recover to be approximately $40,000,000.00. The U.S. District Court, relying on a motion made by the United States, stated, "[n]o additional assets owned and/or controlled by the defendant John Hasson have been identified or are accessible. Accordingly, the total known assets of defendant John Hasson are insufficient to pay the amount of restitution ordered by this Court." Pls.' Ex. 34 at 4-5.

In light of this undisputed evidence, the plaintiffs had ascertained with reasonable certainty in 2001 that they had no prospect of recovering $37,216,383.04. Accordingly, the plaintiffs were entitled, in 2001, to a theft loss deduction in that amount. Under the above holding, the plaintiffs are entitled to theft loss deductions in subsequent years for the amounts they ultimately did not recover on the claims that were pending as of the end of 2001. The plaintiffs also have remaining claims related to a net operating loss carryback from the 2001 tax year, and from subsequent tax years. The parties shall file a joint status report proposing the next steps for resolving the remaining issues in this portion of the litigation.


CONCLUSION


For all of the foregoing reasons, the plaintiffs' motion for summary judgment is GRANTED-IN-PART and DENIED-IN-PART, and the government's cross-motion for summary judgment is GRANTED-IN-PART and DENIED-IN-PART. The parties shall file a joint status report by Monday, February 4, 2008, as detailed above. In the joint status report, the parties shall also propose the next steps for resolving the remaining issues in Case No. 01-428T.

IT IS SO ORDERED.

1 The court also recently considered the government's motion for summary judgment in Case No. 01-428, which was denied on September 27, 2007. Johnson v. United States, 79 Fed. Cl. 266 (2007) ( "Johnson II "). Case No. 01-428 does not deal with a theft loss deduction, but instead deals with capital gains taxes paid by the plaintiffs on income they contend they did not actually receive. In denying the government's motion, the court held that "if the plaintiffs can establish that Mr. Hasson never sold any gems in 1994, but simply paid the plaintiffs from other funds that they had provided Mr. Hasson (in an effort to conceal and advance his fraudulent scheme), the plaintiffs will be able to establish that they did not clearly realize any accession to wealth and were not subject to tax on the amounts received." Id. at 271. Case No. 01-428 is currently stayed pending resolution of the parties' cross-motions for summary judgment before the court.

2 The plaintiffs invested a total of $83,587,534.00 in gems and jewelry purchased from Mr. Hasson. In 1998, the value of the gems and jewelry in the plaintiffs' possession was $5,427,125.00. Accordingly, the plaintiffs' net loss was $83,587,534.00 less $5,427,125.00, or $78,160,409.00.

3 The following were added as third-party defendants on May 5, 1999: Gem Appraiser's Laboratory, Scott Colton in his individual capacity, Scott Colton as Trustee of the Scott Colton Trust, Scott Colton as Trustee of the J.A.S. Irrevocable Trust, Scott Colton as Trustee of the Irene Lois Robertson Trust, Scott Colton as Trustee of the Joseph C. Stein Trust, Cromwell, Pfaffenberger, Barner, Griffin & Colton, P.A., John Farina in his individual capacity, John Farina as Trustee of the John Farina Trust, Boyes & Farina, P.A., Malham Enterprises, Ltd., Peter Westbrook in his individual capacity, Peter Westbrook as Trustee of the Joseph C. Stein Trust, Heloneti Galera, Heloneti Galera as Trustee of the Peter Westbrook Irrevocable Trust, Treasure Coast Harley-Davidson, Inc., Blake of P.B., Inc., Jack Hasson as Trustee of the Jack Hasson Revocable Trust, Jack Hasson as Trustee of the Blake Hasson Trust, Jack Hasson as Trustee of the Tiffany Hasson Trust, Jack Hasson as Trustee of the Kyle Hasson Trust, Jack Hasson as Trustee of the Kimaree Hasson Trust, Jack Hasson as Trustee of the Ryan Hasson Trust, Blake Hasson, Tiffany Hasson, Kyle Hasson, John Hasson, Kimaree Hasson, Ryan Hasson, Diamond H Ranch, Inc., Irene Lois Robertson, James Speiser, Diamond Emerald Isle, Inc., Chianti's PBG, Inc., Harry Speiser, Clifford Sloan, Robert Hinton, Sean O'Neill, Suzanne Hopkins, Mark Russell Hopkins, Sally Ann Hopkins, and Gem Appraiser's Laboratory. The individual claims against each of these parties will be discussed in further detail below.

4 Of the £17,327.15 received, £9,570 was paid to the plaintiffs' attorneys and £7,757.15 was remitted to the plaintiffs. The plaintiffs received $11,405.34, which represents an exchange rate of £1 = $1.47. At the same conversion rate, £17,327.15 = $25,476.16.

5 The following were added as third-party defendants on April 28, 2000: Pascal Robertson, Pascal & Irene Robertson Trust, Barbara Hasson, Sharon Eaton, Sondra Pillion, Avraham Tal, Luther Jeffries, Reading Management, Atlantic Recreation, Norbert Gartmann, Aaron Patrick, Mindy Romer, William Stuart Cross, William Stuart Cross, P.A., and Doumar, Allsworth, Curtis, Cross, Laystrom, Perloff, Voight, Wachs & MacIver.

7 The plaintiffs filed a complaint on July 25, 2001, Case No. 01-428, seeking a tax refund in the amount of $613,669.00 for the tax year 1994, a tax refund in the amount of $121,635.00 for the tax year 1995, and a capital loss carryforward as of the end of 1995 in the amount of $191,066.00, all in an effort to recover taxes paid by the plaintiffs as a result of the capital gains they reported on their 1994 tax return from the alleged gem sales that did not actually occur. The government filed a motion for summary judgment, which the court denied on September 27, 2007 in Johnson II, as discussed supra.

8 This is equal to the difference between $57,562,744.75 and $20,346,361.71, which was the amount held in the Paris account.

9 The court notes that, despite the government's assertions to the contrary, the IRC and Treasury Regulations do not preclude a taxpayer from taking deductions for portions of a theft loss in different years. See, e.g., Treas. Reg. § 1.165-1(d)(2)(ii) (as discussed infra).

10 The plaintiffs ultimately recovered $17,514,133.39 as a result of these claims.

11 As of 2001, the plaintiffs also had pending claims against numerous other individuals. The plaintiffs assert that, although not dismissed until 2003, their claims against Mr. Hasson's children and their trusts were resolved by the end of 2001, as judgments had been entered in the impleader claims against the trusts at that time, and no other assets remained to be collected. The plaintiffs also assert that, although not dismissed until 2002, their claim against James Speiser was worthless after 2001 because they had received the proceeds from the sale of Mr. Speiser's sole assets in 2001. Furthermore, the plaintiffs contend that their claims against Clifford Sloan, Robert Hinton, and Barbara Hasson, although not dismissed until 2002 and 2003, held no value because Mr. Sloan, Mr. Hinton, and Ms. Hasson had no assets that could be collected by the plaintiffs. Finally, the plaintiffs maintain that their claim against Mindy Romer was brought solely to assert a superior claim to the assets Ms. Romer was seeking in post-divorce proceedings from Mr. Hasson and did not seek the recovery of any funds. Accordingly, the plaintiffs contend that none of the above claims offered any prospect of recovery to the plaintiffs after 2001. The court agrees with the plaintiffs.

12 In 2001, the plaintiffs also had a pending claim in France seeking $20,346,361.71 in funds held at the Paris Discount Bank. The plaintiffs contend that enforcement of their judgment against Mr. Hasson in France would have been nearly impossible, so they argue that, in 2001, they had no prospect of recovering the funds in France.

Interpreting a Treaty

When construing a treaty, "[t]he clear import of treaty language controls unless 'application of the words of the treaty according to their obvious meaning effects a result inconsistent with the intent or expectations of its signatories.'" Sumitomo Shoji America, Inc. v. Avagliano, 457 U.S. 176, 180 (1982) (quoting Maximov v. United States, 373 U.S. 49, 54 (1963)); see also Xerox Corp. v. United States, 41 F.3d 647, 652 (Fed. Cir. 1994) (citing United States v. Stuart, 489 U.S. 353, 365-66 (1989)). Moreover, effect must be given to the intent of both signatories. Xerox, 41 F.3d at 656 (citing Valentine v. United States, 299 U.S. 5, 11 (1936)). Thus, when the language of a treaty provision "only imperfectly manifests its purpose," we are required to give effect to its underlying purpose. Great-West Life Assur. Co. v. United States, 678 F.2d 180, 183 (Ct. Cl. 1982) (citing In re Ross, 140 U.S. 453, 475 (1891)); accord Xerox, 41 F.3d at 652 ("'[T]he ultimate question remains what was intended when the language actually employed ... was chosen, imperfect as that language may be.'" (second alteration in original) (quoting Great-West Life, 678 F.2d at 188)). To this end, we must "examine not only the language, but the entire context of agreement." Great-West Life, 678 F.2d at 183.




National Westminster Bank, PLC, Plaintiff-Appellee v. United States, Defendant-Appellant.

U.S. Court of Appeals, Federal Circuit; 2007-5028, January 15, 2008.

Affirming Federal Claims decisions 99-2 USTC ¶50,654, 2004-1 USTC ¶50,105 and 2006-1 USTC ¶50,107.

[ Code Sec. 882]

Foreign corporations: Banking institutions: U.S. branch of U.K. bank: Interest expense deduction: Tax treaties: U.S.-U.K.: Determination of capital: Branch books and records: Separately incorporated U.S. bank. --

The IRS's application of Reg. §1.882-5 or the proposed corporate yardstick method to determine the interest expense deduction when calculating the taxable income of the United States (U.S.) branch of a United Kingdom (U.K.) banking corporation was incompatible with Article 7 (Business Profits) of the 1975 income tax treaty between the United States and the United Kingdom.





GAJARSA, Circuit Judge: This is a tax refund action brought by taxpayer National Westminster Bank PLC ("NatWest"), a United Kingdom corporation, for the tax years 1981-1987. The Government appeals from the judgment of the United States Court of Federal Claims ("trial court" or "court") that NatWest is entitled to a refund of $65,723,053 plus interest for the tax years at issue. Central to the trial court's judgment is the issue of whether the application of Treasury Regulation § 1.882-5 is consistent with the United States' obligations under Article 7 of the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, U.S.-U.K., Dec. 31, 1975, 31 U.S.T. 5668 (the "1975 Treaty"). For the reasons stated below, we affirm.




BACKGROUND


The 1975 Treaty, which governs this dispute, was initially negotiated and signed by the United States and the United Kingdom in 1975. 1 31 U.S.T. at 5668. As may be surmised from its title, the 1975 Treaty states that its purpose is "the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains." Id. at 5670. Of particular import to this case, Article 7 governs the taxing authority of the signatories with respect to the business profits of an enterprise operating in both countries. Id. at 5675-76.

NatWest is a United Kingdom corporation engaged in international banking activities. For the tax years 1981-1987, NatWest conducted wholesale banking operations in the United States through six permanently established branch locations (collectively "the U.S. Branch"). On its United States federal income tax returns for the years at issue, NatWest claimed deductions for accrued interest expenses as recorded on the books of the U.S. Branch. On audit, the Internal Revenue Service ("IRS") recomputed the interest expense deduction according to the formula set forth in Treasury Regulation § 1.882-5. The formula excludes consideration of interbranch transactions for the determination of assets, liabilities, and interest expenses. Treas. Reg. § 1.882-5(a)(5) (1981). 2 The formula also imputes or estimates the amount of capital held by the U.S. Branch based on either a fixed ratio or the ratio of NatWest's average total worldwide liabilities to average total worldwide assets. Id. § 1.882-5(b)(2). Pursuant to the IRS's recalculation of the interest expense deduction, NatWest's taxable income was increased by approximately $155 million for the years at issue.

NatWest concluded that the increased income would result in an additional tax liability of at least $37 million in the United States for which a foreign tax credit would not be available in the United Kingdom. NatWest thus requested, under Article 24 of the 1975 Treaty, that the United Kingdom enter competent authority proceedings with the United States to resolve the double taxation issue. Pursuant to the competent authority proceedings, the United Kingdom presented NatWest with a settlement offer, which NatWest concluded did not sufficiently address its double taxation concerns. NatWest rejected the settlement offer, paid the additional taxes, and filed suit in 1995, claiming that the IRS's application of § 1.882-5 to an international bank such as NatWest violated the terms of the 1975 Treaty.




The 1975 Treaty


After the initial signing of the 1975 Treaty on December 31, 1975, certain provisions not at issue here were amended by three protocols signed between August 1976 and March 1979. 31 U.S.T. at 5668-69. The 1975 Treaty took effect on April 25, 1980. Id. at 5668. Article 7, entitled Business Profits, states as follows:


(1) The business profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the business profits of the enterprise may be taxed in that other State but only so much of them as is attributable to that permanent establishment.



(2) Subject to the provisions of paragraph (3), where an enterprise carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.



(3) In the determination of the profits of the permanent establishment, there shall be allowed as deductions those expenses which are incurred for the purposes of the permanent establishment, including a reasonable allocation of executive and general administrative expenses, research and development expenses, interest, and other expenses incurred for the purposes of the enterprise as a whole (or the part thereof which includes the permanent establishment), whether incurred in the State in which the permanent establishment is situated or elsewhere.


Id. at 5675-76 (emphasis added). Relating the terms of the 1975 Treaty to the present appeal, "a Contracting State" is the United Kingdom, "the other Contracting State" is the United States, "an enterprise" is NatWest, and "a permanent establishment" is the U.S. Branch. The emphasized portion of paragraph 2 sets forth the "separate enterprise principle" and frames the dispute in this case.




Treasury Regulation § 1.882-5


Treasury Regulation § 1.882-5 was proposed on February 27, 1980, adopted on December 30, 1980, and took effect on February 6, 1981. 46 Fed. Reg. 1681 (Jan. 7, 1981). As described by the Government, the regulation sets forth a formula for apportioning the interest expense of foreign corporations. The formula applies to all foreign corporations with permanent establishments in the United States and makes no exception for banks or other financial institutions.

At the outset, "[i]nter-branch loans, assets, liabilities, and interest expense amounts resulting from loan or credit transactions of any type between the separate offices or branches of the same foreign corporation are disregarded." § 1.882-5(a)(5). The deductible interest expense is then calculated according to a three-step formula. In step one, the permanent establishment's U.S.-connected assets --"total value of all assets of the corporation that generate, have generated, or could reasonably have been or be expected to generate income, gain, or loss effectively connected with the conduct of a trade or business in the United States" --are determined according to the books of the permanent establishment, exclusive of the intracorporate transactions disregarded under § 1.882-5(a)(5). § 1.882-5(b)(1). In step two, the permanent establishment's U.S.-connected liabilities are estimated either by multiplying the U.S.-connected assets by a capital ratio of 0.95 or by the ratio of the average total amount of corporate worldwide liabilities to the average total value of corporate worldwide assets. § 1.882-5(b)(2). In step three, the interest deduction is computed under either the "branch book/dollar pool method" or the "separate currency pools method." § 1.882-5(b)(3). The IRS used the branch book/dollar pool method to audit the U.S. Branch. Under this method, the permanent establishment is allowed an interest deduction on the larger of the U.S.-connected liabilities or the average total amount of liabilities, again exclusive of transactions disregarded under § 1.882-5(a)(5), shown on the books of the permanent establishment. § 1.882-5(b)(3)(i)(A), (B). The branch book/dollar pool method further specifies which interest rate(s) will be used to determine the total amount of the interest expense deduction. Id.




Proceedings in the Court of Federal Claims


The parties agree, both before the trial court and on appeal, that the 1975 Treaty requires that the U.S. Branch be taxed as if it were a separate enterprise from NatWest --the "separate enterprise principle." The parties differ with respect to the manner in which the separate enterprise principle treats (1) interest expenses on intracorporate loans (i.e., interbranch loans between the U.S. Branch and NatWest's other branches) and (2) the allocation of capital to the U.S. Branch. The trial court decided these issues in three separate summary judgment opinions and orders.

On cross-motions for partial summary judgment, the trial court concluded that the application of § 1.882-5 to a bank such as NatWest violated the terms of the 1975 Treaty. Nat'l Westminster Bank, PLC v. United States, 44 Fed. Cl. 120, 131 (1999) (Turner, J.) ("NatWest I"). During briefing, the United Kingdom submitted an amicus brief supporting the NatWest position and advocating the result arrived at by the trial court. See Br. Amicus Curiae of the U.K. 2-3 (hereinafter "U.K. Amicus Br."). Specifically, the court found that the § 1.882-5's exclusion of all interbranch transactions from the determination of the allowable interest expense violated the separate enterprise principle of the 1975 Treaty. NatWest I, 44 Fed. Cl. at 130. The court concluded that the separate enterprise principle required that the determination of the profits of the U.S. Branch be based on the books of account as the U.S. Branch would maintain them if it "were a distinct and separate enterprise dealing wholly independently with the remainder of the foreign corporation," without reference to the worldwide information of NatWest. Id. at 128. The books of account, however, "are subject to adjustment as may be necessary for imputation of adequate capital to the branch and to insure use of market rates in computing interest expense." Id. Subsequent to the issuance of the NatWest I opinion, Judge Turner retired and the case was transferred to Judge Firestone.

The parties then filed cross-motions for partial summary judgment regarding the manner in which the IRS should determine or estimate the amount of "adequate" capital held by the U.S. Branch. Nat'l Westminster Bank, PLC v. United States, 58 Fed. Cl. 491, 492 (2003) (Firestone, J.) ("NatWest II"). The Government argued that it was permitted to attribute capital to the U.S. Branch based on regulatory and marketplace capital requirements that applied to U.S. bank corporations --the "corporate yardstick." Id. at 495-96. NatWest argued that the 1975 Treaty did not permit the imputation of capital to the U.S. Branch based on capital requirements to which it was not subject. Id. at 496. The court ruled in NatWest's favor, concluding that the separate enterprise principle did not require or allow "the government to adjust the books and records of the branch to reflect 'hypothetical' infusions of capital based upon banking and market requirements that do not apply to the branch." Id. at 498. Rather, the court adopted NatWest's position that only capital actually allotted to the U.S. Branch is relevant to a determination of the U.S. Branch's tax liability and that the IRS may only allocate additional capital to the extent that the books of the U.S. Branch do not properly record allotted capital. Id. at 497-98.

After the decision in NatWest II, the U.S. moved to reopen discovery regarding the amount of capital that the books of NatWest's home office show as being allotted to the U.S. branch. The government put forth a new theory that capital held by other branches should be imputed to the U.S. Branch, but the court found that the Government waived this theory by failing to present it during the briefing stage of NatWest II. Nat'l Westminster Bank, PLC v. United States, No. 95-758T (Fed. Cl. Jan. 18, 2005) (hereinafter "Order Denying Reconsideration").

In the third summary judgment opinion, the trial court considered whether uncontroverted facts supported NatWest's assertion that, consistent with the holdings of NatWest I and NatWest II, the U.S. Branch was entitled to a refund of $65,808,076 plus interest. Nat'l Westminster Bank PLC v. United States, 69 Fed. Cl. 128, 131 (2005) ("NatWest III"). The court partially granted NatWest's motion for summary judgment and reached the following conclusions: (1) the books and records of the U.S. Branch were accurately maintained; (2) the six branch locations of the U.S. Branch constituted a single "permanent establishment" under the 1975 Treaty; (3) the U.S. Branch did not claim deductions based on interest expenses paid "on allotted capital or amounts to be treated as allotted capital"; (4) the U.S. Branch paid and received arm's-length interest rates on money market transactions; and (5) issues of material fact required a trial on whether the U.S. Branch paid and received arm's-length interest rates on clearing account transactions. Id. at 139-41, 144, 146-48. The parties then settled the remaining issue of interest rates on the clearing account transactions, and the court entered final judgment in NatWest's favor. The Government timely appealed to this court. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(3).




DISCUSSION


The Government presents three issues on appeal. First, the Government appeals the ruling of NatWest I and argues that the application of Treasury Regulation § 1.882-5 to NatWest is consistent with the expectations of the United States and the United Kingdom at the time the 1975 Treaty was negotiated, signed, and entered into force. Second, the Government appeals the ruling of NatWest II and submits that as an alternative to § 1.882-5, the proposed corporate yardstick method is a permissible means for imputing capital to the U.S. Branch. Last, the Government appeals the ruling of the Order Denying Reconsideration and requests that it be allowed to take discovery of NatWest's home office books to determine the capital actually allotted to the U.S. Branch. Should we uphold NatWest I, NatWest II, and the Order Denying Reconsideration, the Government does not appeal the trial court's ruling in NatWest III.

A grant of summary judgment by the Court of Federal Claims is reviewed de novo, drawing justifiable factual inferences in favor of the party opposing the judgment. SmithKline Beecham Corp. v. Apotex Corp., 403 F.3d 1331, 1337 (Fed. Cir. 2005); Winstar Corp. v. United States, 64 F.3d 1531, 1539 (Fed. Cir. 1995) (en banc).

When construing a treaty, "[t]he clear import of treaty language controls unless 'application of the words of the treaty according to their obvious meaning effects a result inconsistent with the intent or expectations of its signatories.'" Sumitomo Shoji America, Inc. v. Avagliano, 457 U.S. 176, 180 (1982) (quoting Maximov v. United States, 373 U.S. 49, 54 (1963)); see also Xerox Corp. v. United States, 41 F.3d 647, 652 (Fed. Cir. 1994) (citing United States v. Stuart, 489 U.S. 353, 365-66 (1989)). Moreover, effect must be given to the intent of both signatories. Xerox, 41 F.3d at 656 (citing Valentine v. United States, 299 U.S. 5, 11 (1936)). Thus, when the language of a treaty provision "only imperfectly manifests its purpose," we are required to give effect to its underlying purpose. Great-West Life Assur. Co. v. United States, 678 F.2d 180, 183 (Ct. Cl. 1982) (citing In re Ross, 140 U.S. 453, 475 (1891)); accord Xerox, 41 F.3d at 652 ("'[T]he ultimate question remains what was intended when the language actually employed ... was chosen, imperfect as that language may be.'" (second alteration in original) (quoting Great-West Life, 678 F.2d at 188)). To this end, we must "examine not only the language, but the entire context of agreement." Great-West Life, 678 F.2d at 183.

The "entire context" of the 1975 Treaty is informed by, and is based on, the Office of Economic Cooperation and Development's ("OECD") 1963 Draft Double Taxation Convention on Income and Capital ("1963 Draft Convention"). See NatWest I, 44 Fed. Cl. at 125 n.7; S. Exec. Rep. No. 95-18, at 15 (1978), as reprinted in 1980-1 C.B. 411, 427; Technical Explanation of the Convention between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains Signed at London, on December 31, 1975, as Amended by the Notes Exchanged at London on April 13, 1976, the Protocol Signed at London on August 26, 1976, and the Second Protocol signed at London on March 31, 1977, submitted to the Senate Foreign Relations Committee at hearings held on July 19-20, 1977, reprinted in 1980-1 C.B. 455, 473-74 (hereinafter "Technical Explanation"). As published, the model Articles of the 1963 Draft Convention issued as Annex I to a report of introductory and explanatory material. 1963 Draft Convention 5. Annex II consists of Commentaries on the Articles of the Draft Convention ("1963 Commentaries") that are "intended to be of great assistance in the application of the conventions and, in particular, in the settlement of eventual disputes." 1963 Draft Convention 18; see also NatWest I, 44 Fed. Cl. at 125. The Senate Report and the Technical Explanation both state specifically that Article 7 of the 1975 Treaty is based on or substantially similar to Article 7 of the 1963 Model Convention. See 1980-1 C.B. at 417, 461.

In NatWest I, the trial court concluded that the application of § 1.882-5 to the U.S. Branch of NatWest violated the separate enterprise principle of the 1975 Treaty. 44 Fed. Cl. at 131. Focusing on paragraphs 2 and 3 of Article 7, the trial court concluded that the plain language of the 1975 Treaty required that for a determination of the taxable income of the U.S. Branch,


the U.S. Branch is to be regarded as an independent, separate entity dealing at arm's length with other units of NatWest as if they were wholly unrelated, except that the U.S. Branch may deduct, in addition to its "own" expenses, a reasonable allocation of home office expense. Words such as "distinct" and "separate" and the phrase "dealing wholly independently" (emphasis added) would appear to permit no other interpretation.


Id. at 124. The trial court also analyzed the 1963 Commentaries, which describe "'payments of interest made by different parts of a financial enterprise (e.g. a bank) to each other on advances, etc., (as distinct from capital allotted to them),'" as "'narrowly related to the ordinary business of such enterprises.'" NatWest I, 44 Fed. Cl. at 127 (quoting 1963 Draft Convention 83-84, ¶ 15). Thus because § 1.882-5 expressly disregards payments of interest on these types of interbranch transactions, the court concluded that § 1.882-5 was inconsistent with the Treaty as applied to the U.S. Branch of NatWest. 3 NatWest I, 44 Fed. Cl. at 130. The court further noted that if the U.S. Branch was a subsidiary of NatWest separately incorporated in the United States, the interest expense on transactions between the U.S. Branch and foreign NatWest branches would be subject to adjustment but would not be disregarded. Id. at 130 n.11; see also Treas. Reg. § 1.482-2(a) (1984).

On appeal, the Government criticizes the trial court's conclusion in NatWest I on the following grounds: (1) the court ignored the 1975 Treaty's plain language; (2) the court misapplied the 1963 Commentaries that support the Government's position; (3) the court ignored the parties' shared expectations; and (4) the court did not accord proper deference to the "Treasury's consistent determination that the regulation is consistent with Article 7."

We agree with the trial court's analysis of the plain language of the 1975 Treaty. On a fundamental level, we do not read the separate enterprise language of Article 7, ¶ 2 --requiring that the U.S. Branch's business profits be determined as "if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment" --as permitting transactions between the permanent establishment and the enterprise to be disregarded. As did the trial court, we find the comparison to a separately incorporated U.S. subsidiary instructive. In that situation, intracorporate transactions recorded on the subsidiary's books are not disregarded, but are adjusted to reflect arm's length terms. See, e.g., Treas. Reg. § 1.482-2(a)(2) (1984) (defining "arm's length interest rate" as "the rate of interest which was charged, or would have been charged at the time the indebtedness arose, in independent transactions with or between unrelated parties under similar circumstances"). The plain language of the 1975 Treaty thus indicates that adjustment of the terms of intracorporate transactions is required and that the disregard of these transactions is prohibited.

To the extent that the Government submits that the "reasonable allocation" language of Article 7, ¶ 3 is relevant to whether § 1.882-5 is permissible under the 1975 Treaty, the Government misreads the treaty. With regard to allowable deductions for a determination of the profits of a permanent establishment, the 1963 Model Convention, which differs slightly from the 1975 Treaty, reads as follows:


In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere.


1963 Draft Convention 46. The 1975 Treaty modifies this language by including a nonexclusive list of executive and general administrative expenses that are incurred on behalf of the enterprise as a whole (e.g., NatWest's worldwide enterprise including the U.S. Branch) and that may be partially allocated to the permanent establishment (e.g., NatWest's U.S. Branch).


In the determination of the profits of a permanent establishment, there shall be allowed as deductions those expenses which are incurred for the purposes of the permanent establishment, including a reasonable allocation of executive and general administrative expenses, research and development expenses, interest and other expenses incurred for the purposes of the enterprise as a whole (or the part thereof which includes the permanent establishment), whether incurred in the State in which the permanent establishment is situated or elsewhere.


31 U.S.T. at 5675-76 (emphasis added). Importantly, the "reasonable allocation" language refers to expenses, such as interest, that are "incurred for the purposes of the enterprise as a whole." Furthermore, a comparison of the Treaty to the 1963 Model Convention indicates that no reasonable allocation is necessary for expenses, such as interest, that are directly "incurred for the purposes of the permanent establishment."

As previously noted, the 1963 Draft Convention was published as part of a document that included the 1963 Commentaries, the purpose of which is "'to illustrate or interpret the provisions'" and to "'be of great assistance ... in the settlement of eventual disputes.'" NatWest I, 44 Fed. Cl. at 125 (quoting 1963 Draft Convention). Accordingly, the 1963 Draft Convention states that Article 7 "settles the question of the expenses which must be allowed as deductions in computing the profits of the permanent establishment." 1963 Draft Convention 12. Among these expenses that must be allowed are interbranch payments of interest "on advances, etc., (as distinct from capital allotted to [the permanent establishment])." 1963 Draft Convention 83-84, ¶ 15. This commentary indicates that § 1.882-5's disregard of interbranch transactions is inconsistent with the 1963 Draft Convention and the 1975 Treaty as modeled thereon.

On the separate enterprise principle specifically, the 1963 Commentary to Article 7, ¶ 2 states, "[T]he profits to be attributed to a permanent establishment are those which that permanent establishment would have made if, instead of dealing with its head office, it had been dealing with an entirely separate enterprise under conditions and at prices prevailing in the ordinary market." 1963 Draft Convention 82, ¶ 10. To determine these profits, "it is always necessary to start with the real facts of the situation as they appear from [t]he business records of the permanent establishment and to adjust as may be shown to be necessary the profit figures which those facts produce." Id. Exceptions to this rule, however, may exist where no separate accounts exist. Id. (allowing for formulaic allocation in the absence of separate accounts). The 1963 Commentary goes on to explain that adjustment to the accounts of the permanent establishment may be necessary in situations such as when the transactions between a permanent establishment and a head office do not reflect market pricing (i.e., market interest rates for financial enterprises). Id. at ¶ 11.

Consistent with the 1963 Commentary to Article 7, ¶ 2, the commentary to Article 7, ¶ 3 focuses on whether an expense is incurred by a permanent establishment, rather than whether the expense is paid to a foreign branch of the same worldwide enterprise. "[F]or the sake of removing doubts," the 1963 Commentary states that Article 7, ¶ 3 "specifically recognizes that in calculating the profits of a permanent establishment allowance is to be made for expenses, wherever incurred, that were incurred for the purposes of the permanent establishment." Id. at 83, ¶ 13. The commentary explicitly includes as a deductible expense "payments of interest made by different parts of a financial enterprise (e.g. a bank) to each other on advances, etc., (as distinct from capital allotted to them), in view of the fact that making and receiving advances is narrowly related to the ordinary business of such enterprises." Id. at 83-84, ¶ 15.

The Government argues that the use of formulaic allocations for taxing purposes by both parties during the period between the signing of the 1975 Treaty and its entry into force is evidence that the parties did not intend for the Treaty to prohibit the use of allocation formulas. The Government's position is undermined in two important respects. First, in 1978 the United Kingdom abandoned its formula then in use after concluding that the formula was inconsistent with the separate enterprise principle. Second, the interest expense allocation formula used by the United States was significantly different than that prescribed by § 1.882-5.

The record demonstrates that during the negotiation period of the 1975 Treaty, the United Kingdom did employ a formulaic allocation when determining the interest expense deduction of a U.K. branch of a foreign (e.g., incorporated in the United States) bank. The Government's reliance on this use in furtherance of its appeal is misplaced. Referred to in the record as the "Price Waterhouse formula" ("PW formula"), the United Kingdom used the ratio of the bank's worldwide total free capital to total liabilities and compared the liabilities of the U.K. branch to the bank's total liabilities to allocate free capital to the U.K. branch for taxation purposes. NatWest II, 58 Fed. Cl. at 505-06. If the U.K. branch's allocated free capital was less than the net balance owed to the bank's head office, a formula was then used to calculate the interest rate on the remainder of the net balance (less an amount equal to allocated capital) that would be used to determine the amount of the deduction. Unlike § 1.882-5, the PW formula does not disregard transactions simply because they occurred between branches of the same worldwide enterprise. In addition, the United Kingdom abandoned use of the PW formula in 1978 after determining that the formulaic capital allocation violated the separate enterprise principle under the U.S.-U.K. treaty that was in effect before the 1975 Treaty entered into force in 1980. NatWest II, 58 Fed. Cl. at 505-06 (citing Counsel's Opinion (Dec. 7, 1978)). The separate enterprise language of that earlier treaty was nearly identical to the language of the 1975 Treaty, 4 and the United Kingdom continued to maintain that the PW formula was equally violative of the supplanting language in the 1975 Treaty. See Inland Revenue, Banking Manual app. 9A, ¶ 3 (1994). This contemporaneous conduct of the United Kingdom supports the position taken in its amicus brief filed with the trial court --the United Kingdom has never interpreted the provisions of the 1975 Treaty as allowing a taxing authority to disregard interbranch transactions when computing the interest expense properly deductible by a permanent establishment. U.K. Amicus Br. 38-39; Letter from I.N. Hunter, Inland Revenue, to Donald E. Bergherm Jr., Assistant Commissioner (International), Internal Revenue Service (March 13, 1990) (Re: Request for Competent Authority Consideration Dated July 27, 1989).

Nor is the Government's position supported by its own conduct contemporaneous to the negotiations of the 1975 Treaty. The Government points to Revenue Ruling 78-423, 1978-2 C.B. 194 (concluding that the interest expense apportionment formulas of Treasury Regulation § 1.861-8 (1977) were permissible in view of the Business Profits article of the U.S.-Japan treaty, which was also based on 1963 OECD Model Convention), as supporting its argument that Treasury's consistent interpretation of § 1.882-5 is informative of the United States' intent as a signatory to the 1975 Treaty. This argument, however, overlooks the key difference between the allocation formula of § 1.861-8 and the formula of § 1.882-5 --namely, that § 1.861-8 does not explicitly disregard interbranch transactions when determining the interest expense deductible by a permanent establishment. Treas. Reg. § 1.861-8(e)(2)(v), (vi) (1977) (apportioning appropriate amount of worldwide interest expense to permanent establishment). In addition, § 1.861-8 expressly stated that if treaty provisions apply to the determination of taxable income, the treaty takes precedence over the regulation. 5 Treas. Reg. § 1.861-8(f)(1)(iv) (1977).

The Government submits that its unwavering, long-held position is to be accorded significant deference. The Government correctly notes that "[a]lthough not conclusive, the meaning attributed to treaty provisions by the Government agencies charged with their negotiation and enforcement is entitled to great weight." Sumitomo, 457 U.S. at 184-85 (according great deference to agency's position where treaty's signatories, neither of which were parties to the lawsuit, agreed as to interpretation). Courts nevertheless "interpret treaties for themselves." Kolovrat v. Oregon, 366 U.S. 187, 194 (1961). Moreover, because we are to interpret treaties so as to give effect to the intent of both signatories, Xerox, 41 F.3d at 656, an agency's position merits less deference "where an agency and another country disagree on the meaning of a treaty," see Iceland Steamship Co., Eimskip v. U.S. Dep't of the Army, 201 F.3d 451, 458 (D.C. Cir. 2000). Finally, this court, when considering different provisions of the 1975 Treaty, has declined to defer to Treasury's contemporaneous interpretation where it conflicted with the contemporaneous intent of the Senate. Xerox, 41 F.3d at 653-57 (rejecting agency's interpretation that was published during the ratification process and reasserted at trial).

The Government is correct to assert that it has unwaveringly interpreted § 1.882-5 as being consistent with the 1975 Treaty and other similar treaties based on the 1963 Draft Convention. See, e.g., Rev. Rul. 89-115, 1989-2 C.B. 130-31 ( § 1.882-5 consistent with 1975 Treaty); Rev. Rul. 85-7, 1985-1 C.B. 188 ( § 1.882-5 consistent with U.S.-Japan treaty). Indeed, in a report issued in 1984, the OECD itself acknowledged that the United States' interpretation of Article 7 of the 1963 Draft Convention 6 allowed for the application of § 1.882-5 to international financial institutions. Comm. on Fiscal Affairs, OECD, Transfer Pricing and Multinational Enterprises 59 (1984) (hereinafter "1984 OECD Report"). The 1984 OECD Report is, however, the earliest indication in the record of the Treasury's belief in the consistency between § 1.882-5 and the 1975 Treaty. Given the nine-year gap between the signing of the 1975 Treaty and the issuance of the 1984 OECD Report (and the four-year gap between the implementation of the 1975 Treaty and the issuance of the 1984 Report), the consistent position of the Treasury as of 1984 can hardly be read as dispositive of the issue of the intent of the United States and the United Kingdom in 1975 when the Treaty was signed --especially when considering that § 1.882-5 was not even proposed until February 27, 1980. Furthermore, to the extent that the 1984 OECD Report establishes that the United States had taken the position that § 1.882-5 is consistent with the 1975 Treaty, the report establishes that of the 24 OECD members (including the United Kingdom), the United States and Japan were the only two that interpreted the 1963 Draft Convention in this fashion. 1984 OECD Report 56-59. Thus, even if the United States' interpretation of the 1963 Draft Convention, and thereby the 1975 Treaty, can be established as of the publication date of the 1984 OECD Report, the United Kingdom's contrary interpretation is established as of the same date.

The record, therefore, contains no evidence prior to the 1984 OECD report that either party understood the separate enterprise principle as allowing a method of determining the interest expense of the U.S. Branch that disregards interbranch transactions. The predecessor to this court, however, did consider post-ratification conduct of the parties, "[i]n an appropriate case," to be relevant to the interpretation of a treaty's terms. Great-West Life, 678 F.2d at 189. In Great-West Life, the Court of Claims found that the government's proffered interpretation at trial was consistent with the legislative history of the treaty at issue, the "almost contemporaneous" subsequent legislative action, and the negotiation of later signed treaties. Id. at 188-89. It was this consistency that lent interpretive weight to the government's post ratification conduct. Id. With respect to the 1975 Treaty, the United States' conduct after the adoption of § 1.882-5 is internally consistent as of the publication of the 1984 OECD Report, but the Government fails to adequately support its contention that this conduct is consistent with the expectations of the United States and the United Kingdom when the 1975 Treaty was signed. The record evidence of the United States' post-ratification conduct seems even less relevant in view of the signatories' contemporaneous acknowledgment that the Treaty is based on the 1963 Model Convention, the commentary to which explicitly authorizes deductions for interest expenses incurred on interbranch advances.

In sum, we find that the plain language of the 1975 Treaty --the separate enterprise principle --mandates that expenses incurred for the benefit of the U.S. Branch be deductible, including interest expenses paid to foreign branches of NatWest. Our reading of the plain language finds direct support in the 1963 Commentary and the contemporaneous understanding of the United Kingdom. Moreover, there is very little evidence that the contemporaneous understanding of the United States differed in any way from that of the United Kingdom. Lastly, the Government's current interpretation of the 1975 Treaty is entitled to minimal deference where it contravenes the treaty's language and negotiation history, as well as the contemporaneous expectations of the United Kingdom. For these reasons, we conclude that Treasury Regulation § 1.882-5 is inconsistent with the 1975 Treaty as applied to a permanent establishment of an international financial enterprise, e.g., the U.S. Branch of NatWest during the tax years at issue.

After rejecting the application of § 1.882-5 to the U.S. Branch in NatWest I, the court considered in NatWest II the method by which the books of the U.S. Branch should be adjusted for the "imputation of adequate capital to the branch and to insure use of market rates in computing interest expenses." NatWest I, 44 Fed. Cl. at 128; NatWest II, 58 Fed. Cl. at 494. The Government argued that the separate enterprise principle required the U.S. Branch to be taxed as if it were a separately incorporated institution and that the U.S. Branch should be deemed to hold an amount of interest-free capital equal to that required of similarly sized U.S. banks (6.996%, as compared to 5.668% for the largest U.S. banks) --the corporate yardstick. NatWest II, 58 Fed. Cl. at 495-96. Conversely, NatWest argued that the imputation of capital on any basis other than an as-necessary adjustment of the U.S. Branch's books to reflect actually allotted capital was improper under the 1975 Treaty. Id. at 496.

At issue is whether the separate enterprise principle was intended by the parties to require a permanent establishment to be taxed as a separately incorporated institution or to be taxed according to the reality of its situation and accounts as adjusted to reflect market pricing in its dealings with the home office. Id. at 497. The trial court adopted NatWest's position and concluded that "'separate and distinct' does not mean the branch should be treated as if it were 'separately-incorporated,' but instead 'separate and distinct,' means separate and distinct from the rest of the bank of which it is a part." Id. The court thus held that capital may not be allocated under any formulaic approach, but rather, the capital held by a branch must be determined according to the books of the branch as may be adjusted to accurately characterize transactions and ensure the use of arm's length rates. Id. at 497-98. In support of its conclusion, the trial court noted that the capital determination method proffered by NatWest was consistent with the historic method used by the United Kingdom, as set forth in Inland Revenue, Banking Manual (1994). Id. at 506-07.

On appeal, the Government maintains that the separate enterprise principle allows the IRS to tax the U.S. Branch as if it were subject to the same regulatory and market capital requirements as a separately incorporated U.S. subsidiary. As before, our analysis begins with the language of the 1975 Treaty as informed by the 1963 Draft Convention and the expectations of the parties.

Turning again to the separate enterprise principle set forth in Article 7, ¶ 2,


there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.


31 U.S.T. at 5675. Under this language, the Government's position seems to focus on the "dealing wholly independently with" phrase as indicating that for tax purposes, the U.S. Branch should be taxed as if it possesses enough interest free capital to support its own operations, rather than rely on the capital of the worldwide NatWest enterprise. Conversely, the "same or similar conditions" language seems to support NatWest's position that the U.S. Branch should be taxed in a manner consistent with the actual conditions of its operation --a branch with operations that are funded with little or no interest free capital.

To the extent the parties' conflicting positions evidence ambiguity in the 1975 Treaty's language, we agree with the trial court that NatWest has espoused the better reading. The "same or similar" language of the separate enterprise principle refers to the activities and conditions in which the U.S. Branch conducted its business. That is, the U.S. Branch should be taxed as if it were a separate enterprise engaged in activities that are the "same or similar" to those activities in which the U.S. Branch engaged and as if it were operating in conditions that are the "same or similar" to the conditions in which the U.S. Branch conducted its activities. By way of contrast, the Government's reading of the separate enterprise principle requires that the "same or similar" language describe the activities of the hypothetical separate enterprise. That is, the U.S. Branch should be taxed as if it were engaged in activities that are the same or similar to those in which a separate enterprise would engage and as if it were operating in conditions that are the same or similar to those in which a separate enterprise would operate.

Under the proper reading of the "same or similar" clauses, it becomes clear that the "dealing wholly independently with" language requires taxing authorities to scrutinize intracorporate transactions involving a permanent establishment to ensure that the transactions are accurately characterized and reflect arm's length terms and pricing. Conversely, the Government's reliance on "dealing wholly independently with" is at odds with a proper reading of the "same or similar" clauses. To conclude that "wholly independently" requires that the U.S. Branch be taxed as if it were subject to regulatory and market capital requirements is to ignore the fact that the U.S. Branch does not operate under conditions in which it is subject to these requirements. In essence, the Government would read the "same or similar conditions" language out of the 1975 Treaty.

Our analysis of the 1975 Treaty's plain language is supported by the 1963 Draft Convention. The 1963 Commentary to Article 7, ¶ 2 states that the analysis of taxable business profits is to begin with the "trading accounts of the permanent establishment," but allows for a formulaic allocation of profits in circumstances where the permanent establishment does not maintain separate accounts from the home office. 1963 Draft Convention 82, ¶ 10. The commentary goes on to state:


It should perhaps be emphasized that the directive contained in paragraph 2 is no justification for tax administrations to construct hypothetical profit figures in vacuo; it is always necessary to start with the real facts of the situation as they appear from the business records of the permanent establishment and to adjust as may be shown to be necessary the profit figures which those facts produce.


Id. (emphasis added). In the instant case, the real facts of the situation are that the U.S. Branch is not required to maintain any minimal amount of capital. Therefore, because the corporate yardstick would essentially recharacterize loans that bear an interest expense as equity capital infusions based on regulatory and domestic market requirements that do not apply to the U.S. Branch, the corporate yardstick ignores the real facts of the U.S. Branch's situation and violates the 1975 Treaty as informed by the 1963 Draft Convention. As stated by the trial court in NatWest II, "The Commentary confirms that the purpose of any adjustment should be to reflect the real facts of the branch's transactions with the entity of which it is a part." 58 Fed. Cl. at 498.

The Government argues that because both parties used capital allocation formulae during the period of the 1975 Treaty's negotiation, the parties expected that the use of similar formulas, e.g., the corporate yardstick, would be permissible under the treaty. Specifically, the Government identifies the adoption of Treasury Regulation § 1.861-8 in 1977, see 49 Fed. Reg. 1195 (Jan. 6, 1977), and the United Kingdom's use of the PW Formula in support of its position. The record reveals, however, that the implementation or abandonment of these formulae provide little, if any, support for the Government's use of the corporate yardstick.

As discussed previously, § 1.861-8 used worldwide information of an international financial enterprise to allocate an interest expense to a permanent establishment doing business in the United States. Section 1.861-8, however, contained language expressly stating that applicable treaty provisions would take precedence over the regulation. Treas. Reg. § 1.861-8(f)(1)(iv) (1977). Thus, to the extent that § 1.861-8 conflicts with our reading of the 1975 Treaty and analysis of the signatories' expectations, the treaty governs.

More importantly, the analysis of the Queen's Counsel opinion when the United Kingdom abandoned the PW Formula in 1978 is particularly instructive. The opinion explicitly considered the appropriateness of treating a permanent establishment as "a company with independent shareholders," Counsel's Opinion 2 (Dec. 7, 1978), and speaks directly to the issue before us on appeal.


[I]n our view the Convention gives no authority to write into the branch accounts a level of capital which the branch does not have. To do this is to go against the scheme of Article III and the requirement of the paragraph (2) hypothesis that the United Kingdom branch is trading under "... the same or similar conditions ...". This directs that the actual conditions under which the United Kingdom branch trades are taken into account. It is those conditions which dictate the expenses in question.



Accordingly the "notional interest formula", under which interest is disallowed to the extent that the (actual) capital account of the branch falls short of an amount (estimated by the Revenue) which would be required as "free working capital" by an independent banking enterprise is in our opinion unwarranted. The notional interest formula may very well result in the disallowance of actual expenditure which is attributable to the branch and that is something which Article III plainly does not authorise. Like the global apportionment referred to in paragraph 5 above the formula may offer a convenient method of avoiding the difficulties involved in the allocation of actual receipts and expenses, but in our opinion it is not sound in law.


Id. at 3 (alterations in original). This analysis of the separate enterprise principle (as similarly set forth in Article III of the previous U.S.-U.K. double taxation treaty, see supra note 4) led the United Kingdom to abandon the PW formula. U.K. Amicus Br. at 24-25. We are persuaded by the clarity of the Queen's Counsel's analysis that when the 1975 Treaty was negotiated, the parties did not understand the separate enterprise principle to allow for imputation of capital to the U.S. Branch according to estimates generated by the IRS's use of the corporate yardstick.

Having concluded that the corporate yardstick violates the 1975 Treaty as applied to the U.S. Branch, we uphold the trial court's decision in NatWest II. "[B]ranch profits must be based on the properly maintained books of the branch," subject to examination and adjustment where: "(1) an interest expense was deducted for advances to the branch that were not used in the ordinary course of its banking business; (2) an interest expense was deducted on amounts designated as capital on its books or on amounts that were in fact allotted to it for capital purposes, such as funding capital infrastructure; and (3) interest paid on inter-branch borrowing [that] was not at arms' length." NatWest II, 58 Fed. Cl. at 505.

Having upheld the trial court's decision in NatWest I and NatWest II, we turn now to the Government's appeal from the Order Denying Reconsideration. Following its ruling in NatWest II, the trial court issued a Scheduling Order that limited the scope of discovery regarding the "capital issue." Order Denying Recons. 1. In the Scheduling Order, the court stated that "the 'capital issue' does not include attributing capital to the U.S. branches from other National Westminster branches or its home office." Id. Thereafter, the Government filed Defendant's Motion for Reconsideration of Court's July 16, 2004, Order, Limiting Scope of Capital Issue (hereinafter "Motion for Reconsideration"). The Government argued that United Kingdom banking regulations required NatWest to hold sufficient capital to support the operations of the U.S. Branch and that this capital should be attributed to the U.S. Branch for tax purposes. Mot. for Recons. 2. As evidence supporting its motion, the Government offered the expert report of Mr. Farrant and the decision of a Dutch court applying this capital allocation approach under a treaty similar to the 1975 Treaty. Id. at 1. The court denied the motion, concluding that the Government was seeking to introduce yet another capital allocation theory and thus waived this issue by failing to introduce it during briefing that gave rise NatWest II. Order Denying Recons. 3. Central to this conclusion was the court's finding that the Government did not dispute that it had for nine years been aware of NatWest's compliance with the United Kingdom banking regulations, yet had never sought to attribute capital held by foreign offices and branches to the U.S. Branch for tax purposes. Id. at 3.

We review the denial of a motion for reconsideration by the Court of Federal Claims for an abuse of discretion. Mass. Bay Transp. Auth. v. United States, 254 F.3d 1367, 1378 (Fed. Cir. 2001). Likewise, the issue of waiver is also "within the discretion of the trial court, consistent with its broad duties in managing the conduct of cases pending before it." United States v. Zielger Bolt & Parts Co., 111 F.3d 878, 882 (Fed. Cir. 1997). An abuse of discretion occurs when a court misunderstands or misapplies the relevant law or makes a clearly erroneous finding of fact. PPG Indus., Inc. v. Celanese Polymer Specialties Co., 840 F.2d 1565, 1572 (Fed. Cir. 1988).

The trial court's denial of the Motion for Reconsideration was not an abuse of discretion. The Government identifies no allegedly clearly erroneous finding of fact. In addition, having concluded that NatWest II was correctly decided, we find no misapplication of the relevant law. Discovery of NatWest's home office books was not necessary because the interest expense deduction for the U.S. Branch is to be determined according to the properly maintained books of the branch. We further find that the trial court did not abuse its discretion by finding that the Government had waived its argument that capital held by the NatWest home office should be imputed to the U.S. Branch for tax purposes.




CONCLUSION


We are persuaded that the signatories to the 1975 Treaty expected that the interest expenses incurred by a permanent establishment of an international financial enterprise, e.g., the U.S. Branch of NatWest, would be deductible to the extent the expenses were related to the permanent establishment's ordinary course of business. Accordingly, we conclude that Treasury Regulation § 1.882-5 and the corporate yardstick as applied to the U.S. Branch violate the 1975 Treaty. We further conclude that the Court of Federal Claims did not abuse its discretion by denying the Government's Motion for Reconsideration. The judgment of the Court of Federal Claims is therefore affirmed.




AFFIRMED





COSTS


No costs.

1 The United States and the United Kingdom negotiated a new treaty that entered into force in 2003. Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains, U.S.-U.K., July 24, 2001, S. Treaty Doc. No. 107-19 (2002).

2 Section 1.882-5 remained unchanged for the tax years at issue but was amended in 1996. 61 Fed. Reg. 9329 (Mar. 8, 1996); 61 Fed. Reg. 15891 (Apr. 10, 1996). Section 1.882-5 was amended again in 2006 to comply with the renegotiation of the U.S.-U.K treaty, as well as a renegotiated U.S.-Japan treaty. 71 Fed. Reg. 7448 (Aug. 17, 2006); 71 Fed. Reg. 56868 (Sept. 28, 2006).

3 The court also concluded that U.S.-connected liabilities under § 1.882-5 were impermissibly computed by reference to the worldwide assets and liabilities of NatWest rather than the operations of the U.S. Branch, NatWest I, 44 Fed. Cl. at 130, but the record demonstrates that the 0.95 capital ratio was used to calculate the U.S.-connected liabilities.

4 The business profits and separate enterprise language of the earlier treaty states,

[T]here shall be attributed to such permanent establishment the industrial or commercial profits which it might be expected to derive if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing at arm's length with the enterprise of which it is a permanent establishment.

Supplementary Protocol Amending the Convention of April 16, 1945, as modified by the supplementary protocols of June 6, 1946, May 25, 1954, and August 19, 1957, U.S.-U.K., March 17, 1966, 17 U.S.T. 1254.

5 The Government's reliance on Revenue Ruling 78-423 may also be mistaken in its assumption that the U.S.-Japan treaty considered therein is sufficiently similar to the U.S.-U.K. treaty at issue here. Rather than mandating deductions for "those expenses which are incurred for the purposes of the permanent establishment," 1975 Treaty, art. 7 ¶ 3, the U.S.-Japan treaty requires deduction for "expenses which are reasonably connected with [the] profits" of a permanent establishment, United States-Japan Income Tax Convention, Mar. 8, 1971, art. 8, ¶ 3, reprinted in 1978-1 CB 630, 634.

6 The OECD issued a new draft convention in 1977 that did not materially alter Article 7 of the 1963 Draft Convention. See NatWest II, 58 Fed. Cl. at 503, 504 n.14.

Properly designated rental allowances paid to faculty, managers, executives, or administrators who are ordained, licensed or commissioned ministers employed by the University can be excluded from gross income under Section 107.



IRS Letter Ruling 200803008

LTR Report Number 1612, January 23, 2008 IRS REF: Symbol: CC:TEGE:EOEG:ET1-PLR-128754-07 [Code Sec. 170]

October 18, 2007

This is in reply to your request for a ruling concerning whether ***** is an integral agency of the Denomination within the meaning of Treas. Reg. §1.1402(c)-5(b)(2) such that rental allowances paid to faculty, managers, executives, or administrators who are ordained, licensed or commissioned ministers employed by the University can be excluded from gross income under Section 107.




FACTS


The University was founded in ***** and named in honor of a minister who pioneered the ***** movement and founded the Denomination. In *****, the University officially became the western regional school of the Denomination. In *****, at the instigation of the Denomination, the University reincorporated in a different state where it currently resides; that year, it also began granting bachelor's degrees. In *****, the University began offering professional studies; in *****, it added graduate studies and degree programs. The University teaches all subjects from a Biblical perspective and its graduate program prepares students for positions as pastors, missionaries, and other religious posts. Ordained, commissioned, or licensed ministers of the Denomination teach and serve in various executive, management, or administrative positions at the University.

The University is incorporated as a tax-exempt organization for federal tax purposes. The University's Articles of Incorporation indicate that some of its principal purposes are to "support and extend the ministry of the church Jesus Christ" and "develop a strong education foundation program designed to build a Christian mind and character."

The Bylaws of the University provide that the University's Board of Trustees ("Board") may consist of 26, 27, or 28 trustees. The Denomination appoints 15 members (i.e., a majority) to the Board. A trustee may be removed by a majority of the Board, but not by the Denomination directly. The University's President is also a member of the Board and must be approved as president by the Board of Directors of the Denomination.

Any amendment to the Bylaws of the University requires approval by a majority, plus one, of the Board. The Denomination approves all amendments to the University's Articles of Incorporation, Bylaws, and mission statement.

The University is required to adopt and abide by the Denomination's Statement of Faith. The University's trustees and employees are not required to be members of the Denomination; however, all are required to adhere to the Denomination's Statement of Faith and to offer to resign if they no longer agree with it. The University employs ministers ordained by the Denomination in faculty, executive, management, and administrative positions. The University also employs ordained, commissioned, and licensed ministers who are ordained by other tax-exempt religious organizations.

The University's Articles of Incorporation provide that if the University were to cease operations, dissolve, or terminate its affiliation with the Denomination without permission from the Denomination, the University's property would become property of the Denomination.

The University's finances are subject to supervision by the Denomination. The University is required to provide annual reports, financial statements, and annual audits to the Denomination. During the fiscal years of *****, the University received aggregate contributions from the Denomination totaling 12.8% of the total gifts it received during that period.




APPLICABLE LAW AND ANALYSIS


Section 107 provides that in the case of a "minister of the gospel", gross income does not include (1) the rental value of a home furnished to him as part of his compensation, or (2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities. Section 1.107-1(a) of the Income Tax Regulations (regulations) provides that:

In order to qualify for the exclusion, the home or rental allowance must be provided as remuneration for services which are ordinarily the duties of a minister of the gospel. In general, the rules provided in section 1.1402(c)-5 will be applicable to such determination. Examples of specific services the performance of which will be considered duties of a minister for purposes of section 107 include the performance of sacerdotal functions, the conduct of religious worship, the administration and maintenance of religious organizations and their integral agencies, and the performance of teaching and administrative functions at theological seminaries.

Consistent with the section 107 regulations, section 1.1402(c)-5(b)(2) provides that service performed by a minister in the exercise of his or her ministry includes: 1) the ministration of sacerdotal functions; 2) the conduct of religious worship; and 3) the control, conduct and maintenance of religious organizations (including the religious boards, societies, and other integral agencies of such organizations) under the authority of a religious body constituting a church or church denomination.

Section 1.1402(c)-5(b)(2)(ii) of the regulations provides that service performed by a minister in the control, conduct and maintenance of a religious organization relates to directing, managing, or promoting the activities of such organization. This section also provides that any religious organization is deemed to be under the authority of a religious body constituting a church or church denomination if it is organized and dedicated to carrying out the tenets and principles of a faith in accordance with either the requirements or sanctions governing the creation of institutions of the faith. The term "religious organization" has the same meaning and application as is given to the term for income tax purposes.

Section 1.1402(c)-5(b)(2)(iv) of the regulations provides in relevant part that if a minister is performing service for an organization which is operated as an integral agency of a religious organization under the authority of a religious body constituting a church or church denomination, all service performed by the minister in the control, conduct, and maintenance of such organization is in the exercise of his ministry.

In Rev. Rul., 62-171, 1962-2 C.B. 39, the Service held that ordained ministers of the gospel who teach or have positions involving administrative and overall management duties in parochial schools, colleges or universities which are integral agencies of religious organizations under the authority of a religious body constituting a church or church denomination are in the performance of their duties as ministers of the gospel for purposes of section 107 of the Code.

In Rev. Rul., 70-549, 1970-2 C.B. 16, the Service held that an ordained minister who was serving as chairman of the department of education of a college that was held to be "in practice" an integral agency of a church, and any minister serving on the faculty of the college as a teacher or administrator, was performing service "in the exercise of his ministry" within the meaning of Sections 1.107-1 and 1.1402(c)-5 of the Income Tax Regulations. The Service held that the college was "in practice" an integral agency of a church. Although the church lacked a central governing body, the college was most rigidly and continuously governed and controlled by a board of directors who were, in turn, under the control of the elders of the church. The requirement in the college charter that each director be a member in good standing of a congregation of the church was found to be a method of indirect control. Similarly, every teacher was required to be a member of the church in good standing, and most students were members of the church. All subjects taught at the college were taught with emphasis on religious principles.

In Rev. Rul., 71-7, 1971-1 C.B. 282, the Service furnished guidance concerning whether a duly ordained minister, who is employed as a member of the faculty of a church-related college and whose duties do not include the conduct of religious worship or the ministration of sacerdotal functions, is performing services as a "minister of a church in exercise of his ministry." Rev. Rul. 71-7 provides that, in considering whether a minister serving on the faculty of a college is performing services in the exercise of his ministry, it is necessary to determine (a) whether the college employing him is itself a religious organization under the authority of a religious body constituting a church or church denomination or, (b) if the college is not such a religious organization, whether the college is operated as an integral agency of such a religious organization. The Service concluded that the college is an integral agency of a state convention of churches and that the state convention of churches is a religious organization under the authority of a religious body constituting a church or church denomination. Thus, the services performed by the ministers as heads of religious departments and as teachers and administrators on the faculty of the college constitute the performance of services in the exercise of their ministry.

In Revenue Ruling 72-606, 1972-2 C.B. 78, the Service considered whether a minister who served as the administrator of an old age home that was affiliated with a religious organization was eligible for the housing allowance provided under section 107 of the Code. The old age home designated an amount equal to the rent he actually paid as a rental allowance under section 107. The revenue ruling holds that the minister cannot exclude the rental allowance from his gross income under section 107 because the old age home is not an integral agency of a religious organization under the facts of ruling.

In Rev. Rul. 72-606, the Service established the following criteria to determine whether a church-related institution is an integral agency of a religious organization: (1) whether the religious organization incorporated the institution; (2) whether the corporate name of the institution indicates a church relationship; (3) whether the religious organization continuously controls, manages, and maintains the institution; (4) whether the trustees or directors of the institution are approved by or must be approved by the religious organization or church; (5) whether trustees or directors may be removed by the religious organization or church; (6) whether annual reports of finances and general operations are required to be made to the religious organization or church; (7) whether the religious organization or church contributes to the support of the institution; (8) whether, in the event of the dissolution of the institution, its assets would be turned over to the religious organization or church. The absence of one or more of these characteristics will not necessarily be determinative in a particular case.

Assuming for purposes of this letter ruling that the University is not a religious organization within the meaning of section 1.1402(c)-5(b)(2)(ii), the relevant issue is whether the University is an integral agency of a religious organization under the authority of a religious body constituting a church or a church denomination. After applying the criteria set forth in the rulings described above, we conclude that the University is an integral agency of the Denomination. The Denomination instigated and approved the University's ***** reincorporation. The University is named in honor of the Denomination's founder and is the official regional school of the Denomination.

The Denomination exercises indirect control over the University. The Denomination's indirect control is somewhat different from the one exercised by the church in Rev. Rul. 70-549. In Rev. Rul. 70-549, the church appointed all of the trustees; the trustees and the teachers were required to be members in good standing of a congregation of the church. In this instance, the Denomination does not appoint each member of the Board; however, it does appoint 15 members that comprise a majority of the Board. Trustees may also be removed by a majority of the Board. The University's President is also a member of the Board and must be approved by the Board of Directors of the Denomination. Even though the trustees and the employees of the University are not required to be members of the Denomination, they must affirm their agreement with the Denomination's Statement of Faith and offer to resign if they no longer agree with it. The Denomination approves all amendments to the University's articles of incorporation, bylaws, and mission statement. Finally, the University teaches all subjects from a Biblical perspective and its graduate degree programs prepare men and women for positions as pastors, missionaries, and other religious posts. Accordingly, the Denomination exercises indirect control over the University.

The University also meets the financial and reporting criteria set forth in Rev. Rul. 72-606. The University is required to provide annual reports, financial statements, and annual audits to the Denomination. During the three fiscal years of *****, the University received aggregate contributions from the Denomination totaling 12.8% of the total gifts it received during that period. Finally, the Articles of Incorporation provide that if the University were to cease operations, dissolve, or terminate its affiliation with the Denomination without permission from the Denomination, the University's property would become property of the Denomination. Accordingly, we conclude that the University is an integral agency of the Denomination.

Under section 1402 and the applicable regulations, an ordained, commissioned or licensed minister who is performing services in the control, conduct or maintenance of an integral agency of a religious organization is engaged in performing services in the exercise of his ministry. Section 1.107-1 of the Income Tax Regulations provides that the rules of section 1402 apply in determining what duties constitute the duties of a minister of the gospel under section 107. Revenue Rulings 70-549 and 71-7 hold that ministers who serve on the faculty of a college that is an integral agency of a church, but do not perform any ecclesiastical duties are engaged in performing services in the exercise of their ministry and hence are eligible to exclude a portion of their compensation as a rental allowance under section 107 of the Code. Revenue Ruling 62-171 holds that that ordained ministers of the gospel who teach or have positions involving administrative and overall management duties in parochial schools, colleges or universities which are integral agencies of religious organizations are performing duties as ministers of the gospel for purposes of section 107 of the Code and hence are eligible to exclude a portion of their compensation as a rental allowance.

In the present case, the University is an integral agency of the Denomination. Accordingly, ordained, commissioned, or licensed ministers of the Denomination who teach or serve in faculty, executive, management, or administrative positions are performing services in the exercise of their ministry for purposes of section 107 of the Code. The ministers are therefore entitled to exclude from their gross income amounts that are properly designated as rental allowances under section 107 of the Code and the applicable regulations.




CONCLUSION


On the basis of the foregoing, we conclude that the University is an integral agency of the Denomination such that properly designated rental allowances paid to faculty, managers, executives, or administrators who are ordained, licensed or commissioned ministers employed by the University can be excluded from gross income under Section 107.

Pursuant to Revenue Procedure 2007-1, §3.01(11), the Service has not considered, and does not express any opinion regarding whether any individual employed by the University is a minister of the gospel for federal tax purposes.

Except as specifically ruled on above, no opinion is expressed as to the application of any other provision of the Code to the facts described above.

This ruling is directed only to the organization which requested it. Section 6110(j) of the Code provides that it may not be used or cited as precedent.

Enclosed is a copy of the letter ruling showing the deletions proposed to be made when the letter is disclosed under section 6110 of the Code.

In accordance with the power of attorney on file with this office, a copy of this letter is being sent to your representative.

Sincerely, Janine Cook, Branch Chief, Employment Tax Branch 1 (Exempt Organizations/Employment Tax/Government Entities) (Tax Exempt & Government Entities).

cc: *****

Section 6694 interim guidance - penalties for not making disclosures to the IRS


Notice 2008-13 , to be published in IRB 2008-3, January 22, 2008.

[ Code Secs. 6662, 6694 and 7701]


Estate, gift, generation-skipping transfer and income taxes: Returns and procedures: Return preparer penalties Interim guidance. --


The Treasury Department and the IRS have issued guidance providing interim rules implementing and interpreting the legislatively expanded tax return preparer penalty under Code Sec. 6694 and Code Sec. 7701(a)(36), as amended by the Small Business and Work Opportunity Act of 2007, P.L. 110-28, 121 Stat. 190. The amendments expanded the return preparer penalty to cover all tax return preparers, including those who prepare estate, gift, and generation-skipping transfer (GST) tax returns. These interim rules will be in effect until the overhaul of the current return preparer penalty regulations is complete. The interim rules emphasize the importance to preparers of understanding the legal basis for positions taken on tax returns, the requirement for taxpayers to disclose certain positions, and the need for preparers to advise taxpayers on the various penalties that can apply when a position is taken on a return that may not be supported by existing law. Under the guidance, preparers generally can continue to rely on taxpayer representations in preparing returns and can also generally rely on representations of third parties, unless the preparer has reason to know they are wrong. Furthermore, preparers of many information returns will not be subject to the new penalty provision unless they willfully understate tax or act in reckless or intentional disregard of the law. The guidance is generally effective January 1, 2008.




This notice provides guidance regarding implementation of the tax return preparer penalty provisions under section 6694 and the related definitional provisions under section 7701(a)(36) of the Internal Revenue Code (Code), as amended by the Small Business and Work Opportunity Tax Act of 2007 (the Act), Pub. L. No. 110-28, 121 Stat. 190.

In 2008, the Treasury Department and the IRS intend to revise the regulatory scheme governing tax return preparer penalties, which has remained substantially unchanged since the late 1970's. Until then, this notice provides interim guidance on the application of the tax return preparer penalties as amended by the Act. This notice also solicits public comments regarding the revision of the regulatory scheme governing tax return preparer penalties in order to enable the Treasury Department and the IRS to complete their work on the overhaul of these rules by the end of 2008.



BACKGROUND

Section 8246 of the Act amended several provisions of the Code to extend the application of the income tax return preparer penalties to all tax return preparers, alter the standards of conduct that must be met to avoid imposition of the section 6694(a) penalty for preparing a return which reflects an understatement of liability, and increase applicable penalties under section 6694(a) and (b). The amendments made by the Act to section 6694 are effective for tax returns and claims for refund prepared after May 25, 2007. The Treasury Department and the IRS issued Notice 2007-54, 2007-27 I.R.B. 12, on June 11, 2007, which provided transitional relief under section 6694(a). Concurrent with the issuance of this notice, the Treasury Department and the IRS are issuing additional guidance clarifying Notice 2007-54. See Notice 2008-11.

Prior to amendment by the Act, section 7701(a)(36) defined income tax return preparer as any person who prepared for compensation an income tax return or claim for refund, or a substantial portion of an income tax return or claim for refund. As amended by the Act, section 7701(a)(36) now defines tax return preparer as any person that prepares for compensation a tax return or claim for refund, or a substantial portion of a tax return or claim for refund, and is no longer limited to persons who prepare income tax returns.

Section 301.7701-15 of the current Procedure and Administration Regulations defines the term income tax return preparer to include any person who prepares for compensation all or a substantial portion of a tax return or claim for refund under Subtitle A of the Code. Operation of the current regulations brings into the preparer penalty regime a wide range of activities performed by persons who do not sign the tax return or claim for refund, who may have no knowledge of how their work is ultimately reported on the tax return or claim for refund, or who may have no knowledge of the size or complexity of the schedule, entry, or other portion of a tax return or claim for refund relative to the entire tax return. For example, current regulations broadly define the term substantial portion using a facts and circumstances test that compares the relative length, complexity, and tax liability of a particular schedule, entry, or other portion of a tax return or claim for refund to the length, complexity, and tax liability of the tax return or claim for refund as a whole. Case law, including Goulding v. United States, 717 F. Supp. 545 (N.D. Ill. 1989), aff'd, 957 F.2d 1420 (7th Cir. 1992), supports the current regulations which deem the preparer of a Schedule K-1 for a partnership to be the preparer of a partner's income tax return on which the partnership items were reported, if the Schedule K-1 constitutes a substantial portion of the partner's tax return.

The Act also amended section 6694(a) by raising the standards of conduct for tax return preparers. For undisclosed positions, the Act replaced the realistic possibility standard with a requirement that there be a reasonable belief that the tax treatment of the position would more likely than not be sustained on its merits. For disclosed positions, the Act replaced the nonfrivolous standard with the requirement that there be a reasonable basis for the tax treatment of the position.

The amendments made by the Act did not modify the exception to liability under section 6694 that is applicable when it is shown, considering all the facts and circumstances, that the tax return preparer has acted in good faith and there is reasonable cause for the understatement.

As part of the regulatory rulemaking process, the Treasury Department and IRS will determine the appropriate modifications to the existing regulatory framework, given the complexities and anomalies created by the inter-relationship of the amendments to section 6694 applicable to tax return preparers and the various accuracy-related penalty provisions applicable to taxpayers, as well as the inter-relationship of the amendments to section 6694 and the regulations governing the practice before the IRS in Circular 230 (31 CFR part 10). In advance of publication of regulations in 2008, this notice provides interim guidance to tax return preparers regarding the definitions and standards of conduct that must be met by a tax return preparer to avoid a penalty under section 6694(a). Tax return preparers may rely on the interim guidance in this notice until further guidance is issued. It is important to note that the regulations expected to be finalized in 2008 may be substantially different from the rules described in this notice, and in some cases more stringent.

Section 7805(a) provides the Treasury Department and the IRS with authority to issue regulations and other published guidance interpreting the Code, including sections 6694 and 7701(a)(36). Consistent with the legislative history of section 6694, the Treasury Department and the IRS promulgated regulations dating back to 1977 that interpreted the statutory term disclosed in section 6694(a)(3), as applied to nonsigning preparers, to include making statements, either orally or in writing. See Treas. Reg. §1.6694-2(c)(3)(ii)(A) and (B). Section 6694(a)(3) provides the Treasury Department and the IRS with authority to grant relief from penalty liability if a tax return preparer has acted in good faith and there is reasonable cause for any understatement of tax that may result from a position taken on a return. In addition, in the past, reasonable cause relief (such as in section 6694(a)) has been provided to implement appropriate transitional rules for a new or revised statutory provision.

This interim guidance discusses the following issues: (1) relevant categories of tax returns or claims for refund for purposes of section 6694; (2) the definition of tax return preparer under sections 6694 and 7701(a)(36); (3) standards of conduct applicable to tax return preparers for disclosed and undisclosed positions taken on tax returns; and (4) interim penalty compliance obligations applicable to tax return preparers. It is the IRS's intent to administer these provisions in a fair and equitable manner that will promote compliance with the requirements of the Code and effective tax administration.



INTERIM GUIDANCE UNDER SECTION 6694

Except to the extent modified by the interim guidance in this notice, and until further guidance is issued, existing regulations and guidance under sections 6694 and 7701(a)(36) will remain in effect.



A. Returns and Claims for Refund Subject to 6694 Penalty

Interim guidance discussed below describes categories of returns to which section 6694 could apply and includes associated exhibits to this notice. The Treasury Department and the IRS may choose to add or remove documents from any of the categories or exhibits to this notice in future guidance as they gain experience in implementing the provisions of the Act and receive public comments.

1. Tax Returns Reporting Tax Liability

Until further guidance is issued, solely for purposes of section 6694, a return or claim for refund includes the tax returns listed on Exhibit 1 or a claim for refund with respect to any such return. A claim for refund of tax includes a claim for credit against any tax. A person who for compensation prepares all or a substantial portion of a tax return listed on Exhibit 1, or a claim for refund with respect to any such tax return, is a tax return preparer who is subject to section 6694.

2. Information Returns and Other Documents

Under current regulations, a person who for compensation prepares information returns or other documents that include information that is or may be reported on a taxpayer's tax return is subject to section 6694 if the information reported on the information return or other document constitutes a substantial portion of the taxpayer's tax return, notwithstanding the fact that the information return or other document may not be reporting the liability of the taxpayer. The current regulatory definitions of substantial portion and substantial preparation require a facts and circumstances analysis of each document prepared and a comparison of the items included on that document with the tax return that actually reports a tax liability. Section 301.7701-15(b). Thus, for example, under current regulations, the preparer of a Form 1065, U.S. Return of Partnership Income, may be deemed to be the preparer of any of the partners' individual income tax return ( e.g., Form 1040, U.S. Individual Income Tax Return), if the items on the partnership return constitute a substantial portion of that partner's income tax return. Section 301.7701-15(b)(3).

(a) Information Returns Constituting a Substantial Portion of a Taxpayer's Tax Return

Until further guidance is issued, solely for purposes of section 6694, an information return listed on Exhibit 2 that includes information that is or may be reported on a taxpayer's tax return or claim for refund is a return to which section 6694 could apply if the information reported constitutes a substantial portion of that taxpayer's tax return or claim for refund. A person who for compensation prepares any of the forms listed on Exhibit 2, which form does not report a tax liability but affects an entry or entries on a tax return and constitutes a substantial portion of the tax return or claim for refund that does report a tax liability, is a tax return preparer who is subject to section 6694.

(b) Other Documents Constituting a Substantial Portion of a Taxpayer's Tax Return

Until further guidance is issued, solely for purposes of section 6694, a document that includes information that is or may be reported on a taxpayer's tax return or claim for refund is treated as a return to which section 6694 could apply if the information reported constitutes a substantial portion of that taxpayer's tax return or claim for refund. For example, a person who for compensation prepares documents, such as depreciation schedules or cost, expense or income allocation studies, that do not report a tax liability but which will affect an entry or entries on a tax return that does report a tax liability, and that constitute a substantial portion of such tax return, is a tax return preparer who is subject to section 6694.

(c) Other Documents Not Constituting a Substantial Portion of a Taxpayer's Tax Return Unless Prepared Willfully to Understate Tax or in Reckless or Intentional Disregard of the Rules or Regulations

Until further guidance is issued, solely for purposes of section 6694, a document listed on Exhibit 3 that includes information that is or may be reported on a taxpayer's tax return or claim for refund (and that constitutes a substantial portion of such tax return or claim for refund) will not subject the preparer to a penalty under section 6694(a). A document listed on Exhibit 3, however, may subject the preparer to a willful or reckless conduct penalty under section 6694(b) if the information reported on the document constitutes a substantial portion of the tax return or claim for refund and is prepared willfully in any manner to understate the liability of tax on a tax return or claim for refund, or in reckless or intentional disregard of rules or regulations. For example, preparation of a Form W-2, Wage and Tax Statement, reporting certain executive compensation may constitute preparation of a substantial portion of the Form 1040 return on which the compensation is reported if it is prepared willfully in a manner to understate the liability of tax. A person who for compensation prepares all or a substantial portion of any of the forms or other documents listed on Exhibit 3 is not a tax return preparer subject to section 6694(a) unless the form or document was prepared willfully in any manner to understate the liability of tax on a tax return or claim for refund or in reckless or intentional disregard of rules or regulations.



B. Definition of Tax Return Preparer

Until further guidance is issued, solely for purposes of section 6694, the term tax return preparer in section 7701(a)(36) is defined by using the definitions in §§1.6694-1, 1.6694-3 and 301.7701-15, with the following modifications:


1. Eliminating the word income as a modifier to tax return preparer throughout §§1.6694-1, 1.6694-3, and 301.7701-15. This modification conforms the current regulations to amendments made by the Act.



2. Expanding the definition of returns and claims for refund from returns of tax under subtitle A, claims for refund under subtitle A, or similar language, to include returns of tax and claims for refund under subtitles A through E of the Code throughout §§1.6694-1, 1.6694-3, and 301.7701-15. This modification conforms the current regulations to amendments made by the Act.



3. Interpreting the term substantial portion in §301.7701-15(b)(1) to mean a schedule, entry, or other portion of a tax return or claim for refund that, if adjusted or disallowed, could result in a deficiency determination (or disallowance of refund claim) that the preparer knows or reasonably should know is a significant portion of the tax liability reported on the tax return (or, in the case of a claim for refund, a significant portion of the tax originally reported or previously adjusted). This clarifies that any determination as to whether a person has prepared a substantial portion of a tax return and thus is considered a tax return preparer will depend on the relative size of the deficiency attributable to the schedule, entry, or other portion.


For examples illustrating the provisions of this section B, see section H below.



C. Date Return is Prepared

Until further guidance is issued, solely for purposes of section 6694, a return or claim for refund is deemed prepared on the date reflected by the tax return preparer's signature. If a signing preparer fails to sign the tax return, the tax return is deemed prepared on the date the tax return is filed. In the case of a nonsigning preparer, the relevant date is the date the person provides the advice, which date will be determined based on all the facts and circumstances. For purposes of this interim guidance, the rules described in this section will apply instead of §1.6694-2(b)(5).



D. Reasonable Belief that the Tax Treatment of the Position Would More Likely Than Not Be Sustained on the Merits

Until further guidance is issued, solely for purposes of section 6694, a tax return preparer is considered reasonably to believe that the tax treatment of an item is more likely than not the proper tax treatment (without taking into account the possibility that the tax return will not be audited, that an issue will not be raised on audit, or that an issue will be settled) if the tax return preparer analyzes the pertinent facts and authorities in the manner described in §1.6662-4(d)(3)(ii) and, in reliance upon that analysis, reasonably concludes in good faith that there is a greater than fifty percent likelihood that the tax treatment of the item will be upheld if challenged by the IRS. For purposes of interim guidance, the standard described in this section will apply instead of §1.6694-2(b).

For purposes of determining whether the tax return preparer has a reasonable belief that the position would more likely than not to be sustained on the merits, a tax return preparer may rely in good faith without verification upon information furnished by the taxpayer, as provided in §1.6694-1(e). In addition, a tax return preparer may rely in good faith and without verification upon information furnished by another advisor, tax return preparer or other third party. Thus, a tax return preparer is not required to independently verify or review the items reported on tax returns, schedules or other third party documents to determine if the items meet the standard requiring a reasonable belief that the position would more likely than not be sustained on the merits. The tax return preparer, however, may not ignore the implications of information furnished to the tax return preparer or actually known to the tax return preparer. The tax return preparer also must make reasonable inquiries if the information furnished by another tax return preparer or a third party appears to be incorrect or incomplete.

For examples illustrating the provisions of this section D, see section H below.



E. Reasonable Basis

Until further guidance is issued, solely for purposes of section 6694, reasonable basis will be interpreted in accordance with §1.6662-3(b)(3). For purposes of this interim guidance, the standards described in this section will apply instead of §1.6694-2(c). The reasonable basis standard will also apply for purposes of §1.6694-3(c)(2).

For purposes of determining whether the tax return preparer has a reasonable basis for a position, a tax return preparer may rely in good faith without verification upon information furnished by the taxpayer, as provided in §1.6694-1(e). In addition, a tax return preparer may rely in good faith and without verification upon information furnished by another tax return preparer or other third party. Thus, a tax return preparer is not required to independently verify or review the items reported on tax returns, schedules or other third party documents to determine if the items meet the standard requiring a reasonable basis for a position. The tax return preparer, however, may not ignore the implications of information furnished to the tax return preparer or actually known to the tax return preparer. The tax return preparer also must make reasonable inquiries if the information furnished by another tax return preparer or a third party appears to be incorrect or incomplete.

For examples illustrating the provisions of this section E, see section H below.



F. Reasonable Cause and Good Faith

Until further guidance is issued, solely for purposes of section 6694, the IRS will continue to consider the factors described in §§1.6694-2(d)(1) to - 2(d)(4), but the factor regarding reliance on advice found in §1.6694-2(d)(5) is replaced by the rules described in this section F. For purposes of this interim guidance, a tax return preparer will be found to have acted in good faith when the tax return preparer relied on the advice of a third party who is not in the same firm as the tax return preparer and who the tax return preparer had reason to believe was competent to render the advice. The advice may be written or oral, but in either case the burden of establishing that the advice was received is on the tax return preparer. A tax return preparer is not considered to have relied in good faith if --

(i) The advice is unreasonable on its face;

(ii) The tax return preparer knew or should have known that the third party advisor was not aware of all relevant facts; or

(iii) The tax return preparer knew or should have known (given the nature of the tax return preparer's practice), at the time the tax return or claim for refund was prepared, that the advice was no longer reliable due to developments in the law since the time the advice was given.

For examples illustrating the provisions of this section F, see section H below.



G. Interim Penalty Compliance Rules

Until further guidance is issued, solely for purposes of section 6694, a signing tax return preparer shall be deemed to meet the requirements of section 6694 with respect to a position for which there is a reasonable basis but for which the tax return preparer does not have a reasonable belief that the position would more likely than not be sustained on the merits, if the tax return preparer meets any of the following requirements:


1. The position is disclosed in accordance with §1.6662-4(f) (which permits disclosure on a properly completed and filed Form 8275, Disclosure Statement, or 8275-R, Regulation Disclosure Statement, as appropriate, or on the tax return in accordance with the annual revenue procedure described in §1.6662-4(f)(2));



2. If the position would not meet the standard for the taxpayer to avoid a penalty under section 6662(d)(2)(B) without disclosure, the tax return preparer provides the taxpayer with the prepared tax return that includes the disclosure in accordance with §1.6662-4(f);



3. If the position would otherwise meet the requirement for nondisclosure under section 6662(d)(2)(B)(i), the tax return preparer advises the taxpayer of the difference between the penalty standards applicable to the taxpayer under section 6662 and the penalty standards applicable to the tax return preparer under section 6694, and contemporaneously documents in the tax return preparer's files that this advice was provided; or



4. If section 6662(d)(2)(B) does not apply because the position may be described in section 6662(d)(2)(C), the tax return preparer advises the taxpayer of the penalty standards applicable to the taxpayer under section 6662(d)(2)(C) and the difference, if any, between these standards and the standards under section 6694, and contemporaneously documents in the tax return preparer's files that this advice was provided.


For purposes of this interim guidance, the rules applicable to signing tax return preparers described in this section will apply instead of §1.6694-2(c)(3)(i).

Until further guidance is issued, solely for purposes of section 6694, a nonsigning tax return preparer shall be deemed to meet the requirements of section 6694 with respect to a position for which there is a reasonable basis but for which the nonsigning tax return preparer does not have a reasonable belief that the position would more likely than not be sustained on the merits, if the advice to the taxpayer includes a statement informing the taxpayer of any opportunity to avoid penalties under section 6662 that could apply to the position as a result of disclosure, if relevant, and of the requirements for disclosure. If a nonsigning tax return preparer provides advice to another tax return preparer, a nonsigning tax return preparer shall be deemed to meet the requirements of section 6694 with respect to a position for which there is a reasonable basis but for which the nonsigning tax return preparer does not have a reasonable belief that the position would more likely than not be sustained on the merits, if the advice to the tax return preparer includes a statement that disclosure under section 6694(a) may be required. If the advice with respect to a position is in writing, the statement must be in writing. If the advice with respect to a position is oral, the statement also may be oral. Contemporaneously prepared documentation in the nonsigning tax return preparer's files is sufficient to establish that the statement was given to the taxpayer or other tax return preparer. For purposes of this interim guidance, the rules applicable to nonsigning tax return preparers described in this section will apply instead of §1.6694-2(c)(3)(ii).

For examples illustrating the provisions of this section G, see section H below.



H. Examples

Examples illustrating the provisions of this notice and existing rules under current regulations:


Example 1. Accountant A prepares a Form 8886, Reportable Transaction Disclosure Statement, that is used to disclose reportable transactions. Accountant A does not prepare the tax return or advise the taxpayer regarding the tax return reporting position of the transaction to which the Form 8886 relates. The preparation of the Form 8886 is not directly relevant to the determination of the existence, characterization, or the amount of an entry on a tax return or claim for refund. Rather, the Form 8886 is prepared by Accountant A to disclose a reportable transaction. Accountant A has not prepared a substantial portion of the tax return and is not considered a tax return preparer under section 6694.



Example 2. Accountant B prepares a partnership's Form 1065 (including Schedules K-1) allocating the partnership's losses among its partners in proportion to their original investment. Accountant B is not an employee of either the partnership or the general partner. Accountant B knows that the loss deduction calculated by Accountant B and claimed by one of the partners on that partner's tax return, if disallowed, is the most significant portion of the liability on that partner's tax return. Accountant B has prepared a substantial portion of that partner's tax return and is considered a tax return preparer under section 6694.



Example 3. Attorney C, an attorney in a law firm, advises a large corporate taxpayer on specific issues of law regarding the tax consequences of a proposed corporate transaction. Based upon this advice, the corporate taxpayer enters into the transaction. Once the transaction is completed, the corporate taxpayer does not receive any additional advice from Attorney C or anyone in Attorney C's firm with respect to the proposed corporate transaction. Six months later, the corporate taxpayer hires Preparer D, who is not associated with the same firm as Attorney C, to prepare its entire tax return. Attorney C has not prepared a substantial portion of the corporation's tax return and is not considered a tax return preparer under section 6694.



Example 4. Attorney D, an attorney in a law firm, advises a large corporate taxpayer concerning the proper treatment and amount of a single entry on the corporate taxpayer's tax return. The tax liability involved in this entry is an insignificant portion of the tax liability for the corporate tax return as a whole. Neither Attorney D nor any other attorney associated with Attorney D's firm signs the corporate taxpayer's tax return as a tax return preparer. Attorney D has not prepared a substantial portion of the corporation's tax return and is not considered a tax return preparer under section 6694.



Example 5. Attorney E specializes in tax planning at a law firm and develops Strategy Y, a plan with a significant purpose of tax avoidance. Attorney E provides advice with respect to Strategy Y to 50 taxpayers. The 50 taxpayers implement Strategy Y in a manner that significantly reduces the Federal tax liability that would otherwise be reported on their tax returns. After Strategy Y is entered into, Attorney E advises each of the 50 taxpayers on the reporting of specific amounts that Attorney E knows will be placed on the tax return of each of the 50 taxpayers. Attorney E knows that the tax liability involved in this entry, if disallowed, is a significant portion of the tax liability for each of the tax returns. Neither Attorney E nor any other person associated with Attorney E's firm signs the taxpayers' tax returns as a tax return preparer. The advice relating to Strategy Y constitutes preparation of a substantial portion of each of the 50 taxpayers' tax returns. Thus, Attorney E is a tax return preparer under section 6694.



Example 6. During an interview conducted by Preparer F, the taxpayer provided a schedule prepared by another advisor in Preparer F's firm for use in preparing the taxpayer's tax return. The schedule did not appear to be incorrect or incomplete. On the basis of this information, Preparer F completed the tax return. It is later determined that there is an understatement of liability for tax that resulted from incorrect information on the schedule. Preparer F is not required to audit, examine or review the schedule in order to verify independently that the information on the schedule met the standard requiring a reasonable belief that the position would more likely than not sustained on the merits. Preparer F is not subject to a penalty under section 6694.



Example 7. In preparing a tax return, Accountant G relies on the advice of an actuary concerning the limit on deductibility under section 404(a)(1)(A) of a contribution by an employer to a qualified pension trust. The actuary providing the advice was not associated with Accountant G's firm. On the basis of this advice, Accountant G completed the tax return. It is later determined that there is an understatement of liability for tax that resulted from incorrect advice provided by the actuary. Accountant G had no reason to believe that the advice was incorrect or incomplete, and the advice appeared reasonable on its face. Accountant G was also not aware of any reason why the actuary did not know all of the relevant facts or that the advice was no longer reliable due to developments in the law since the time the advice was given. Accountant G is not subject to a penalty under section 6694.



Example 8. During an interview conducted by Preparer H, a taxpayer stated that he had made a charitable contribution of real estate in the amount of $50,000 during the tax year, when in fact he had not made this charitable contribution. Preparer H did not inquire about the existence of a qualified appraisal or complete a Form 8283 in accordance with the reporting and substantiation requirements under section 170(f)(11). Preparer H reported deductions on the tax return for the charitable contribution which resulted in an understatement of liability for tax. Preparer H is subject to a penalty under section 6694.



Example 9. Preparer I prepared the tax returns of a taxpayer for each of the past three years. While preparing this year's tax return, Preparer I realizes that the taxpayer did not provide a Form 1099 for a bank account that produced significant taxable income in each of the previous three years. When Preparer I asked the taxpayer about any other existing income and the lack of this Form 1099, the taxpayer furnishes the Form 1099 to Preparer I for use in preparation of the tax return. Preparer I did not know that the taxpayer owned an additional bank account this past year that generated taxable income and the taxpayer did not reveal this information to the tax return preparer. Preparer I is not subject to a penalty under section 6694.



Example 10. A corporate taxpayer hires Accountant J to prepare its tax return. Accountant J encounters an issue regarding various small asset expenditures. Accountant J researches the issue and concludes that there is a reasonable basis for a particular treatment of the issue. Accountant J cannot, however, reach a reasonable belief whether the position would more likely than not be sustained on the merits because it was impossible to make a precise quantification regarding whether the position would more likely than not be sustained on the merits. The position is not disclosed on the tax return. Accountant J signs the tax return as the tax return preparer. The IRS later disagrees with this position taken on the tax return. Accountant J is not subject to a penalty under section 6694.



Example 11. A corporate taxpayer hires Accountant K to prepare its income tax return. Accountant K does not reasonably believe that a particular position taken on the tax return would more likely than not be sustained on its merits although there is substantial authority for the position. Accountant K prepares and signs the tax return without disclosing the position taken on the tax return, but advises the corporate taxpayer of the difference between the penalty standards applicable to the taxpayer under section 6662 and to the tax return preparer under section 6694, and contemporaneously documents in the tax return preparer's files that this advice was provided. The corporate taxpayer signs and files the tax return without disclosing the position because the position meets the requirements for nondisclosure under section 6662(d)(2)(B)(i). The IRS later disagrees with the position taken on the tax return, resulting in an understatement of liability reported on the tax return. Accountant K is not subject to a penalty under section 6694.



Example 12. Attorney L advises a large corporate taxpayer in writing concerning the proper treatment of complex entries on the corporate taxpayer's tax return. Attorney L has reason to know that the tax liability involved in these entries, if disallowed, is a significant portion of the tax liability for the tax return. When providing the advice, Attorney L concludes that one position with respect to these entries does not meet the reasonable belief that the position would more likely than not be sustained on the merits standard and also does not have substantial authority, although the position meets the reasonable basis standard. Attorney L, in good faith, advises the corporate taxpayer in writing that the position lacks substantial authority and the taxpayer will be subject to an accuracy-related penalty under section 6662 unless the position is disclosed in a disclosure statement included in the return. Attorney L also documents the fact that this advice was contemporaneously provided to the corporate taxpayer in writing at the time the advice was provided. The corporate taxpayer decides not to include a disclosure statement in the return. Neither Attorney L nor any other attorney associated with Attorney L's firm signs the corporate taxpayer's return as a tax return preparer, but the advice by Attorney L constitutes preparation of a substantial portion of the tax return. Thus, Attorney L is a tax return preparer for purposes of section 6694. Attorney L, however, will not be subject to a penalty under section 6694.




REQUESTS FOR COMMENTS

Interested parties are invited to submit comments on this notice by March 24, 2008. Comments should be submitted to: Internal Revenue Service, CC:PA:LPD:PR ( Notice 2008-13), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20224. Alternatively, comments may be hand delivered Monday through Friday between the hours of 8:00 a.m. to 4:00 p.m. to: CC:PA:LPD:PR ( Notice 2008-13), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, DC. Comments may also be submitted electronically via the following e-mail address: Notice.Comments@irscounsel.treas.gov. Please include Notice 2008-13 in the subject line of any electronic submissions.

Specifically, this notice requests comments with respect to the definition of a tax return preparer. The Treasury Department and the IRS are considering various modifications to the regulations defining tax return preparer for purposes of sections 6694 and 7701(a)(36). These modifications may include limiting the definition or keeping a broader definition in order to clarify the definition of nonsigning tax return preparers in such a manner that nonsigning tax return preparers can more easily identify the circumstances under which they would be subject to section 6694. This may involve the addition of examples or changes to the current de minimis safe harbor in §301.7701-15(b)(2).

This notice also requests comments with respect to providing additional guidance on defining both the reasonable belief and more likely than not concepts included in section 6694, as amended by the Act. Comments are requested whether the Treasury Department and the IRS should promulgate rules specifically tailored to common situations when reaching a more likely than not level of certainty on a position is not possible or practical as either a legal or factual matter and, specifically, whether disclosure should be necessary to avoid penalties under section 6694(a) and how disclosure should be made in those situations.



EFFECTIVE DATE

This notice is effective as of: (1) January 1, 2008, for all tax returns, amended tax returns, and claims for refund (other than 2007 employment and excise tax returns) filed on after that date with respect to advice provided on or after that date; and (2) February 1, 2008, for all 2007 employment and excise tax returns filed on after that date with respect to advice provided on or after that date.



CONTACT INFORMATION

The principal authors of this notice are Matthew S. Cooper and Michael E. Hara of the Office of Associate Chief Counsel (Procedure and Administration). For further information regarding this notice, contact Mr. Cooper at (202) 622-4940 or Mr. Hara at (202) 622-4910 (not toll-free calls).



EXHIBIT 1 - Tax Returns Reporting Tax Liability



Income Tax Returns - Subtitle A


Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation;



Form 990T, Exempt Organization Business Income Tax Return;



Form 1040, U.S. Individual Income Tax Return;



Form 1040A, U.S. Individual Income Tax Return;



Form 1040-EZ, Income Tax Return for Single Filers and Joint Filers With No Dependents;



Form 1040-EZT, Claim for Refund of Federal Telephone Excise Tax;



Form 1040X, Amended U.S. Individual Income Tax Return;



Form 1040-PR (Anexo H-PR), Contribuciones sobre el Empleo de Empleados Domesticos;



Form 1041, U.S. Income Tax Return for Estates and Trusts;



Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons;



Form 1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return;



Form 1120, U.S. Corporation Income Tax Return;



Form 1120-C, U.S. Income Tax Return for Cooperative Associations;



Form 1120-IC DISC, Interest Charge Domestic International Sales -Corporation Return;



Form 1120-F, U.S. Income Tax Return of a Foreign Corporation;



Form 1120S, U.S. Income Tax Return for an S Corporation;



Form 1120X, Amended U.S. Corporation Income Tax Return;



Form 8831, Excise Taxes on Excess Inclusions of REMIC Residual Interests ( I.R.C. §860E); and



Form 8924, Excise Tax on Certain Transfers of Qualifying Geothermal or Mineral Interests (New Form, Exclusion from Capital Gains).




Estate and Gift Tax Returns - Subtitle B


Form 706, U.S. Estate Tax Return;



Form 706-A, United States Additional Estate Tax Return;



Form 706-D, United States Additional Estate Tax Return Under Code Section 2057;



Form 706-GS(D) Generation-Skipping Transfer Tax Return for Distributions;



Form 706-GS(T) Generation-Skipping Transfer Tax Return for Terminations;



Form 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return - Estate of nonresident not a citizen of the United States ;



Form 706-QDT, United States Estate Tax Return for Qualified Domestic Trusts;



Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return; and



Form 843, Claim For Refund and Request for Abatement (also used to claim refunds for employment and certain excise tax returns).




Employment Tax Returns - Subtitle C


Form CT-1, Employer's Annual Railroad Retirement Tax Return;



Form CT-2, Employee Representative's Quarterly Railroad Tax Return;



Form 940, Employer's Annual Federal Unemployment Tax Return;



Form 940-PR, Planilla para la Declaración Federal ANUAL del Patrono de la Contribución Federal para el Desempleo (FUTA);



Form 941, Employer's QUARTERLY Federal Tax Return;



Form 941-PR, Planilla para la Declaración Federal TRIMESTRAL del Patrono;



Form 941-SS, Employer's QUARTERLY Federal Tax Return;



Form 941-M, Employer's MONTHLY Federal Tax Return;



Form 943, Employer's Annual Federal Tax Return for Agricultural Employees;



Form 943-PR, Planilla Para la Declaración ANUAL de la Contribución Federal del Patrono De Empleados Agrícolas;



Form 944, Employer's ANNUAL Federal Tax Return;



Form 944-PR, Planilla para la Declaración ANUAL de la Contribución Federal del Patrono;



Form 944(SP), Declaración Federal ANUAL de Impuestos del Patrono o Empleador;



Form 944-SS, Employer's ANNUAL Federal Tax Return;



Form 945, Annual Return of Withheld Federal Income Tax;



Form 1040-SS, U.S. Self-Employment Tax Return.




Miscellaneous Excise Tax Returns - Subtitle D


Form 11-C, Occupational Tax and Registration Return for Wagering;



Form 720, Quarterly Federal Excise Tax Return;



Form 720X, Amended Quarterly Federal Excise Tax Return;



Form 730, Monthly Tax Return for Wagers;



Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation (with respect to the excise tax based on investment income);



Form 2290, Heavy Highway Vehicle Use Tax Return;



Form 2290(FR), Declaration d'Impot sur L'utilisation des Vehicules Lourds sur les Routes;



Form 2290(SP), Declaración del Impuesto sobre el Uso de Vehículos Pesados en las Carreteras;



Form 4720, Return of Certain Excise Taxes on Charities and Other Persons Under Chapters 41 and 42 of the Internal Revenue Code;



Form 5330, Return of Excise Taxes Related to Employee Benefit Plans;



Form 8612, Return of Excise Tax on Undistributed Income of Real Estate Investment Trusts;



Form 8613, Return of Excise Tax on Undistributed Income of Regulated Investment Companies; and



Form 8849, Claim for Refund of Excise Taxes.




Alcohol, Tobacco, and Certain Other Excise Taxes - Subtitle E


Form 8725, Excise Tax on Greenmail; and



Form 8876, Excise Tax on Structured Settlement Factoring Transactions.




Exhibit 2 - Information Returns That Report Information That is or May be Reported on Another Tax Return That May Subject a Tax Return Preparer to the Section 6694(a) Penalty if the Information Reported Constitutes a Substantial Portion of the Other Tax Return


Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding;



Form 1065, U.S. Return of Partnership Income (including Schedules K-1);



Form 1120S, U.S. Income Tax Return for an S Corporation (including Schedules K-1);



Form 5500, Annual Return/Report of Employee Benefit Plan;



Form 8038, Information Return for Tax-Exempt Private Activity Bond Issues;



Form 8038-G, Information Return for Government Purpose Tax-Exempt Bond Issues; and



Form 8038-GC, Consolidated Information Return for Small Tax-Exempt Government Bond Issues.




Exhibit 3 - Forms That Would Not Subject a Tax Return Preparer to the Section 6694(a) Penalty Unless Prepared Willfully in any Manner to Understate the Liability of Tax on a Return or Claim for Refund or in Reckless or Intentional Disregard of Rules or Regulations


Form 1099 series of returns;



Form W-2 series of returns;



Form W-8BEN, Beneficial Owner's Certificate of Foreign Status for U.S. Tax Withholding;



Form SS-8, Determination of Worker Status;



Form 990, Return of Organization Exempt from Income Tax;



Form 990-EZ, Short Form Return of Organization Exempt From Income Tax;



Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations not Required To File Form 990 or 990-EZ;



Form 1040-ES, Estimated Tax for Individuals;



Form 1120-W, Estimated Tax for Corporations;



Form 2350, Application for Extension of Time to File U.S. Income Tax Return;



Form 2350 (SP), Application for Extension of Time to File U.S. Income tax Return (Spanish Version);



Form 4137, Social Security and Medicare Tax on Unreported Tip Income;



Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes;



Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return;



Form 4868 (SP), Application for Automatic Extension of Time to File U.S. Individual Income Tax Return (Spanish Version);



Form 5558, Application for Extension of Time to File Certain Employee Plan Returns;



Form 7004, Application for Automatic 6-Month Extension of Time To File Certain Business Income Tax, Information, and Other Returns;



Form 8109, Federal Tax Deposit Coupon;



Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips;



Form 8809, Application for Extension of Time to File Information Returns;



Form 8868, Application for Extension of Time To File an Exempt Organization Return;



Form 8892, Application for Automatic Extension of Time to File Form 709 and/or Payment of Gift/Generation-Skipping Transfer Tax; and



Form 8919, Uncollected Social Security and Medicare Tax on Wages.

Tax sheler - The IRS has identified the four components identifying an intermediary transaction tax shelter (ITTS), which is a listed transaction under Reg. §1.6011-4(b)(2), and has modified Notice 2001-16, 2001-1 C.B. 730, with respect to the types of persons considered to be participants in such transaction.




Notice 2008-20 , I.R.B. 2008-06, January 17, 2008.

[ Code Secs. 6011, 6111, 6112, 6662, 6662A, 6700 and 6701]


Listed transactions: Intermediary transaction tax shelter: Components and participants. --




A transaction is characterized as an ITTS if it has four components: 1) a corporation (T) or its successor owns appreciated assets and has insufficient tax benefits to eliminate or offset the gain if such assets were sold (the "built-in tax"); 2) at least 50 percent of T's stock is sold by it shareholder(s) (X) in a non-liquidation transaction within a 12 month period; 3) at the time X sells at least 50 percent of T's stock, or within the twelve months before or thereafter, T's assets are sold to one or more buyers (Y); and 4) T's built-in tax is purportedly offset, avoided or not paid. In addition, X will not be considered a participant in an ITTS transaction if the T stock X disposes of is traded on an established securities market ( "Securities"). The buyer, Y, will not be treated as a participant if the only assets of T which Y acquires are either Securities or do no include a trade or business. Participants in ITTS transactions have disclosure and registration requirements, and may be subject to penalties for failing to satisfy them. Back references: ¶35,141.78, ¶37,002.156, ¶37,022.156, ¶39,651G.825, ¶39,654E.01, ¶39,960.40, ¶40,030.14 and ¶40,035.80.






SECTION 1. PURPOSE

Notice 2001-16, 2001-1 C.B. 730, identified the Intermediary Transaction Tax Shelter as a listed transaction under §1.6011-4(b)(2) of the Income Tax Regulations. Since that notice was published, the Internal Revenue Service (Service) has received disclosure statements with respect to Notice 2001-16 transactions pursuant to §1.6011-4 and other information pursuant to §§6111 and 6112 of the Internal Revenue Code and through promoter audits. After reviewing the disclosure statements and other information, the Service and Treasury Department have decided to identify the components of an Intermediary Transaction Tax Shelter. A transaction that does not have all of the components identified herein is not the same as or substantially similar to the listed transaction described in Notice 2001-16. The Service and Treasury Department also are identifying the persons who are treated as participants in an Intermediary Transaction Tax Shelter under §1.6011-4(c)(3)(i)(A). This notice should not otherwise be construed as limiting the scope or application of Notice 2001-16 and should not otherwise create any inference as to whether or not a transaction was required to be disclosed or registered under §6011 or §6111 prior to January 17, 2008.



SECTION 2. BACKGROUND

An Intermediary Transaction Tax Shelter attempts to avoid the corporate income tax from a sale of assets. Generally it involves transactions in which shareholders of a corporation dispose of their shares of stock of the corporation, one or more persons purchase the corporation's assets in one or more taxable transactions, and all or a portion of the gain or tax that would otherwise result to the corporation from a sale of the assets is avoided.



SECTION 3. DISCUSSION

.01 Components of an Intermediary Transaction Tax Shelter

An Intermediary Transaction Tax Shelter involves the use of an intermediary (M) (which can be one or more persons) in facilitating the transaction. However, the Service has received information and comments from taxpayers suggesting that identifying the transaction based on the role of an entity that appears to be an intermediary may result in over-disclosure or under-disclosure of the transaction depending on the circumstances of the transaction. To address these concerns, this notice identifies the four necessary components in an Intermediary Transaction Tax Shelter from the perspective of the target corporation, its shareholders, and the purchasers of the target corporation's assets.

1. A corporation (T) directly or indirectly (e.g., through a pass-through entity or a member of a consolidated group of which T is a member) owns assets the sale of which would result in taxable gain and, as of the time of the stock disposition described in component two, T (or the consolidated group of which T is a member) has insufficient tax benefits to eliminate or offset such taxable gain (or the tax) in whole or in part. The tax that would result from such sale is hereinafter referred to as T's Built-in Tax. In determining whether T's (or the consolidated group's) tax benefits are insufficient for purposes of the first sentence, the following tax benefits shall be excluded: (i) any tax benefits attributable to a listed transaction under §1.6011-4(b)(2), and (ii) any tax benefits attributable to built-in loss property acquired within 12 months before the stock disposition described in component two, to the extent such built-in losses exceed built-in gains in property acquired in the same transaction(s). All references to T in this notice include successors to T.

2. At least 50 percent of the T stock (by vote or value) is disposed of by T's shareholder(s) (X), other than in liquidation of T, in one or more related transactions within a 12 month period.

3. Either within 12 months before, simultaneously, or within 12 months after the date on which´has disposed of at least 50 percent of the T stock (by vote or value) (excluding any time T is protected or hedged against price fluctuations), all or most of T's assets are disposed of (Sold T Assets) to one or more buyers (Y) in one or more transactions in which gain is recognized with respect to the Sold T Assets. Where a disposition of Sold T Assets is an intercompany transaction between members of a consolidated group, the disposition will not be a "transaction in which gain is recognized with respect to the Sold T Assets" for purposes of the preceding sentence until such gain must be taken into account under the rules of §1.1502-13.

4. All or most of T's Built-in Tax described in component one that would otherwise result from the disposition of the Sold T Assets described in component three is purportedly offset or avoided or not paid.

.02 Participation in the Listed Transaction

A transaction must have all four of the components identified herein to be the same as or substantially similar to the listed transaction identified in Notice 2001-16 as the Intermediary Transaction Tax Shelter. In determining whether a person is a participant in a transaction identified in Notice 2001-16, the general rule in §1.6011-4(c)(3)(i)(A) applies, except the following rules apply with respect to persons in the position of´or Y as described below:


Ÿ In no event will any´be treated as a participant under §1.6011-4(c)(3)(i)(A) if the only T stock´disposes of is traded on an established securities market (within the meaning of §1.453-3(d)(4)) and prior to the disposition´(including related persons described in section 267(b) or 707(b)) did not hold five percent (or more) by vote or value of any class of T stock disposed of by X.



Ÿ In no event will any Y be treated as a participant under §1.6011-4(c)(3)(i)(A) if the only Sold T Assets acquired by Y are either (i) securities (as defined in section 475(c)(2)) that are traded on an established securities market (within the meaning of §1.453-3(d)(4)) and represent a less-than-five-percent interest in that class of security, or (ii) assets that are not securities and do not include a trade or business as described in §1.1060-1(b)(2).


.03 Disclosure, List Maintenance, and Registration Requirements; Penalties; Other Considerations

Independent of their classification as "listed transactions," transactions that are the same as, or substantially similar to, the transaction described in Notice 2001-16 may already be subject to the requirements of §6011, §6111, or §6112, or the regulations thereunder.

Persons involved with these transactions are alerted to certain responsibilities that may arise from their involvement with these transactions. Persons required to disclose these transactions under §1.6011-4 and who fail to do so may be subject to the penalty under §6707A. Persons required to disclose or register these transactions under §6111 who have failed to do so may be subject to the penalty under §6707(a). Persons required to maintain lists of investors under §6112 who fail to provide such lists when requested by the Service may be subject to the penalty under §6708(a). A person that is a tax-exempt entity within the meaning of §4965(c), or an entity manager within the meaning of §4965(d), may be subject to excise tax, disclosure, filing or payment obligations under §4965, §6033(a)(2), §6011, and §6071. Some taxable entities may be subject to disclosure obligations under §6011(g) that apply to "prohibited tax shelter transactions" as defined by §4965(e) (including listed transactions).

In addition, the Service may impose other penalties on persons involved in this transaction or substantially similar transactions (including an accuracy-related penalty under §6662 or 6662A) and, as applicable, on persons who participate in the promotion or reporting of this transaction or substantially similar transactions (including the return preparer penalty under §6694, the promoter penalty under §6700, and the aiding and abetting penalty under §6701).

Further, under §6501(c)(10), the period of limitations on assessment may be extended beyond the general three-year period of limitations for persons required to disclose transactions under §1.6011-4 who fail to do so. See Rev. Proc. 2005-26, 2005-1 C.B. 965.

The Service and the Treasury Department recognize that some taxpayers may have filed tax returns taking the position that they were entitled to the purported tax benefits of the types of transactions described in Notice 2001-16. These taxpayers should consult with a tax advisor to ensure that their transactions are disclosed properly and to take appropriate corrective action.



SECTION 4. EFFECTIVE DATE

This notice is effective as of January 17, 2008. This notice is applicable to returns and statements due under §6011 or §6111 after January 17, 2008.



SECTION 5. EFFECT ON OTHER DOCUMENTS

Notice 2001-16 is modified with respect to the types of persons who may be treated as participants in an Intermediary Transaction Tax Shelter under §1.6011-4(c)(3)(i)(A).



DRAFTING INFORMATION

The principal author of this notice is T. Ian Russell of the Office of Associate Chief Counsel (Corporate). For further information regarding this notice contact Mr. Russell at (202) 622-7550 (not a toll-free call).

New Procedures for Exempt Organizations

The IRS has updated procedures regarding the request, issuance and appeal of determination letters and rulings on the exempt status of organizations under Code Secs. 501 and 521. These procedures apply to exempt organizations other than those relating to pension, profit-sharing, stock bonus, annuity and employee stock ownership plans. The updated procedures provide guidance on requesting determination letters, the steps taken in issuing determination letters, appealing determination letters, revoking determination letters and when an organization will have sufficiently exhausted administrative remedies allowing for a declaratory judgment proceeding under Code Sec. 7428. Included in the guidance is the new central address for the processing of exempt status applications, replacing the former system of district offices. However, some applications may be processed in other exempt organization (EO) offices or referred to EO Technical. Rev. Proc. 2007-52, I.R.B. 2007-30, 222, is superseded, and Rev. Proc. 76-34, 1976-2 CB 656, is supplemented.



Rev. Proc. 2008-9 , I.R.B. 2008-2, 258, January 14, 2008.[ Code Secs. 501, 507, 511, 521, 527, 4947, 7428 and Statement of Procedural Rules Sec. 601.201]


Exempt organizations: Exempt status: Application for exempt status: Procedures. --


TABLE OF CONTENTS


SECTION 1. WHAT IS THE PURPOSE OF THIS REVENUE PROCEDURE?

.01 Description of terms used in this revenue procedure

.02 Updated annually

SECTION 2. NATURE OF CHANGES AND RELATED REVENUE PROCEDURES

.01 Rev. Proc. 2007-52 is superseded and the processing of applications is now centralized

.02 Related revenue procedures

SECTION 3. WHAT ARE THE PROCEDURES FOR REQUESTING RECOGNITION OF EXEMPT STATUS?

.01 In general

.02 User fee

.03 Form 1023 application

.04 Form 1024 application

.05 Letter application

.06 Form 1028 application

.07 Form 8871 notice for political organizations

.08 Requirements for a substantially completed application

.09 Terrorist organizations not eligible to apply for recognition of exemption

SECTION 4. WHAT ARE THE STANDARDS FOR ISSUING A DETERMINATION LETTER OR RULING ON EXEMPT STATUS?

.01 Exempt status must be established in application and supporting documents

.02 Determination letter or ruling based solely on administrative record

.03 Exempt status may be recognized in advance of actual operations

.04 No letter if exempt status issue in litigation or under consideration within the Service

.05 Incomplete application

.06 Even if application is complete, additional information may be required

.07 Expedited handling

SECTION 5. WHAT OFFICES ISSUE AN EXEMPT STATUS DETERMINATION LETTER OR RULING?

.01 EO Determinations issues a determination letter in most cases

.02 Certain applications referred to EO Technical

.03 Technical advice may be requested in certain cases

.04 Technical advice must be requested in certain cases

SECTION 6. WITHDRAWAL OF AN APPLICATION

.01 Application may be withdrawn prior to issuance of a determination letter or ruling

.02 § 7428 implications of withdrawal of application under § 501(c)(3)

SECTION 7. WHAT ARE THE PROCEDURES WHEN EXEMPT STATUS IS DENIED?

.01 Proposed adverse determination letter or ruling

.02 Appeal of a proposed adverse determination letter issued by EO Determinations

.03 Protest of a proposed adverse ruling issued by EO Technical

.04 Final adverse determination letter or ruling where no appeal or protest is submitted

.05 How EO Determinations handles an appeal of a proposed adverse determination letter

.06 Consideration by the Appeals Office

.07 If a protest of a proposed adverse ruling is submitted to EO Technical

.08 An appeal or protest may be withdrawn

.09 Appeal or protest and conference rights not applicable in certain situations

SECTION 8. DISCLOSURE OF APPLICATIONS AND DETERMINATION LETTERS AND RULINGS

.01 Disclosure of applications, supporting documents, and favorable determination letters or rulings

.02 Disclosure of adverse determination letters or rulings

.03 Disclosure to State officials when the Service refuses to recognize exemption under § 501(c)(3)

.04 Disclosure to State officials of information about § 501(c)(3) applicants

SECTION 9. REVIEW OF DETERMINATION LETTERS BY EO TECHNICAL

.01 Determination letters may be reviewed by EO Technical to assure uniformity

.02 Procedures for cases where EO Technical takes exception to a determination letter

SECTION 10. DECLARATORY JUDGMENT PROVISIONS OF § 7428

.01 Actual controversy involving certain issues

.02 Exhaustion of administrative remedies

.03 Not earlier than 270 days after seeking determination

.04 Service must have reasonable time to act on an appeal or protest

.05 Final determination to which § 7428 applies

SECTION 11. EFFECT OF DETERMINATION LETTER OR RULING RECOGNIZING EXEMPTION

.01 Effective date of exemption

.02 Reliance on determination letter or ruling

SECTION 12. REVOCATION OR MODIFICATION OF DETERMINATION LETTER OR RULING RECOGNIZING EXEMPTION

.01 Revocation or modification of a determination letter or ruling may be retroactive

.02 Appeal and conference procedures in the case of revocation or modification of exempt status letter

SECTION 13. EFFECT ON OTHER REVENUE PROCEDURES

SECTION 14. EFECTIVE DATE

SECTION 15. PAPERWORK REDUCTION ACT

DRAFTING INFORMATION



SECTION 1. WHAT IS THE PURPOSE OF THIS REVENUE PROCEDURE?

This revenue procedure sets forth procedures for issuing determination letters and rulings on the exempt status of organizations under §§ 501 and 521 of the Internal Revenue Code other than those subject to Rev. Proc. 2008-6, 2008-1 I.R.B. 192 (relating to pension, profit-sharing, stock bonus, annuity, and employee stock ownership plans). Generally, the Service issues these determination letters and rulings in response to applications for recognition of exemption from Federal income tax. These procedures also apply to revocation or modification of determination letters or rulings. This revenue procedure also provides guidance on the exhaustion of administrative remedies for purposes of declaratory judgment under § 7428 of the Code.



Description of terms used in this revenue procedure

.01 For purposes of this revenue procedure -

(1) the term "Service" means the Internal Revenue Service.

(2) the term "application" means the appropriate form or letter that an organization must file or submit to the Service for recognition of exemption from Federal income tax under the applicable section of the Internal Revenue Code. See section 3 for information on specific forms.

(3) the term "EO Determinations" means the office of the Service that is primarily responsible for processing initial applications for tax-exempt status. It includes the main EO Determinations office located in Cincinnati, Ohio, and other field offices that are under the direction and control of the Manager, EO Determinations.

(4) the term "EO Technical" means the office of the Service that is primarily responsible for issuing letter rulings to taxpayers on exempt organization matters, and for providing technical advice or technical assistance to other offices of the Service on exempt organization matters. The EO Technical office is located in Washington, DC.

(5) the term "Appeals Office" means any office under the direction and control of the Chief, Appeals. The purpose of the Appeals Office is to resolve tax controversies, without litigation, on a fair and impartial basis. The Appeals Office is independent of EO Determinations and EO Technical.

(6) the term "determination letter" means a written statement issued by EO Determinations or an Appeals Office in response to an application for recognition of exemption from Federal income tax under §§ 501 and 521. This includes a written statement issued by EO Determinations or an Appeals Office on the basis of advice secured from EO Technical pursuant to the procedures prescribed herein and in Rev. Proc. 2008-5, 2008-1 I.R.B. 164.

(7) the term "ruling" means a written statement issued by EO Technical in response to an application for recognition of exemption from Federal income tax under §§ 501 and 521.



Updated annually

.02 This revenue procedure is updated annually, but may be modified or amplified during the year.



SECTION 2. NATURE OF CHANGES AND RELATED REVENUE PROCEDURES



Rev. Proc. 2007-52 is superseded and the processing of applications is now centralized

.01 This revenue procedure updates Rev. Proc. 2007-52, 2007-30 I.R.B. 222, which is hereby superseded.

(1) The responsibility for processing applications is now centralized in the EO Determinations office in Cincinnati, Ohio. Key district offices no longer exist.

(2) Although applications are generally processed in the Cincinnati office, some applications may be processed in other EO Determinations offices or referred to EO Technical.



Related revenue procedures

.02 This revenue procedure supplements Rev. Proc. 76-34, 1976-2 C.B. 656, with respect to the effects of § 7428 of the Code on the classification of organizations under §§ 509(a) and 4942(j)(3). Rev. Proc. 80-27, 1980-1 C.B. 677, sets forth procedures under which exemption may be recognized on a group basis for subordinate organizations affiliated with and under the general supervision and control of a central organization. Rev. Proc. 72-5, 1972-1 C.B. 709, provides information for religious and apostolic organizations seeking recognition of exemption under § 501(d). General procedures for requests for a determination letter or ruling are provided in Rev. Proc. 2008-4, 2008-1 I.R.B. 121. User fees for requests for a determination letter or ruling are set forth in Rev. Proc. 2008-8, 2008-1 I.R.B. 233.



SECTION 3. WHAT ARE THE PROCEDURES FOR REQUESTING RECOGNITION OF EXEMPT STATUS?



In general

.01 An organization seeking recognition of exempt status under § 501 or § 521 is required to submit the appropriate application. In the case of a numbered application form, the current version of the form must be submitted. A central organization that has previously received recognition of its own exemption can request a group exemption letter by submitting a letter application with Form 8718, User Fee for Exempt Organization Determination Letter Request. See Rev. Proc. 80-27.



User fee

.02 An application must be submitted with the correct user fee, as set forth in Rev. Proc. 2008-8.



Form 1023 application

.03 An organization seeking recognition of exemption under § 501(c)(3) and §§ 501(e), (f), (k), (n) or (q) must submit a completed Form 1023. In the case of an organization that provides credit counseling services, see § 501(q) of the Code.



Form 1024 application

.04 An organization seeking recognition of exemption under §§ 501(c)(2), (4), (5), (6), (7), (8), (9), (10), (12), (13), (15), (17), (19) or (25) must submit a completed Form 1024 with Form 8718. In the case of an organization that provides credit counseling services and seeks recognition of exemption under section 501(c)(4), see § 501(q) of the Code.



Letter application

.05 An organization seeking recognition of exemption under §§ 501(c)(l 1), (14), (16), (18), (21), (22), (23), (26), (27) or (28) or under § 501(d) must submit a letter application with Form 8718.



Form 1028 application

.06 An organization seeking recognition of exemption under § 521 must submit a completed Form 1028 with Form 8718.



Form 8871 notice for political organizations

.07 A political party, a campaign committee for a candidate for federal, state or local office, and a political action committee are all political organizations subject to tax under § 527. To be tax-exempt, a political organization may be required to notify the Service that it is to be treated as a § 527 organization by electronically filing Form 8871, Political Organization Notice of Section 527 Status. For details, go to the IRS website at www.irs.gov/polorgs.



Requirements for a substantially completed application

.08 A substantially completed application, including a letter application, is one that:

(1) is signed by an authorized individual.

(2) includes an Employer Identification Number (EIN).

(3) includes a statement of receipts and expenditures and a balance sheet for the current year and the three preceding years (or the years the organization was in existence, if less than four years). If the organization has not yet commenced operations, or has not completed one accounting period, a substantially completed application generally includes a proposed budget for two full accounting periods and a current statement of assets and liabilities.

(4) includes a detailed narrative statement of proposed activities, including each of the fundraising activities of a § 501(c)(3) organization, and a narrative description of anticipated receipts and contemplated expenditures.

(5) includes a copy of the organizing or enabling document that is signed by a principal officer or is accompanied by a written declaration signed by an authorized individual certifying that the document is a complete and accurate copy of the original or otherwise meets the requirements of a "conformed copy" as outlined in Rev. Proc. 68-14, 1968-1 C.B. 768.

(6) if the organizing or enabling document is in the form of articles of incorporation, includes evidence that it was filed with and approved by an appropriate state official ( e.g., stamped "Filed" and dated by the Secretary of State). Alternatively, a copy of the articles of incorporation may be submitted if accompanied by a written declaration signed by an authorized individual that the copy is a complete and accurate copy of the original copy that was filed with and approved by the state. If a copy is submitted, the written declaration must include the date the articles were filed with the state.

(7) if the organization has adopted by-laws, includes a current copy. The by-laws need not be signed if submitted as an attachment to the application for recognition of exemption. Otherwise, the by-laws must be verified as current by an authorized individual.

(8) is accompanied by the correct user fee and Form 8718, when applicable.



Terrorist organizations not eligible to apply for recognition of exemption

.09 An organization that is identified or designated as a terrorist organization within the meaning of § 501(p)(2) of the Code is not eligible to apply for recognition of exemption.



SECTION 4. WHAT ARE THE STANDARDS FOR ISSUING A DETERMINATION LETTER OR RULING ON EXEMPT STATUS?



Exempt status must be established in application and supporting documents

.01 A favorable determination letter or ruling will be issued to an organization only if its application and supporting documents establish that it meets the particular requirements of the section under which exemption from Federal income tax is claimed.



Determination letter or ruling based solely on administrative record

.02 A determination letter or ruling on exempt status is issued based solely upon the facts and representations contained in the administrative record.

(1) The applicant is responsible for the accuracy of any factual representations contained in the application.

(2) Any oral representation of additional facts or modification of facts as represented or alleged in the application must be reduced to writing over the signature of an authorized individual.

(3) The failure to disclose a material fact or misrepresentation of a material fact on the application may adversely affect the reliance that would otherwise be obtained through issuance by the Service of a favorable determination letter or ruling.



Exempt status may be recognized in advance of actual operations

.03 Exempt status may be recognized in advance of the organization's operations if the pro-posed activities are described in sufficient detail to permit a conclusion that the organization will clearly meet the particular requirements for exemption pursuant to the section of the Internal Revenue Code under which exemption is claimed.

(1) A mere restatement of exempt purposes or a statement that proposed activities will be in furtherance of such purposes will not satisfy this requirement.

(2) The organization must fully describe all of the activities in which it expects to engage, including the standards, criteria, procedures or other means adopted or planned for carrying out the activities, the anticipated sources of receipts, and the nature of contemplated expenditures.

(3) Where the organization cannot demonstrate to the satisfaction of the Service that it qualifies for exemption pursuant to the section of the Internal Revenue Code under which exemption is claimed, the Service will generally issue a proposed adverse determination letter or ruling. See also section 7.



No letter if exempt status issue in litigation or under consideration within the Service

.04 A determination letter or ruling on exempt status will not ordinarily be issued if an issue involving the organization's exempt status under § 501 or § 521 is pending in litigation, is under consideration within the Service, or if issuance of a determination letter or ruling is not in the interest of sound tax administration. If the Service declines to issue a determination or ruling to an organization seeking exempt status under § 501(c)(3), the organization may be able to pursue a declaratory judgment under § 7428 provided that it has exhausted its administrative remedies.



Incomplete application

.05 If an application does not contain all of the items set out in section 3.08, the Service may return it to the applicant for completion.

(1) In lieu of returning an incomplete application, the Service may retain the application and request additional information needed for a substantially completed application.

(2) In the case of an application or a group exemption request under § 501(c)(3) that is returned incomplete, the 270-day period referred to in § 7428(b)(2) will not be considered as starting until the date a substantially completed Form 1023 or group exemption request is refiled with or remailed to the Service. If the application or group exemption request is mailed to the Service and a postmark is not evident, the 270-day period will start to run on the date the Service actually receives the substantially completed Form 1023 or group exemption request. The same rules apply for purposes of the notice requirement of § 508.

(3) Generally, the user fee will not be refunded if an incomplete application is filed. See Rev. Proc. 2008-8, section 10.



Even if application is complete, additional information may be required

.06 Even though an application is substantially complete, the Service may request additional information before issuing a determination letter or ruling.

(1) If the application involves an issue where contrary authorities exist, an applicant's failure to disclose and distinguish contrary authorities may result in requests for additional information, which could delay final action on the application.

(2) In the case of an application under § 501(c)(3), the period of time beginning on the date the Service requests additional information until the date the information is submitted to the Service will not be counted for purposes of the 270-day period referred to in § 7428(b)(2).



Expedited handling

.07 Applications are normally processed in the order of receipt by the Service. However, expedited handling of an application may be approved where a request is made in writing and contains a compelling reason for processing the application ahead of others. Upon approval of a request for expedited handling an application will be considered out of its normal order. This does not mean the application will be immediately approved or denied. Circumstances generally warranting expedited processing include:

(1) A grant to the applicant is pending and the failure to secure the grant may have an adverse impact on the organization's ability to continue to operate.

(2) The purpose of the newly created organization is to provide disaster relief to victims of emergencies such as flood and hurricane.

(3) There have been undue delays in issuing a determination letter or ruling caused by a Service error.



SECTION 5. WHAT OFFICES ISSUE AN EXEMPT STATUS DETERMINATION LETTER OR RULING?



EO Determinations issues a determination letter in most cases

.01 Under the general procedures outlined in Rev. Proc. 2008 --4, EO Determinations is authorized to issue determination letters on applications for exempt status under §§ 501 and 521.



Certain applications referred to EO Technical

.02 EO Determinations will refer to EO Technical those applications that present issues which are not specifically covered by statute or regulations, or by a ruling, opinion, or court decision published in the Internal Revenue Bulletin. In addition, EO Determinations will refer those applications that have been specifically reserved by revenue procedure or by other official Service instructions for handling by EO Technical for purposes of establishing uniformity or centralized control of designated categories of cases. EO Technical will notify the applicant organization upon receipt of a referred application, and will consider each such application and issue a ruling directly to the organization.



Technical advice may be requested in certain cases

.03 If at any time during the course of consideration of an exemption application by EO Determinations the organization believes that its case involves an issue on which there is no published precedent, or there has been non-uniformity in the Service's handling of similar cases, the organization may request that EO Determinations either refer the application to EO Technical or seek technical advice from EO Technical. See Rev. Proc. 2008-5, section 4.04.



Technical advice must be requested in certain cases

.04 If EO Determinations proposes to recognize the exemption of an organization to which EO Technical had issued a previous contrary ruling or technical advice, EO Determinations must seek technical advice from EO Technical before issuing a determination letter. This does not apply where EO Technical issued an adverse ruling and the organization subsequently made changes to its purposes, activities, or operations to remove the basis for which exempt status was denied.



SECTION 6. WITHDRAWAL OF AN APPLICATION



Application may be withdrawn prior to issuance of a determination letter or ruling

.01 An application may be withdrawn upon the written request of an authorized individual at any time prior to the issuance of a determination letter or ruling. Therefore, an application may not be withdrawn after the issuance of a proposed adverse determination letter or ruling.

(1) When an application is withdrawn, the Service will retain the application and all supporting documents. The Service may consider the information submitted in connection with the withdrawn request in a subsequent examination of the organization.

(2) Generally, the user fee will not be refunded if an application is withdrawn. See Rev. Proc. 2008-8, section 10.



§ 7428 implications of withdrawal of application under § 501(c)(3)

.02 The Service will not consider the withdrawal of an application under § 501(c)(3) as either a failure to make a determination within the meaning of § 7428(a)(2) or as an exhaustion of administrative remedies within the meaning of § 7428(b)(2).



SECTION 7. WHAT ARE THE PROCEDURES WHEN EXEMPT STATUS IS DENIED?



Proposed adverse determination letter or ruling

.01 If EO Determinations or EO Technical reaches the conclusion that the organization does not satisfy the requirements for exempt status pursuant to the section of the Internal Revenue Code under which exemption is claimed, the Service will generally issue a proposed adverse determination letter or ruling, which will:

(1) Include a detailed discussion of the Service's rationale for the denial of tax-exempt status.

(2) Advise the organization of its opportunity to appeal or protest the decision and request a conference.



Appeal of a proposed adverse determination letter issued by EO Determinations

.02 A proposed adverse determination letter issued by EO Determinations will advise the organization of its opportunity to appeal the determination by requesting Appeals Office consideration. To do this, the organization must submit a statement of the facts, law and arguments in support of its position within 30 days from the date of the adverse determination letter. The organization must also state whether it wishes an Appeals Office conference. Any determination letter issued on the basis of technical advice from EO Technical may not be appealed to the Appeals Office on issues that were the subject of the technical advice.



Protest of a proposed adverse ruling issued by EO Technical

.03 A proposed adverse ruling issued by EO Technical will advise the organization of its opportunity to file a protest statement within 30 days and to request a conference. If a conference is requested, the conference procedures outlined in Rev. Proc. 2008-4, section 12, are applicable.



Final adverse determination letter or ruling where no appeal or protest is submitted

.04 If an organization does not submit a timely appeal of a proposed adverse determination letter issued by EO Determinations, or a timely protest of a proposed adverse ruling issued by EO Technical, a final adverse determination letter or ruling will be issued to the organization. The final adverse letter or ruling will provide information about the filing of tax returns and the disclosure of the proposed and final adverse letters or rulings.



How EO Determinations handles an appeal of a proposed adverse determination letter

.05 If an organization submits an appeal of the proposed adverse determination letter, EO Determinations will first review the appeal, and if it determines that the organization qualifies for tax-exempt status issue a favorable exempt status determination letter. If EO Determinations maintains its adverse position after reviewing the appeal, it will forward the appeal and the exemption application case file to the Appeals Office.



Consideration by the Appeals Office

.06 The Appeals Office will consider the organization's appeal. If the Appeals Office agrees with the proposed adverse determination, it will either issue a final adverse determination or, if a conference was requested, contact the organization to schedule a conference. At the end of the conference process, which may involve the submission of additional information, the Appeals Office will either issue a final adverse determination letter or a favorable determination letter. If the Appeals Office believes that an exemption or private foundation status issue is not covered by published precedent or that there is non-uniformity, the Appeals Office must request technical advice from EO Technical in accordance with Rev. Proc. 2008-5, section 4.04.



If a protest of a proposed adverse ruling is submitted to EO Technical

.07 If an organization submits a protest of a proposed adverse exempt status ruling, EO Technical will review the protest statement. If the protest convinces EO Technical that the organization qualifies for tax-exempt status, a favorable ruling will be issued. If EO Technical maintains its adverse position after reviewing the protest, it will either issue a final adverse ruling or, if a conference was requested, contact the organization to schedule a conference. At the end of the conference process, which may involve the submission of additional information, EO Technical will either issue a final adverse ruling or a favorable exempt status ruling.



An appeal or protest may be withdrawn

.08 An organization may withdraw its appeal or protest before the Service issues a final adverse determination letter or ruling. Upon receipt of the withdrawal request, the Service will complete the processing of the case in the same manner as if no appeal or protest was received.



Appeal or protest and conference rights not applicable in certain situations

.09 The opportunity to appeal or protest a proposed adverse determination letter or ruling and the conference rights described above are not applicable to matters where delay would be prejudicial to the interests of the Service (such as in cases involving fraud, jeopardy, the imminence of the expiration of the statute of limitations, or where immediate action is necessary to protect the interests of the Government).



SECTION 8. DISCLOSURE OF APPLICATIONS AND DETERMINATION LETTERS AND RULINGS

Sections 6104 and 6110 of the Code provide rules for the disclosure of applications, including supporting documents, and determination letters and rulings.



Disclosure of applications, supporting documents, and favorable determination letters or rulings

.01 The applications, any supporting documents, and the favorable determination letter or ruling issued are available for public inspection under § 6104(a)(1) of the Code. However, there are certain limited disclosure exceptions for a trade secret, patent, process, style of work, or apparatus if the Service determines that the disclosure of the information would adversely affect the organization.

(1) The Service is required to make the applications, supporting documents, and favorable determination letters or rulings available upon request. The public can request this information by submitting Form 4506-A, Request for Public Inspection or Copy of Exempt or Political Organization IRS Form.

(2) The exempt organization is required to make its exemption application, supporting documents, and determination letter or ruling available for public inspection without charge. For more information about the exempt organization's disclosure obligations, see Publication 557, Tax-Exempt Status for Your Organization.



Disclosure of adverse determination letters or rulings

.02 The Service is required to make adverse determination letters and rulings available for public inspection under § 6110 of the Code. Upon issuance of the final adverse determination letter or ruling to an organization, both the proposed adverse determination letter or ruling and the final adverse determination letter or ruling will be released under § 6110.

(1) These documents are made available to the public after the deletion of names, addresses, and any other information that might identify the taxpayer. See § 6110(c) for other specific disclosure exemptions.

(2) The final adverse determination letter or ruling will enclose Notice 437, Notice of Intention to Disclose, and redacted copies of the final and proposed adverse determination letters or rulings. Notice 437 provides instructions if the organization disagrees with the deletions proposed by the Service.



Disclosure to State officials when the Service refuses to recognize exemption under § 501(c)(3)

.03 The Service may notify the appropriate State officials of a refusal to recognize an organization as tax-exempt under § 501(c)(3). See § 6104(c) of the Code. The notice to the State officials may include a copy of a proposed or final adverse determination letter or ruling the Service issued to the organization. In addition, upon request by the appropriate State official, the Service may make available for inspection and copying the exemption application and other information relating to the Service's determination on exempt status.



Disclosure to State officials of information about § 501(c)(3) applicants

.04 The Service may disclose to State officials the name, address, and identification number of any organization that has applied for recognition of exemption under § 501(c)(3).



SECTION 9. REVIEW OF DETERMINATION LETTERS BY EO TECHNICAL



Determination letters may be reviewed by EO Technical to assure uniformity

.01 Determination letters issued by EO Determinations may be reviewed by EO Technical, or the Office of the Associate Chief Counsel (Passthroughs and Special Industries) (for cases under § 521), to assure uniform application of the statutes or regulations, or rulings, court opinions, or decisions published in the Internal Revenue Bulletin.



Procedures for cases where EO Technical takes exception to a determination letter

.02 If EO Technical takes exception to a determination letter issued by EO Determinations, the manager of EO Determinations will be advised. If EO Determinations notifies the organization of the exception taken, and the organization disagrees with the exception, the file will be returned to EO Technical. The referral to EO Technical will be treated as a request for technical advice and the procedures in Rev. Proc. 2008-5 will be followed.



SECTION 10. DECLARATORY JUDGMENT PROVISIONS OF § 7428



Actual controversy involving certain issues

.01 Generally, a declaratory judgment proceeding under § 7428 of the Code can be filed in the United States Tax Court, the United States Court of Federal Claims, or the district court of the United States for the District of Columbia with respect to an actual controversy involving a determination by the Service or a failure of the Service to make a determination with respect to the initial or continuing qualification or classification of an organization under § 501(c)(3) (charitable, educational, etc.); § 170(c)(2) (deductibility of contributions); § 509(a) (private foundation status); or § 4942(j)(3) (operating foundation status).



Exhaustion of administrative remedies

.02 Before filing a declaratory judgment action, an organization must exhaust its administrative remedies by taking, in a timely manner, all reasonable steps to secure a determination from the Service. These include:

(1) the filing of a substantially completed application Form 1023 or group exemption request under § 501(c)(3) pursuant to section 3.08 of this Revenue Procedure or the request for a determination of foundation status pursuant to Rev. Proc. 76-34;

(2) in appropriate cases, requesting relief pursuant to § 301.9100-1 of the Procedure and Administration Regulations regarding the extension of time for making an election or application for relief from tax ( see Rev. Proc. 92-85, 1992-2 C.B. 490);

(3) the timely submission of all additional information requested by the Service to perfect an exemption application or request for determination of private foundation status; and

(4) exhaustion of all administrative appeals available within the Service pursuant to section 7.



Not earlier than 270 days after seeking determination

.03 An organization will in no event be deemed to have exhausted its administrative remedies prior to the earlier of:

(1) the completion of the steps in section 10.02, and the sending by the Service by certified or registered mail of a final determination letter or ruling; or

(2) the expiration of the 270-day period described in § 7428(b)(2) in a case where the Service has not issued a final determination letter or ruling and the organization has taken, in a timely manner, all reasonable steps to secure a determination letter or ruling.



Service must have reasonable time to act on an appeal or protest

.04 The steps described in section 10.02 will not be considered completed until the Service has had a reasonable time to act upon an appeal or protest as the case may be.



Final determination to which § 7428 applies

.05 A final determination to which § 7428 of the Code applies is a determination letter or ruling, sent by certified or registered mail, which holds that the organization is not described in § 501(c)(3) or § 170(c)(2), is a public charity described in a part of § 509 or § 170(b)(1)(A) other than the part under which the organization requested classification, is not a private foundation as defined in § 4942(j)(3), or is a private foundation and not a public charity described in a part of § 509 or § 170(b)(1)(A).



SECTION 11. EFFECT OF DETERMINATION LETTER OR RULING RECOGNIZING EXEMPTION



Effective date of exemption

.01 A determination letter or ruling recognizing exemption is usually effective as of the date of formation of an organization if its purposes and activities prior to the date of the determination letter or ruling were consistent with the requirements for exemption. However, special rules under § 508(a) of the Code may apply to an organization applying for exemption under § 501(c)(3), and special rules under § 505(c) may apply to an organization applying for exemption under §§ 501(c)(9), (17), or (20).

(1) If the Service requires the organization to alter its activities or make substantive amendments to its enabling instrument, the exemption will be effective as of the date specified in a determination letter or ruling.

(2) If the Service requires the organization to make a nonsubstantive amendment, exemption will ordinarily be recognized as of the date of formation. Examples of nonsubstantive amendments include correction of a clerical error in the enabling instrument or the addition of a dissolution clause where the activities of the organization prior to the determination letter or ruling are consistent with the requirements for exemption.



Reliance on determination letter or ruling

.02 A determination letter or ruling recognizing exemption may not be relied upon if there is a material change, inconsistent with exemption, in the character, the purpose, or the method of operation of the organization. Also, a determination letter or ruling may not be relied upon if it was based on any inaccurate material factual representations. See section 12.01.



SECTION 12. REVOCATION OR MODIFICATION OF DETERMINATION LETTER OR RULING RECOGNIZING EXEMPTION

A determination letter or ruling recognizing exemption may be revoked or modified by (1) a notice to the taxpayer to whom the determination letter or ruling was issued, (2) enactment of legislation or ratification of a tax treaty, (3) a decision of the United States Supreme Court, (4) the issuance of temporary or final regulations, or (5) the issuance of a revenue ruling, revenue procedure, or other statement published in the Internal Revenue Bulletin.



Revocation or modification of a determination letter or ruling may be retroactive

.01 The revocation or modification of a determination letter or ruling recognizing exemption may be retroactive if the organization omitted or misstated a material fact, operated in a manner materially different from that originally represented, or, in the case of organizations to which § 503 of the Code applies, engaged in a prohibited transaction with the purpose of diverting corpus or income of the organization from its exempt purpose and such transaction involved a substantial part of the corpus or income of such organization. In certain cases an organization may seek relief from retroactive revocation or modification of a determination letter or ruling under § 7805(b). Requests for § 7805(b) relief are subject to the procedures set forth in Rev. Proc. 2008-5.

(1) Where there is a material change, inconsistent with exemption, in the character, the purpose, or the method of operation of an organization, revocation or modification will ordinarily take effect as of the date of such material change.

(2) In the case where a determination letter or ruling is issued in error or is no longer in accord with the Service's position and § 7805(b) relief is granted ( see sections 13 and 14 of Rev. Proc. 2008-4), ordinarily, the revocation or modification will be effective not earlier than the date when the Service modifies or revokes the original determination letter or ruling.



Appeal and conference procedures in the case of revocation or modification of exempt status letter

.02 In the case of a revocation or modification of a determination letter or ruling, the appeal and conference procedures are generally the same as set out in section 7 of these procedures, including the right of the organization to request that EO Determinations or the Appeals Office seek technical advice from EO Technical. However, appeal and conference rights are not applicable to matters where delay would be prejudicial to the interests of the Service (such as in cases involving fraud, jeopardy, the imminence of the expiration of the statute of limitations, or where immediate action is necessary to protect the interests of the Government).

(1) If the case involves an exempt status issue on which EO Technical had issued a previous contrary ruling or technical advice, EO Determinations generally must seek technical advice from EO Technical.

(2) EO Determinations does not have to seek technical advice if the prior ruling or technical advice has been revoked by subsequent contrary published precedent or if the proposed revocation involves a subordinate unit of an organization that holds a group exemption letter issued by EO Technical, the EO Technical ruling or technical advice was issued under the Internal Revenue Code of 1939 or prior revenue acts, or if the ruling was issued in response to Form 4653, Notification Concerning Foundation Status.



SECTION 13. EFFECT ON OTHER REVENUE PROCEDURES

Rev. Proc. 2007-52 is superseded.



SECTION 14. EFECTIVE DATE

This revenue procedure is effective January 7, 2008.



SECTION 15. PAPERWORK REDUCTION ACT

The collection of information for a letter application under section 3.05 of this revenue procedure has been reviewed and approved by the Office of Management and Budget (OMB) in accordance with the Paperwork Reduction Act (44 U.S.C. § 3507) under control number 1545-2080. All other collections of information under this revenue procedure have been approved under separate OMB control numbers.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number.

The collection of this information is required if an organization wants to be recognized as tax-exempt by the Service. We need the information to determine whether the organization meets the legal requirements for tax-exempt status. In addition, this information will be used to help the Service delete certain information from the text of an adverse determination letter or ruling before it is made available for public inspection, as required by § 6110.

The time needed to complete and file a letter application will vary depending on individual circumstances. The estimated average time is 10 hours.

Books and records relating to the collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. The rules governing the confidentiality of letter applications are covered in § 6104.



DRAFTING INFORMATION

The principal author of this revenue procedure is Ted Lieber of the Exempt Organizations, Tax Exempt and Government Entities Division.

Rev. Proc. 2008-8 , I.R.B. 2008-1, 233, January 7, 2008.
[ Code Secs. 401, 403, 408, 408A, 412, 501, 503, 507, 509, 511, 521, 4945, 4971 and Statement of Procedural Rules Sec. 601.201]


Internal Revenue Service: User fees: Employee plans: Exempt organizations. --
Rev. Proc. 2008-8 provides guidance for complying with the IRS's user fee program as it pertains to requests for letter rulings, determination letters and similar requests regarding matters under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division. Further, the procedure addresses the method by which the administrative scrutiny determination user fees described in Rev. Proc. 93-41, 1993-2 CB 536, are collected. The procedure reflects Section 8244 of the U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007 ( P.L. 110-28), which makes user fees permanent. Also, two new user fees have been added to section 6.01 as a result of on-going practice and the Pension Protection Act of 2006 ( P.L. 109-280), and the user fee for Form 6406, Short Form Application for Determination for Minor Amendment of Employee Benefit Plan, has been removed due to the elimination of that form. Rev. Proc. 2008-8 is effective for requests postmarked, or if not mailed, received on or after January 7, 2008. Rev. Proc. 2007-8, I.R.B. 2007-1, 230, is superseded.



TABLE OF CONTENTS




SECTION 1. PURPOSE



SECTION 2. CHANGES
.01 In general

.02 Changes to fee schedules



SECTION 3. BACKGROUND
.01 Legislation authorizing user fees

.02 Related revenue procedures



SECTION 4. SCOPE
.01 Requests to which user fees apply

.02 Requests and other actions that do not require the payment of a user fee

.03 Exemptions from the user fee requirements



SECTION 5. DEFINITIONS



SECTION 6. FEE SCHEDULE
EMPLOYEE PLANS USER FEES

.01 Letter ruling requests

.02 Opinion letters on prototype individual retirement accounts and/or annuities, SEPs, SIMPLE IRAs, SIMPLE IRA Plans, and Roth IRAs.

Note: If a mass submitter submits, in any 12-month period ending January 31, more than 300 applications on behalf of word-for-word adopters of prototype IRAs or prototype dual purpose IRAs with respect to a particular plan document, only the first 300 such applications will be subject to the fee; no fee will apply to those in excess of the first 300 such applications submitted within the 12-month period

.03 Opinion letters on master and prototype plans

.04 Advisory letters on volume submitter plans

.05 Determination letters

EXEMPT ORGANIZATIONS USER FEES

.06 Letter rulings

.07 Determination letters and requests for group exemption letters

.08 Summary of exempt organization fees



SECTION 7. MAILING ADDRESS FOR REQUESTING LETTER RULINGS, DETERMINATION LETTERS, ETC
.01 Matters handled by EP or EO Technical

.02 Matters handled by EP or EO Determinations



SECTION 8. REQUESTS INVOLVING MULTIPLE OFFICES, FEE CATEGORIES, ISSUES, TRANSACTIONS, OR ENTITIES
.01 Requests involving several offices

.02 Requests involving several fee categories

.03 Requests involving several issues

.04 Requests involving several unrelated transactions

.05 Requests for separate letter rulings for several entities



SECTION 9. PAYMENT OF FEE
.01 Method of payment

.02 Transmittal forms

.03 Effect of nonpayment or payment of incorrect amount



SECTION 10. REFUNDS
.01 General rule

.02 Examples



SECTION 11. REQUEST FOR RECONSIDERATION OF USER FEE



SECTION 12. EFFECT ON OTHER DOCUMENTS



SECTION 13. EFFECTIVE DATE



SECTION 14. PAPERWORK REDUCTION ACT



APPENDIX



SECTION 1. PURPOSE

This revenue procedure provides guidance for complying with the user fee program of the Internal Revenue Service as it pertains to requests for letter rulings, determination letters, etc., on matters under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division; and requests for administrative scrutiny determinations under Rev. Proc. 93-41, 1993-2 C.B. 536.



SECTION 2. CHANGES

.01 In general. This revenue procedure is a general update of Rev. Proc. 2007-8, 2007-1 I.R.B. 230.

.02 Section 3.01 is revised to reflect the legislation that makes Service user fees permanent.

.03 Two new employee plans user fees are added to section 6.01 as a result of ongoing practice and the Pension Protection Act of 2006, Pub. L. No. 109-280.

.04 As a result of the elimination of Form 6406, the user fee for that form is eliminated and the appropriate paragraphs renumbered.



SECTION 3. BACKGROUND

.01 Legislation authorizing user fees. Section 7528 was added to the Code by section 202 of the Temporary Assistance for Needy Families Block Grant Program, Pub. L. No. 108-89, and was made permanent by section 8244 of the U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007, Pub. L. No. 110-28. Section 7528 of the Code directs the Secretary of the Treasury or delegate (the "Secretary") to establish a program requiring the payment of user fees for requests to the Service for letter rulings, opinion letters, determination letters, and similar requests. The fees charged under the program (1) are to vary according to categories or subcategories established by the Secretary; (2) are to be determined after taking into account the average time for, and difficulty of, complying with requests in each category and subcategory; and (3) are payable in advance. Section 7528(b)(3) directs the Secretary to provide for exemptions and reduced fees under the program as the Secretary determines to be appropriate, but the average fee applicable to each category may not be less than the amount specified in § 7528.

.02 Related revenue procedures. The various revenue procedures that require payment of a user fee, or an administrative scrutiny determination user fee are described in the appendix to this revenue procedure.



SECTION 4. SCOPE

.01 Requests to which user fees apply. In general, user fees apply to all requests for letter rulings, opinion letters, determination letters, and advisory letters submitted by or on behalf of taxpayers, sponsoring organizations or other entities as described in this revenue procedure. Further, administrative scrutiny determination user fees, described in Rev. Proc. 93-41, are collected through the user fee program described in this revenue procedure. Requests to which a user fee or an administrative scrutiny determination user fee is applicable must be accompanied by the appropriate fee as determined from the fee schedule set forth in section 6 of this revenue procedure. The fee may be refunded in limited circumstances as set forth in section 10.

.02 Requests and other actions that do not require the payment of a user fee. Actions which do not require the payment of a user fee include the following:

(1) Requests for information letters as defined in Rev. Proc. 2008-4, page 121, this Bulletin.

(2) Elections pertaining to automatic extensions of time under § 301.9100-1 of the Procedure and Administration regulations.

(3) Use of forms which are not to be filed with the Service. For example, no user fee is required in connection with the use of Form 5305, Traditional Individual Retirement Trust Account, or Form 5305-A, Traditional Individual Retirement Custodial Account, in order to adopt an individual retirement account under § 408(a).

(4) In general, plan amendments whereby sponsors amend their plans by adopting, word-for-word, the model language contained in a revenue procedure which states that the amendment should not be submitted to the Service and that the Service will not issue new opinion, advisory, ruling or determination letters for plans that are amended solely to add the model language.

(5) Change in accounting period or accounting method permitted by a published revenue procedure that permits an automatic change without prior approval of the Commissioner.

(6) Compliance and Correction Fees. Compliance fees and compliance correction fees under the Employee Plans Compliance Resolution System are not described in this procedure because they are compliance fees or compliance correction fees and not user fees. For further guidance, please see Rev. Proc. 2006-27, 2006-1 C.B. 945, as modified by Rev. Proc. 2007-49, 2007-30 I.R.B. 141.

.03 Exemptions from the user fee requirements. The following exemptions apply to the user fee requirements. These are the only exemptions that apply:

(1) Departments, agencies, or instrumentalities of the United States that certify that they are seeking a letter ruling, determination letter, opinion letter or similar letter on behalf of a program or activity funded by federal appropriations. The fact that a user fee is not charged has no bearing on whether an applicant is treated as an agency or instrumentality of the United States for purposes of any provision of the Code except for § 7528.

(2) Requests as to whether a worker is an employee for federal employment taxes and federal income tax withholding purposes (chapters 21, 22, 23, 23A, and 24 of subtitle C of the Code) submitted on Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, or its equivalent. Such a request may be submitted in connection with an application for a determination on the qualification of a plan when it is necessary to determine whether an employer-employee relationship exists. See section 6.13 of Rev. Proc. 2008-6, page 192, this Bulletin. In that case, although no user fee applies to the request submitted on Form SS-8, the applicable user fee must be paid in connection with the application for determination on the plan's qualification.



SECTION 5. DEFINITIONS

The following terms used in this revenue procedure are defined in the pertinent revenue procedures referred to below, which are described in the appendix:





Administrative scrutiny determination Rev. Proc. 93-41

Adoption agreement Rev. Proc. 2005-16

Advisory letter Rev. Procs. 2005-16, 2008-6

Basic plan document Rev. Proc. 2005-16

Determination letter Rev. Procs. 2007-52, 2008-4

Dual-purpose IRA Rev. Proc. 98-59

Group exemption letter Rev. Proc. 80-27

Information letter Rev. Proc. 2008-4

Letter ruling Rev. Proc. 2008-4

Mass submitter Rev. Procs. 87-50, 2005-16

Mass submitter plan Rev. Proc. 2005-16

Master plan Rev. Proc. 2005-16

Minor modification Rev. Procs. 87-50, 2005-16

Opinion letter Rev. Procs. 2005-16, 2008-4

Prototype plan Rev. Proc. 2005-16

Roth IRA Rev. Proc. 98-59

SIMPLE IRA Rev. Proc. 97-29

SIMPLE IRA Plan Rev. Proc. 97-29

Plan Sponsor Rev. Proc. 2005-16

Sponsoring organization Rev. Procs. 87-50, 2005-16

Staggered Remedial Amendment Period Rev. Proc. 2007-44

Substitute mortality table Rev. Proc. 2007-37

Volume submitter lead specimen plan Rev. Proc. 2005-16

Volume submitter plan Rev. Proc. 2005-16

Volume submitter specimen plan Rev. Proc. 2005-16

Word-for-word identical adoption Rev. Procs. 87-50, 2005-16





SECTION 6. FEE SCHEDULE

The amount of the user fee payable with respect to each category or subcategory of submission is as set forth in the following schedule.
CATEGORY



EMPLOYEE PLANS USER FEES

.01 Letter ruling requests.

(1) Computation of exclusion for annuitant under § 72 $500

(2) Change in plan year (Form 5308) $500

Note: No user fee is required if the requested change is permitted
to be made pursuant to the procedure for automatic approval set forth
in Rev. Proc. 87-27, 1987-1 C.B. 769. In such a case, Form 5308
should not be submitted to the Service.

(3) Certain waivers of 60-day rollover period

(a) Rollover less than $50,000 $500

(b) Rollover equal to or greater than $50,000 and $1,500
less than $100,000

(c) Rollover equal to or greater than $100,000 $3,000

(4) Change in funding method $2,800

(5) Letter ruling under Rev. Proc. 90-49, 1990-2 C.B. 620 $2,800

(6) Change in accounting method $2,800

(7) Request for administrative exemptions for $2,800
participant-directed transactions that are in compliance with
the regulations under § 404(c) of ERISA

(8) Approval to become a nonbank trustee (see § 1.408-2(e) of $14,500
the Income Tax Regulations)

(9) Any letter ruling under § 419 or § 419A $14,500

(10) Substitute mortality table under Rev. Proc. 2007-37 $14,500

(11) Waiver of minimum funding standard or excise tax of $14,500
$1,000,000 or more ( § 412(d), 4971(b) or 4971(f))

(12) All other letter rulings, etc., including: $9,000

(a) Administrative scrutiny determinations with
respect to separate lines of business (for each
separate line or lines of 5 or less)

(b) Individually designed simplified employee pension
(SEP)

(c) Waiver of minimum funding standard or excise tax
of less than $1,000,000 ( § 412(d), 4971(b) or
4971(f))

.02 Opinion letters on prototype individual retirement accounts
and/or annuities, SEPs, SIMPLE IRAs, SIMPLE IRA Plans, and Roth IRAs.


(1) Prototype IRA, SEP, SIMPLE IRA, SIMPLE IRA Plan, or Roth $3,000
IRA, per plan document, new or amended

(2) Sponsoring organization's word-for-word identical $200
adoption of mass submitter's prototype IRA, SEP, SIMPLE IRA,
SIMPLE IRA Plan, or Roth IRA, per plan document or an
amendment thereof

(3) Sponsoring organization's minor modification of a mass $750
submitter's prototype IRA, SEP, SIMPLE IRA, dual purpose IRA,
SIMPLE IRA Plan, or Roth IRA, per plan document

(4) Opinion letters on dual-purpose, per plan document new or $4,500
amended

(5) Assumption of sponsorship of an approved prototype IRA or $200
SEP, without any amendment to the plan document by a new
entity as evidenced by a change of an employer identification
number

Note: If a mass submitter submits, in any 12-month period ending
January 31, more than 300 applications on behalf of word-for-word
adopters of prototype IRAs or prototype dual purpose IRAs with
respect to a particular plan document, only the first 300 such
applications will be subject to the fee; no fee will apply to those
in excess of the first 300 such applications submitted within the
12-month period.

.03 Opinion letters on master and prototype plans.

(1) Mass submitter M & P plan, per basic plan document, new $9,000
or amended, with one adoption agreement

(2) Nonmass submission (new or amended) by M & P sponsor, per $9,000
adoption agreement

(3) Mass submitter M & P plan, per each additional adoption $650
agreement

(4) Sponsor's minor modification of M & P mass submitter's $650
plan document, per adoption agreement

(5) M & P mass submitter's request for an advisory letter $650
with respect to the addition of optional provisions following
issuance of a favorable opinion letter (see section 12.031(c)
of Rev. Proc. 2005-16), per basic plan document (regardless
of the number of adoption agreements)

(6) M & P mass submitter's addition of new adoption $650
agreements after the basic plan document and associated
adoption agreements have been approved, per adoption
agreement

Note 1: Mass submitters that are sponsors in their own right are
liable for this fee.

Note 2: If a mass submitter submits, in any 12-month period ending
January 31, more than 300 applications on behalf of word-for-word
adopters with respect to a particular adoption agreement, only the
first 300 such applications will be subject to the fee; no fee will
apply to those in excess of the first 300 such applications submitted
within the 12-month period.

(7) Sponsor's word-for-word identical adoption of M & P mass $200
submitter's basic plan document (or an amendment thereof),
per adoption agreement

(8) Assumption of sponsorship of an approved M & P plan, $200
without any amendment to the plan document, by a new entity,
as evidenced by a change of employer identification number

(9) Mass submitter or sponsor per trust document in excess of $650
10

.04 Advisory letters on volume submitter plans.

(1) Volume submitter specimen plans $9,000

(2) Volume submitter lead specimen plan $9,000

(3) Volume submitter specimen plan that is word-for-word $200
identical to a lead specimen plan

.05 Determination letters

(1) If the plan is intended to satisfy a design-based or
nondesign-based safe harbor, or if the applicant is not
electing to receive a determination with respect to any of
the general tests, and the applicant is not electing to
receive a determination with respect to the average benefit
test:

(a) Form 5300 ( Application for Determination for $1,000
Employee Benefit Plan)

(b) Form 5310 ( Application for Determination for $1,000
Terminating Plan)

(c) Form 5307 ( Application for Determination for $300
Adopters of Master or Prototype or Volume Submitter
Plans)

(d) Multiple employer plans (Form 5300):

(i) 2 to 10 Forms 5300 $1,500

(ii) 11 to 99 Forms 5300 $1,500

(iii) 100 to 499 Forms 5300 $10,000

(iv) Over 499 Forms 5300 $10,000

Note: In the case of a multiple employer
plan that is adopted by other employers after
the initial submission, the fee would be the
same as in paragraph (1) above.

(e) Multiple employer plans (Form 5310):

(i) 2 to 10 employers $1,500

(ii) 11 to 99 employers $1,500

(iii) 100 to 499 employers $10,000

(iv) Over 499 employers $10,000

(2) If the applicant is electing to receive a determination
with respect to the average benefit test and/or any of the
general tests:

(a) Form 5300 ( Application for Determination for $1,800
Employee Benefit Plan)

(b) Form 5310 ( Application for Determination for $1,800
Terminating Plan)

(c) Form 5307 ( Application for Determination for $1,000
Adopters of Master or Prototype or Volume Submitter
Plans)

(d) Multiple employer plans (Form 5300):

(i) 2 to 10 Forms 5300 $2,300

(ii) 11 to 99 Forms 5300 $2,300

(iii) 100 to 499 Forms 5300 $15,000

(iv) Over 499 Forms 5300 $15,000

Note: In the case of a multiple employer
plan that is adopted by other employers after
the initial submission, the fee would be the
same as in paragraph (2) above.

(e) Multiple employer plans (Form 5310):

(i) 2 to 10 employers $2,300

(ii) 11 to 99 employers $2,300

(iii) 100 to 499 employers $15,000

(iv) Over 499 employers $15,000

(3) Group trusts contemplated by Rev. Rul. 81-100, 1981-1 $750
C.B. 326, and Rev. Rul. 2004-67, 2004-2 C.B. 28.




EXEMPT ORGANIZATIONS USER FEES

.06 Letter rulings.

(1) Applications with respect to change in accounting period (Form $350
1128)

Note: No user fee is charged if the procedure described in
Rev. Proc. 85-58, 1985-2 C.B. 740, is used by timely filing the
appropriate information return, or if the procedure described in
Rev. Proc. 76-10, 1976-1 C.B. 548, for organizations with group
exemptions is followed.

(2) Applications with respect to change in accounting method (Form $275
3115)

Note: No user fee is charged if the method described in
Rev. Proc. 2002-9, 2002-1 C.B. 327, is used. Taxpayers complying
timely with Rev. Proc. 2002-9 will be deemed to have obtained the
consent of the Commissioner of Internal Revenue to change their
method of accounting.

(3) Request for approval of a qualified subsidiary related to a $900
§ 501(c)(25) organization.

(4) All other letter rulings $8,700

.07 Determination letters and requests for group exemption letters

(1) Initial application for exemption under § 501 or § 521 from $300
organizations (other than pension, profit-sharing, and stock bonus
plans described in § 401) that have had annual gross receipts
averaging not more than $10,000 during the preceding four years, or
new organizations that anticipate gross receipts averaging not more
than $10,000 during their first four years

Note: Organizations seeking this reduced fee must sign a
certification with their application that the receipts are or will
be not more than the indicated amounts.

(2) Initial application for exempt status from organizations $750
otherwise described in paragraph (1) of this section 6.07 whose
actual or anticipated gross receipts exceed the $10,000 average
annually

Note: If an organization that is already recognized as exempt
under § 501(c) seeks reclassification under another subparagraph of
§ 501(c), a new user fee will be charged whether or not a new
application is required. An additional fee applies to organizations
that seek recognition of exemption under § 501(c)(4) (unless
requested at the time of the § 501(c)(3) application) for a period
for which they do not qualify for exemption under § 501(c)(3)
because their application was filed late and they do not qualify
for relief under § 301.9100-1.

(3) Group exemption letters $900

Note: An additional fee under (1) or (2) above is required when a
central organization submits an initial application for exemption
with its request for a group exemption letter.

(4) Canadian registered charities none

In accordance with the income tax treaty between the United States
and Canada, Canadian registered charities are automatically
recognized as exempt under § 501(c)(3) without filing an
application for exemption. For details, see Notice 99-47, 1999-2
C.B. 391. Therefore, no user fee is required when a Canadian
registered charity submits all or part of a Form 1023 or other
written request to be listed in Publication 78, or for a
determination on its private foundation status.

.08 Summary of exempt organization fees



This table summarizes the various types of exempt organization issues, indicates the office of jurisdiction for each type, and lists the applicable user fee. Reduced fees may be applicable in certain instances.


ISSUE TECHNICAL OFFICE USER FEE

Accounting method changes $275

Accounting period changes $350

Qualified subsidiaries of § 501(c)(25) $900
organizations

Section 514(b)(3) Neighborhood Land Use None
Rule

Section 4943(c)(7) extensions of $8,700
disposal period




ISSUE DETERMINATIONS OFFICE USER FEE

Application for recognition of exemption $750

Reduced fee described in section 6.07(1) $300

Advance ruling period inquiries None

Confirmation of exemption (to replace None
lost exempt status letter, and to reflect
name and address changes)

Reclassification of private foundation None
status

Regulations § 301.9100 relief in None
connection with applications for
recognition of exemption

Section 507 terminations - advance None
ruling under § 507(b)(1)(B) and notice
under § 507(a)(1) or 507(b)(1)(B)

Section 4940(d) exempt operating None
foundation status

Section 4942(g)(2) set asides - advance None
approval

Section 4945 advance approval of None
organization's grant making procedures

Section 4945(f) advance approval of None
voter registration activities

Section 6033 annual information return None
filing requirements

Unusual grants to certain organizations None
under §§ 170(b)(1)(A)(vi) and 509(a)(2)





SECTION 7. MAILING ADDRESS FOR REQUESTING LETTER RULINGS, DETERMINATION LETTERS, ETC.

.01 Matters handled by EP or EO Technical. Requests should be mailed to the appropriate address set forth in this section 7.01.

(1) Employee plans letter rulings under Rev. Procs. 79-62, 87-50, 90-49, 94-42, 2000-41, 2004-15, 2004-44, 2007-37, or 2008-4:

Internal Revenue Service
Attention: EP Letter Rulings
P.O. Box 27063
McPherson Station
Washington, DC 20038
(2) Employee plans opinion letters under Rev. Procs. 87-50, 97-29, and 98-59:

Internal Revenue Service
Attention: EP Opinion Letters
P.O. Box 27063
McPherson Station
Washington, DC 20038
(3) Employee plans administrative scrutiny determinations under Rev. Proc. 93-41 :

Internal Revenue Service
Attention: Administrative Scrutiny
P.O. Box 27063
McPherson Station
Washington, DC 20038
(4) Exempt organizations letter rulings:

Internal Revenue Service
Attention: EO Letter Rulings
P.O. Box 27720
McPherson Station
Washington, DC 20038
Note: Hand delivered requests must be marked RULING REQUEST SUBMISSION. The delivery should be made to the following address between the hours of 8:30 a.m. and 4:00 p.m. where a receipt will be given:

Courier's Desk
Internal Revenue Service
Attention: SE:T:EP [or SE:T:EO]
1111 Constitution Avenue, NW --PE
Washington, DC 20224
.02 Matters handled by EP or EO Determinations Office. The following types of requests and applications are handled by the EP or EO Determinations Office and should be sent to the Internal Revenue Service Center in Covington, Kentucky, at the address shown below: requests for determination letters on the qualified status of employee plans under §§ 401, 403(a), or 409, and the exempt status of any related trust under § 501; applications for recognition of tax exemption on Form 1023, Form 1024 and Form 1028; and other applications for recognition of qualification or exemption. The address is:

Internal Revenue Service
P.O. Box 192
Covington, KY 41012-0192
The following types of requests and applications are handled by the EP Determinations Office and should be sent to the Internal Revenue Service at the address shown below: requests for opinion letters and for volume submitter advisory letters on the form of employee plans under § 401 or 403(a) and the exempt status of any related trust under § 501. The address is:

Internal Revenue Service
P.O. Box 2508
Rm. 5106
Cincinnati, OH 45201
Applications shipped by Express Mail or a delivery service should be sent to:

Internal Revenue Service
201 West Rivercenter Blvd.
Attn: Extracting Stop 312
Covington, KY 41011


SECTION 8. REQUESTS INVOLVING MULTIPLE OFFICES, FEE CATEGORIES, ISSUES, TRANSACTIONS, OR ENTITIES

.01 Requests involving several offices. If a request dealing with only one transaction involves more than one of the offices within Headquarters (for example, one issue is under the jurisdiction of the Associate Chief Counsel (Income Tax & Accounting) and another issue is under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division), only one fee applies, namely the highest fee that otherwise would apply to each of the offices involved. See Rev. Proc. 2008-1, this Bulletin, for the user fees applicable to issues under the jurisdiction of the Associate Chief Counsel (Corporate), the Associate Chief Counsel (Financial Institutions & Products), the Associate Chief Counsel (Income Tax & Accounting), the Associate Chief Counsel (Passthroughs & Special Industries), the Associate Chief Counsel (Procedure and Administration), the Associate Chief Counsel (International) or the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities).

.02 Requests involving several fee categories. If a request dealing with only one transaction involves more than one fee category, only one fee applies, namely the highest fee that otherwise would apply to each of the categories involved.

.03 Requests involving several issues. If a request dealing with only one transaction involves several issues, or a request for a change in accounting method dealing with only one item or sub-method of accounting involves several issues, or a request for a change in accounting period dealing with only one item involves several issues, the request is treated as one request. There-fore, only one fee applies, namely the fee that applies to the particular category or subcategory involved. The addition of a new issue relating to the same transaction will not result in an additional fee, unless the issue places the transaction in a higher fee category.

.04 Requests involving several unrelated transactions. If a request involves several unrelated transactions, or a request for a change in accounting method involves several unrelated items or sub-methods of accounting, or a request for a change in accounting period involves several unrelated items, each transaction or item is treated as a separate request. As a result, a separate fee will apply for each unrelated transaction or item. An additional fee will apply if the request is changed by the addition of an unrelated transaction or item not contained in the initial submission.

.05 Requests for separate letter rulings for several entities. Each entity involved in a transaction (for example, an exempt hospital reorganization) that desires a separate letter ruling in its own name must pay a separate fee regardless of whether the transaction or transactions may be viewed as related.



SECTION 9. PAYMENT OF FEE

.01 Method of payment. Each request to the Service for a letter ruling, determination letter, opinion letter, etc., must be accompanied by a check or money order, payable to the United States Treasury, in the appropriate amount. Taxpayers should not send cash.

.02 Transmittal forms. Form 8717, User Fee for Employee Plan Determination, Opinion, and Advisory Letter Request, and Form 8718, User Fee for Exempt Organization Determination Letter Request, are intended to be used as attachments to certain determination letter, opinion letter and advisory letter applications. Space is reserved for the attachment of the applicable user fee check or money order. No similar form has been designed to be used in connection with requests for letter rulings or administrative scrutiny determinations.

.03 Effect of nonpayment or payment of incorrect amount.

It will be the general practice of the Service that:

(1) The respective offices within the Service that are responsible for issuing letter rulings, determination letters, etc., will exercise discretion in deciding whether to immediately return submissions that are not accompanied by a properly completed check or money order or that are accompanied by a check or money order for less than the correct amount. In those instances where the submission is not immediately returned, the requester will be contacted and given a reasonable amount of time to submit the proper fee. If the proper fee is not received within a reasonable amount of time, the entire submission will then be returned. However, the respective offices of the Service, in their discretion, may defer substantive consideration of a submission until proper payment has been received.

(2) An application for a determination letter will not be returned merely because Form 8717 or Form 8718 was not attached.

(3) The return of a submission to the requester may adversely affect substantive rights if the submission is not perfected and resubmitted to the Service within 30 days of the date of the cover letter returning the submission. Examples of this are: (a) where an application for a determination letter is submitted prior to the expiration of the remedial amendment period under § 401(b) and is returned because no user fee was attached, the submission will be timely if it is resubmitted by the expiration of the remedial amendment period or, if later, within 30 days after the application was returned; and (b) where an application for exemption under § 501(c)(3) is submitted before expiration of the period provided by § 1.508-1(a)(2) and is returned because no user fee was attached, the submission will be timely if it is resubmitted before expiration of the period provided by §1.508-1(a)(2) or within 30 days, whichever is later.

(4) If a check or money order is for more than the correct amount, the submission will be accepted and the amount of the excess payment will be returned to the requester.



SECTION 10. REFUNDS

.01 General rule. In general, the fee will not be refunded unless the Service declines to rule or make a determination on all issues for which a ruling or determination letter is requested.

.02 Examples.

(1) The following situations are examples in which the fee will not be refunded:

(a) The request for a letter ruling, determination letter, etc., is withdrawn at any time subsequent to its receipt by the Service, unless the only reason for withdrawal is that the Service has advised the requester that a higher user fee than was sent with the request is applicable and the requester is unwilling to pay the higher fee. For example, no fee will be refunded where the taxpayer has been advised that a proposed adverse ruling is contemplated and subsequently withdraws its submission.

(b) The request is procedurally deficient, although accompanied by the proper fee or an overpayment, and it is not timely perfected. When there is a failure to timely perfect the request, the case will be considered closed and the failure to perfect will be treated as a withdrawal for purposes of this revenue procedure. An exemption application that is not substantially complete is considered a procedurally deficient request for a letter ruling or a determination letter on exempt status.

(c) In the case of a request for a letter ruling, if the case has been closed by the Service because essential information has not been submitted timely, the request may be reopened and treated as a new request, but the requester must pay another user fee before the case can be reopened. See, section 11.04(5) of Rev. Proc. 2008-4, page 121, this Bulletin.

(d) A letter ruling, determination letter, etc., is revoked in whole or in part at the initiative of the Service. The fee paid at the time the original letter ruling, determination letter, etc., was requested will not be refunded.

(e) The request contains several issues and the Service rules on some, but not all, of the issues. The highest fee applicable to the issues on which the Service rules will not be refunded.

(f) The requester asserts that a letter ruling the requester received covering a single issue is erroneous or not responsive (other than an issue on which the Service has declined to rule) and requests reconsideration. The Service, upon reconsideration, does not agree that the letter ruling is erroneous or is not responsive. The fee accompanying the request for reconsideration will not be refunded.

(g) The situation is the same as described in subparagraph (f) of this section 10.02(1) except that the letter ruling covered several unrelated transactions. The Service, upon reconsideration, does not agree with the requester that the letter ruling is erroneous or is not responsive for all of the transactions, but does agree that it is erroneous as to one transaction. The fee accompanying the request for reconsideration will not be refunded except to the extent applicable to the transaction for which the Service agrees the letter ruling was in error.

(h) The request is for a supplemental letter ruling, determination letter, etc., concerning a change in facts (whether significant or not) relating to the transaction on which the Service ruled.

(i) The request is for reconsideration of an adverse or partially adverse letter ruling or a final adverse determination letter, and the taxpayer submits arguments and authorities not submitted before the original letter ruling or determination letter was issued.

(2) The following situations are examples in which the user fee will be refunded:

(a) In a situation to which section 10.02(l)(i) of this revenue procedure does not apply, the taxpayer asserts that a letter ruling the taxpayer received covering a single issue is erroneous or is not responsive (other than an issue on which the Service declined to rule) and requests reconsideration. Upon reconsideration, the Service agrees that the letter ruling is erroneous or is not responsive. The fee accompanying the taxpayer's request for reconsideration will be refunded.

(b) In a situation to which section 10.02(1)(i) of this revenue procedure does not apply, the requester requests a supplemental letter ruling, determination letter, etc., to correct a mistake that the Service agrees it made in the original letter ruling, determination letter, etc., such as a mistake in the statement of facts or in the citation of a Code section. Once the Service agrees that it made a mistake, the fee accompanying the request for the supplemental letter ruling, determination letter, etc., will be refunded.

(c) The taxpayer requests and is granted relief under § 7805(b) in connection with the revocation in whole or in part, of a previously issued letter ruling, determination letter, etc. The fee accompanying the request for relief will be refunded.

(d) In a situation to which section 10.02(1)(e) of this revenue procedure applies, the requester requests reconsideration of the Service's decision not to rule on an issue. Once the Service agrees to rule on the issue, the fee accompanying the request for reconsideration will be refunded.



SECTION 11. REQUEST FOR RECONSIDERATION OF USER FEE

A taxpayer that believes the user fee charged by the Service for its request for a letter ruling, determination letter, etc., is either not applicable or incorrect and wishes to receive a refund of all or part of the amount paid (see section 10 of this revenue procedure) may request reconsideration and, if desired, the opportunity for an oral discussion by sending a letter to the Internal Revenue Service at the applicable Post Office Box or other address given in section 7. Both the incoming envelope and the letter requesting such reconsideration should be prominently marked "USER FEE RECONSIDERATION REQUEST." No user fee is required for these requests.
If the matter involves primarily: Mark for the attention of:

Employee plans letter ruling requests and Employee Plans Technical
all other employee plans matters handled
by EP Technical

Exempt organizations letter ruling Exempt Organizations Technical
requests

Employee plans determination letter Manager, EP Determinations Quality
requests and opinion letter and advisory Assurance
letter requests pursuant to
Rev. Proc. 2005-16

Exempt organizations determination letter Manager, EO Determinations Quality
requests Assurance





SECTION 12. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2007-8 is superseded.



SECTION 13. EFFECTIVE DATE

This revenue procedure is effective January 7, 2008.



SECTION 14. PAPERWORK REDUCTION ACT

The collections of information contained in this revenue procedure have been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-1520.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number.

The collections of information in this revenue procedure are in section 6.07 and section 11. This information is required to substantiate that a taxpayer or an exempt organization seeking to pay a reduced user fee with respect to a request for a determination letter is entitled to pay the reduced fee; to identify the user fee category and corresponding fee required to be paid with respect to determination letter requests; to request reconsideration of the user fee charged by the Service and, in connection with such a request, to indicate whether an oral discussion is desired. This information will be used to enable the Service to determine whether the taxpayer or exempt organization is entitled to pay a reduced user fee, to ascertain whether reconsideration of the user fee is being requested and, if it is being requested, whether an oral discussion is requested. The collections of information are voluntary, to obtain a benefit. The likely respondents are individuals, businesses or other for-profit institutions, nonprofit institutions, and small businesses or organizations.

The estimated total annual reporting and/or recordkeeping burden is 300 hours.

The estimated annual burden per respondent/recordkeeper varies from one hour to ten hours, depending on individual circumstances, with an estimated average of three hours. The estimated number of respondents and/or recordkeepers is 90 (requests for reduced fees) and 10 (requests for reconsideration of fee).

The estimated annual frequency of responses is on occasion.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.



DRAFTING INFORMATION

The principal author of this revenue procedure is Michael Rubin of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding employee plans matters in this revenue procedure, please contact the Employee Plans' taxpayer assistance telephone service 877-829-5500 (a toll-free number) between the hours of 8:30 a.m. and 4:30 p.m., Eastern time, Monday through Friday. For employee plans matters, please e-mail Mr. Rubin at RetirementPlanQuestions@irs.gov. For exempt organization matters, please contact Mr. Ted Lieber at 202-283-8999 (not a toll-free number).



APPENDIX

Following is a list of revenue procedures requiring payment of a user fee or an administrative scrutiny determination user fee.



A. Procedures applicable to both Employee Plans and Exempt Organizations

Rev. Proc. 2008-4, this Bulletin, provides procedures for issuing letter rulings, information letters, etc., on matters relating to matters under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division.



B. Procedures applicable to Employee Plans matters other than actuarial matters

Rev. Proc. 75-26, 1975-1 C.B. 722, sets forth the general procedures of the Internal Revenue Service for the processing of applications for exemption under § 4975(c)(2).

Rev. Proc. 87-50, 1987-2 C.B. 647, as modified by Rev. Proc. 91-44, Rev. Proc. 92-38, and Rev. Proc. 2002-10, 2002-1 C.B. 401, sets forth the procedures of the Service relating to the issuance of rulings and opinion letters with respect to the establishment of individual retirement accounts and annuities (IRAs) under § 408, the entitlement to exemption of related trusts or custodial accounts under § 408(e), and the acceptability of the form of prototype simplified employee pension (SEP) agreements under §§ 408(k) and 415.

Rev. Proc. 92-24, 1992-1 C.B. 739, provides procedures for requesting determination letters on the effect on a plan's qualified status under § 401(a) of the Code of plan language that permits, pursuant to § 420, the transfer of assets in a defined benefit plan to a health benefits account described in § 401(h).

Rev. Proc. 92-38, 1992-1 C.B. 859, provides notice that individual retirement arrangement trusts, custodial account agreements, and annuity contracts must be amended to provide for the required distribution rules in § 408(a)(6) or (b)(3) of the Code. In addition, Rev. Proc. 92-38 modifies the guidance in Rev. Proc. 87-50 with regard to opinion letters issued to sponsoring organizations, including mass submitters and sponsors of prototype IRAs.

Rev. Proc. 93-41, 1993-2 C.B. 536, sets forth the procedures of the Service relating to the issuance of an administrative scrutiny determination as to whether a separate line of business satisfies the requirement of administrative scrutiny within the meaning of § 1.414(r)-6.

Rev. Proc. 97-29, 1997-1 C.B. 698, describes model amendments for SIMPLE IRAs; guidance to drafters of prototype SIMPLE IRAs on obtaining opinion letters; permissive amendments to sponsors of nonSIMPLE IRAs; the opening of a prototype program for SIMPLE IRA Plans; and transitional relief for users of SIMPLE IRAs and SIMPLEIRA Plans that have not been approved by the Service.

Rev. Proc. 98-59, 1998-2 C.B. 727, provides guidance on obtaining opinion letters to drafters of prototype Roth IRAs, and provides transitional relief for users of Roth IRAs that have not been approved by the Internal Revenue Service.

Rev. Proc. 2003-16, 2003-1 C.B. 359, sets forth guidelines for the implementation of the provision for a waiver of the 60-day rollover period described in section 644 of EGTRRA.

Rev. Proc. 2005-16, 2005-1 C.B. 674, revises and combines the Service's master and prototype (M&P) and volume submitter program into a unified program for the pre-approval of pension, profit-sharing and annuity plans.

Rev. Proc. 2008-6, this Bulletin, provides procedures for issuing determination letters on the qualified status of employee plans under §§ 401(a), 403(a), 409, and 4975(e)(7).



C. Procedures applicable to Employee Plans actuarial matters

Rev. Proc. 79-62, 1979-2 C.B. 576, outlines the procedure by which a plan sponsor or administrator may request a determination that a plan amendment is reasonable and provides for only de minimis increases in plan liabilities in accordance with § 412(f)(2)(A) of the Code and § 304(b)(2)(A) of ERISA.

Rev. Proc. 90-49, 1990-2 C.B. 620, modifies and replaces Rev. Proc. 89-35, 1989-1 C.B. 917, in order to extend the effective date to contributions made for plan years beginning after December 31, 1989, to change the deadline for requesting rulings under the revenue procedure, to revise the information requirements for a ruling request made under the revenue procedure, to furnish a worksheet for actuarial computations, and to provide a special rule under which certain de minimis non-deductible employer contributions to a qualified defined benefit plan may be returned to the taxpayer without a formal ruling or disallowance from the Service.

Rev. Proc. 94-42, 1994-1 C.B. 717, sets forth a procedure for obtaining approval of an amendment to a qualified plan that, under § 412(c)(8), reduces the accrued benefits of plan participants.

Rev. Proc. 2000-41, 2000-2 C.B. 371, sets forth the procedure by which a plan administrator or plan sponsor may obtain approval of the Secretary of the Treasury for a change in funding method as provided by § 412(c)(5) of the Code and section 302(c)(5) of ERISA.

Rev. Proc. 2004-15, 2004-1 C.B. 490, sets forth procedures for requesting waivers of the minimum funding standard described in § 412(d) and the issuance of such waivers by the office of the Director, Employee Flans, Tax Exempt and Government Entities Division.

Rev. Proc. 2004-44, 2004-2 C.B. 134, outlines the procedure by which a plan administrator or plan sponsor may request and obtain approval for an extension of an amortization period in accordance with § 412(e) of the Code and section 304(a) of ERISA.

Rev. Proc. 2007-37, 2007-25 I.R.B. 1433, provides guidelines for requesting letter rulings for substitute mortality tables for certain defined benefit plans as a result of section 102 and 112 of the Pension Protection Act of 2006.



D. Procedures applicable to Exempt Organizations matters only

Rev. Proc. 80-27, 1980-1 C.B. 677, as modified by Rev. Proc. 96-40, 1996-2 C.B. 301, provides procedures under which recognition of exemption from federal income tax under § 501(c) may be obtained on a group basis for subordinate organizations affiliated with and under the general supervision or control of a central organization. This procedure relieves each of the subordinates covered by a group exemption letter from filing its own application for recognition of exemption.

Rev. Proc. 2007-52, 2007-30 I.R.B. 222, sets forth revised procedures with regard to applications for recognition of exemption from federal income tax under §§ 501 and 521.
ase contact the TE/GE Customer Service office at (877) 829-5500 (a toll-free call).



Rev. Proc. 2008-4 , I.R.B. 2008-1, 121, January 7, 2008.[ Code Secs. 381, 401, 412, 414, 501, 507, 509, 529, 4942, 4966, 4967, 6033 and Statement of Procedural Rules Sec. 601.201]


Employee plans: Exempt organizations: Rulings and determinations: Information letters. --
The IRS has updated its procedures for issuing letter rulings and revenue rulings, as well as determination, opinion, notification and information letters, on matters relating to Internal Revenue Code provisions under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division (TE/GE). Most of the changes involve minor revisions, such as updating citations to other revenue procedures; however, a few larger changes have also been made. The ruling also clarifies that a letter ruling will not be issued with respect to an issue that is clearly and adequately addressed by statute, regulations, court decisions or IRS rulings that are published in the Internal Revenue Bulletin, although the IRS may issue an information letter calling attention to well-established principles of tax law. Rev. Proc. 2008-4 is effective January 7, 2008. Rev. Proc. 2007-4, I.R.B. 2007-1, 118, is superseded.




TABLE OF CONTENTS




SECTION 1. WHAT IS THE PURPOSE OF THIS REVENUE PROCEDURE?



SECTION 2. WHAT CHANGES HAVE BEEN MADE TO REV. PROC. 2007-4?



SECTION 3. IN WHAT FORM IS GUIDANCE PROVIDED BY THE COMMISSIONER, TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION?
.01 In general

.02 Letter ruling

.03 Closing agreement

.04 Determination letter

.05 Opinion letter

.06 Information letter

.07 Revenue ruling

.08 Oral guidance

(1) No oral rulings, and no written rulings in response to oral requests

(2) Discussion possible on substantive issues

.09 Nonbank trustee requests

.10 Compliance Statement



SECTION 4. ON WHAT ISSUES MAY TAXPAYERS REQUEST WRITTEN GUIDANCE UNDER THIS PROCEDURE?



SECTION 5. ON WHAT ISSUES MUST WRITTEN GUIDANCE BE REQUESTED UNDER DIFFERENT PROCEDURES?
.01 Determination letters

.02 Master and prototype plans and volume submitter plans

.03 Closing agreement program for defined contribution plans that purchased GICs or GACs

.04 Employee Plans Compliance Resolution System

.05 Chief Counsel

.06 Alcohol, tobacco, and firearms taxes



SECTION 6. UNDER WHAT CIRCUMSTANCES DOES TE/GE ISSUE LETTER RULINGS?
.01 In exempt organizations matters

.02 In employee plans matters

.03 In qualifications matters

.04 Request for extension of time for making an election or for other relief under §301.9100-1 of the Procedure and Administration Regulations

.05 Issuance of a letter ruling before the issuance of a regulation or other published guidance

.06 Issues in prior return

.07 Generally not to business associations or groups

.08 Generally not to foreign governments

.09 Generally not on federal tax consequences of proposed legislation

.10 Not on certain matters under § 53.4958-6 of the Foundation and Similar Excise Taxes Regulations

.11 Not on stock options

.12 Generally not on EO joint venture with a for-profit organization

.13 Not on qualification of state run programs under § 529

.14 Not on UBIT issues involving certain investments of a charitable lead trust

.15 Not on issues under § 4965

.16 Not on issues under § 4966 or § 4967

.17 Not on issues under § 507, §4941 or §4945



SECTION 7. UNDER WHAT CIRCUMSTANCES DOES EP OR EO DETERMINATIONS ISSUE DETERMINATION LETTERS?
.01 Circumstances under which determination letters are issued

.02 In general

.03 In employee plans matters

.04 In exempt organizations matters

.05 Circumstances under which determination letters are not issued

.06 Requests involving returns already filed

.07 Attach a copy of determination letter to taxpayer's return

.08 Review of determination letters



SECTION 8. UNDER WHAT CIRCUMSTANCES DOES THE SERVICE HAVE DISCRETION TO ISSUE LETTER RULINGS AND DETERMINATION LETTERS?
.01 Ordinarily not in certain areas because of factual nature of the problem

.02 No "comfort" letter rulings

.03 Not on alternative plans or hypothetical situations

.04 Ordinarily not on part of an integrated transaction

.05 Not on partial terminations of employee plans

.06 Law requires letter ruling

.07 Issues under consideration by PBGC or DOL

.08 Cafeteria plans

.09 Determination letters

.10 Domicile in a foreign jurisdiction

.11 Employee Stock Ownership Plans

.12 Governmental Plans



SECTION 9. WHAT ARE THE GENERAL INSTRUCTIONS FOR REQUESTING LETTER RULINGS AND DETERMINATION LETTERS?
.01 In general

.02 Certain information required in all requests

(1) Complete statement of facts and other information

(2) Copies of all contracts, wills, deeds, agreements, instruments, plan documents, and other documents

(3) Analysis of material facts

(4) Statement regarding whether same issue is in an earlier return

(5) Statement regarding whether same or similar issue was previously ruled on or requested, or is currently pending

(6) Statement of supporting authorities.

(7) Statement of contrary authorities.

(8) Statement identifying pending legislation

(9) Statement identifying information to be deleted from copy of letter ruling or determination letter for public inspection.

(10) Signature by taxpayer or authorized representative

(11) Authorized representatives

(12) Power of attorney and declaration of representative

(13) Penalties of perjury statement

(14) Applicable user fee

(15) Number of copies of request to be submitted

(16) Sample form at for a letter ruling request

(17) Checklist for letter ruling requests

.03 Additional information required in certain circumstances

(1) To request separate letter rulings for multiple issues in a single situation

(2) Recipient of original of letter ruling or determination letter

(3) To request expedited handling

(4) To receive a letter ruling or submit a request for a letter ruling by facsimile transmission (fax).

(5) To request a conference

.04 Address to send the request

(1) Requests for letter rulings

(2) Requests for information letters

(3) Requests for determination letters

.05 Pending letter ruling requests

.06 When to attach letter ruling to return

.07 How to check on status of request

.08 Request may be withdrawn or EP or EO Technical may decline to issue letter ruling

.09 Compliance with Treasury Department Circular No. 230



SECTION 10. WHAT SPECIFIC, ADDITIONAL PROCEDURES APPLY TO CERTAIN REQUESTS?
.01 In general

.02 Exempt Organizations

.03 Employee Plans



SECTION 11. HOW DOES EP OR EO TECHNICAL HANDLE LETTER RULING REQUESTS?
.01 In general

.02 Is not bound by informal opinion expressed

.03 Tells taxpayer if request lacks essential information during initial contact

.04 Requires prompt submission of additional information requested after initial contact

.05 Near the completion of the ruling process, advises taxpayer of conclusions and, if the Service will rule adversely, offers the taxpayer the opportunity to withdraw the letter ruling request

.06 May request draft of proposed letter ruling near the completion of the ruling process



SECTION 12. HOW ARE CONFERENCES SCHEDULED?
.01 Schedules a conference if requested by taxpayer

.02 Permits taxpayer one conference of right

.03 Disallows verbatim recording of conferences

.04 Makes tentative recommendations on substantive issues

.05 May offer additional conferences

.06 Requires written confirmation of information presented at conference

.07 May schedule a pre-submission conference

.08 Under limited circumstances, may schedule a conference to be held by telephone

.09 Conference rules for EO determination letters not subject to §7428 or § 501 or § 521



SECTION 13. WHAT EFFECT WILL A LETTER RULING HAVE?
.01 May be relied on subject to limitations

.02 Will not apply to another taxpayer

.03 Will be used by TE/GE in examining the taxpayer's return

.04 May be revoked or modified if found to be in error

.05 Not generally revoked or modified retroactively

.06 Retroactive effect of revocation or modification applied only to a particular transaction

.07 Retroactive effect of revocation or modification applied to a continuing action or series of actions

.08 May be retroactively revoked or modified when transaction is completed without reliance on the letter ruling

.09 Taxpayer may request that retroactivity be limited

(1) Request for relief under § 7805(b) must be made in required format

(2) Taxpayer may request a conference on application of §7805(b)



SECTION 14. WHAT EFFECT WILL A DETERMINATION LETTER HAVE?
.01 Has same effect as a letter ruling

.02 Taxpayer may request that retroactive effect of revocation or modification be limited

(1) Request for relief under § 7805(b) must be made in required format

(2) Taxpayer may request a conference on application of § 7805(b)

(3) Taxpayer steps in exhausting administrative remedies.



SECTION 15. UNDER WHAT CIRCUMSTANCES ARE MATTERS REFERRED BETWEEN DETERMINATIONS AND TECHNICAL?
.01 Requests for determination letters

.02 No-rule areas

.03 Requests for letter rulings



SECTION 16. WHAT ARE THE GENERAL PROCEDURES APPLICABLE TO INFORMATION LETTERS ISSUED BY THE HEADQUARTERS OFFICE?
.01 Will be made available to the public

.02 Deletions made under the Freedom of Information Act

.03 Effect of information letters



SECTION 17. WHAT IS THE EFFECT OF THIS REVENUE PROCEDURE ON OTHER DOCUMENTS?



SECTION 18. EFFECTIVE DATE



SECTION 19. PAPERWORK REDUCTION ACT



DRAFTING INFORMATION



INDEX



APPENDIX A --SAMPLE FORMAT FOR A LETTER RULING REQUEST



APPENDIX B --CHECKLIST FOR A LETTER RULING REQUEST



APPENDIX C --ADDITIONAL CHECKLIST FOR ROTH IRA RECHARACTERIZATIONS



APPENDIX D --ADDITIONAL CHECKLIST FOR GOVERNMENT PICK-UP PLANS



APPENDIX E --ADDITIONAL CHECKLIST FOR CHURCH PLANS



SECTION 1. WHAT IS THE PURPOSE OF THIS REVENUE PROCEDURE?

This revenue procedure explains how the Internal Revenue Service gives guidance to taxpayers on issues under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division. It explains the kinds of guidance and the manner in which guidance is requested by taxpayers and provided by the Service. A sample format of a request for a letter ruling is provided in Appendix A.



SECTION 2. WHAT CHANGES HAVE BEEN MADE TO REV. PROC. 2007-4?

.01 This revenue procedure is a general update of Rev. Proc. 2007-4, 2007-1 I.R.B. 118 which contains the Service's general procedures for employee plans and exempt organizations letter ruling requests. Most of the changes to Rev. Proc. 2007-4 involve minor revisions, such as updating citations to other revenue procedures.

.02 Additional no rule areas for EO Technical are added as section 6.17

.03 Section 9.03(4)(a) is revised by deleting the requirement that a waiver of disclosure violations resulting from a fax transmission must accompany a taxpayer's request to receive a copy of a private letter ruling by fax. Conforming changes are made throughout this revenue procedure.

.04 Section 12.09 is added allowing a taxpayer to request a conference regarding a determination letter that is not subject to §7428 or § 501 or § 521.



SECTION 3. IN WHAT FORM IS GUIDANCE PROVIDED BY THE COMMISSIONER, TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION?



In general

.01 The Service provides guidance in the form of letter rulings, closing agreements, compliance statements, determination letters, opinion letters, advisory letters, information letters, revenue rulings, and oral advice.



Letter ruling

.02 A "letter ruling" is a written statement issued to a taxpayer by the Service's Employee Plans Technical office or Exempt Organizations Technical office that interprets and applies the tax laws or any nontax laws applicable to employee benefit plans and exempt organizations to the taxpayer's specific set of facts. Once issued, a letter ruling may be revoked or modified for any number of reasons, as explained in section 13 of this revenue procedure, unless it is accompanied by a "closing agreement."



Closing agreement

.03 A closing agreement is a final agreement between the Service and a taxpayer on a specific issue or liability. It is entered into under the authority in §7121 and is final unless fraud, malfeasance, or misrepresentation of a material fact can be shown.

A closing agreement prepared in an office under the responsibility of the Commissioner, TE/GE, may be based on a ruling that has been signed by the Commissioner, TE/GE, or the Commissioner, TE/GE's, delegate that says that a closing agreement will be entered into on the basis of the ruling letter.

A closing agreement may be entered into when it is advantageous to have the matter permanently and conclusively closed, or when a taxpayer can show that there are good reasons for an agreement and that making the agreement will not prejudice the interests of the Government. In appropriate cases, taxpayers may be asked to enter into a closing agreement as a condition to the issuance of a letter ruling.

If, in a single case, a closing agreement is requested for each person in a class of taxpayers, separate agreements are entered into only if the class consists of 25 or fewer taxpayers. However, if the issue and holding are identical for the class and there are more than 25 taxpayers in the class, a "mass closing agreement" will be entered into with the taxpayer who is authorized by the others to represent the class.

In appropriate cases, a closing agreement may be made with sponsors of master and prototype plans.

A closing agreement may also be entered into with respect to retirement plan failures corrected under the Audit Closing Agreement Program of the Employee Plans Compliance Resolution System (EPCRS), as set forth in Rev. Proc. 2006-27, 2006-1 C.B. 945, as modified by Rev. Proc. 2007-49, 2007-30 I.R.B. 141.



Determination letter

.04 A "determination letter" is a written statement issued to a taxpayer by the Service's EO Determinations or EP Determinations office that applies the principles and precedents previously announced to a specific set of facts. It is issued only when a determination can be made based on clearly established rules in the statute, a tax treaty, or the regulations, or based on a conclusion in a revenue ruling, opinion, or court decision published in the Internal Revenue Bulletin that specifically answers the questions presented.

The Manager, EP Determinations, issues determination letters involving §§401, 403(a), 409, and 4975(e)(7) as provided in Rev. Proc. 2008-6, page 192, this Bulletin.



Opinion letter

.05 An "opinion letter" is a written statement issued by Employee Plans Rulings and Agreements to a sponsor as to the acceptability (for purposes of §§401 and 501(a)) of the form of a master or prototype plan and any related trust or custodial account under §§401, 403(a), and 501(a), or as to the conformance of a prototype trust, custodial account, or individual annuity with the requirements of §408(a), (b), or (k), as applicable. See. Rev. Proc. 2005-16, 2005-1 C.B. 674. See also Rev. Proc. 91-44, 1991-2 C.B. 733, and Rev. Proc. 92-38, 1992-1 C.B. 859.



Information letter

.06 An "information letter" is a statement issued either by the Director, Employee Plans Rulings and Agreements or the Director, Exempt Organizations Rulings and Agreements. It calls attention to a well-established interpretation or principle of tax law (including a tax treaty) without applying it to a specific set of facts. To the extent resources permit, an information letter may be issued if the taxpayer's inquiry indicates a need for general information or if the taxpayer's request does not meet the requirements of this revenue procedure and the Service thinks general information will help the taxpayer. The taxpayer should provide a daytime telephone number with the taxpayer's request for an information letter. Requests for information letters should be sent to the address stated in section 9.04(2) of this revenue procedure. The requirements of section 9.02 of this revenue procedure are not applicable to information letters. An information letter is advisory only and has no binding effect on the Service.



Revenue ruling

.07 A "revenue ruling" is an interpretation by the Service that has been published in the Internal Revenue Bulletin. It is the conclusion of the Service on how the law is applied to a specific set of facts. Revenue rulings are published for the information and guidance of taxpayers, Service personnel, and other interested parties.

Because each revenue ruling represents the conclusion of the Service regarding the application of law to the entire statement of facts involved, taxpayers, Service personnel, and other concerned parties are cautioned against reaching the same conclusion in other cases unless the facts and circumstances are substantially the same. They should consider the effect of subsequent legislation, regulations, court decisions, revenue rulings, notices, and announcements. See Rev. Proc. 89-14, 1989-1 C.B. 814, which states the objectives of and standards for the publication of revenue rulings and revenue procedures in the Internal Revenue Bulletin.



Oral guidance

.08

(1) No oral rulings and no written rulings in response to oral requests.

The Service does not orally issue letter rulings or determination letters, nor does it issue letter rulings or determination letters in response to oral requests from taxpayers. However, Service employees ordinarily will discuss with taxpayers or their representatives inquiries regarding whether the Service will rule on particular issues and questions relating to procedural matters about submitting requests for letter rulings, determination letters, and requests for recognition of exempt status for a particular organization.

(2) Discussion possible on substantive issues.

At the discretion of the Service, and as time permits, substantive issues may also be discussed. However, such a discussion will not be binding on the Service, and cannot be relied on as a basis for obtaining retroactive relief under the provisions of §7805(b).

Substantive tax issues involving the taxpayer that are under examination, in appeals, or in litigation will not be discussed by Service employees not directly involved in the examination, appeal, or litigation of the issues unless the discussion is coordinated with those Service employees who are directly involved in the examination, appeal, or litigation of the issues. The taxpayer or the taxpayer's representative ordinarily will be asked whether the oral request for guidance or information relates to a matter pending before another office of the Service.

If a tax issue is not under examination, in appeals, or in litigation, the tax issue may be discussed even though the issue is affected by a nontax issue pending in litigation.

A taxpayer may seek oral technical guidance from a taxpayer service representative in TE/GE Customer Account Services when preparing a return or report. Oral guidance is advisory only, and the Service is not bound to recognize it, for example, in the examination of the taxpayer's return.

The Service does not respond to letters seeking to confirm the substance of oral discussions, and the absence of a response to such a letter is not confirmation of the substance of the letter.



Nonbank trustee requests

.09 In order to receive approval to act as a nonbank custodian of plans qualified under §401(a) or accounts described in §403(b)(7), and as a nonbank trustee or nonbank custodian for individual retirement arrangements (IRAs) established under §408(a), (b), or (h), or for a Coverdell educational savings account established under §530 or an Archer medical savings account established under §220, or a Health Savings Account under §223, a written application must be filed that demonstrates how the applicant complies with the requirements of §1.408-2(e)(2) through (5) of the Income Tax Regulations.

The Service must have clear and convincing proof in its files that the requirements of the regulations are met. If there is a requirement that the applicant feels is not applicable, the application must provide clear and convincing proof that such requirement is not germane to the manner in which the applicant will administer any trust or custodial account. See, §1.408-2(e)(6).

The completed application should be sent to:

Internal Revenue Service
Commissioner, TE/GE
Attention: SE:T:EP:RA
P.O. Box 27063
McPherson Station
Washington, DC 20038
Section 6.01(8) of Rev. Proc. 2008-8, page 233, this Bulletin, imposes a user's fee for anyone applying for approval to become a nonbank trustee or custodian.



Compliance Statement

.10 A compliance statement is a binding written agreement between the Service and a taxpayer with respect to certain retirement plan failures identified by a taxpayer in a voluntary submission under the Voluntary Correction Program of the EPCRS (see Rev. Proc. 2006-27). The compliance statement addresses the failures identified in the VCP submission, the terms of correction, including any revision of administrative procedures, and the time period within which proposed corrections must be implemented. A compliance statement is conditioned on (i) there being no misstatement or omission of material facts in connection with the submission, and (ii) the implementation of the specific corrections and satisfaction of any other conditions in the compliance statement.



SECTION 4. ON WHAT ISSUES MAY TAXPAYERS REQUEST WRITTEN GUIDANCE UNDER THIS PROCEDURE?

Taxpayers may request letter rulings, information letters and closing agreements on issues within the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division under this revenue procedure. The Service issues letter rulings to answer written inquiries of individuals and organizations about their status for tax purposes and the tax effects of their acts or transactions when appropriate in the interest of sound tax administration.

Taxpayers also may request determination letters that relate to Code sections under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division. See Rev. Proc. 2008-6, this Bulletin.



SECTION 5. ON WHAT ISSUES MUST WRITTEN GUIDANCE BE REQUESTED UNDER DIFFERENT PROCEDURES?



Determination letters

.01 The procedures for obtaining determination letters involving §§401, 403(a), 409, and 4975(e)(7), and the status for exemption of any related trusts or custodial accounts under §501(a) are contained in Rev. Proc. 2008-6, this Bulletin.



Master and prototype plans and volume submitter plans

.02 The procedures for obtaining opinion letters for master and prototype plans and any related trusts or custodial accounts under §§401(a), 403(a) and 501(a) and advisory letters for volume submitter plans are contained in Rev. Proc. 2005-16. The procedures for obtaining opinion letters for prototype trusts, custodial accounts or annuities under §408(a) or (b) are contained in Rev. Proc. 87-50, as modified by Rev. Proc. 92-38 and Rev. Proc. 2002-10, 2002-1 C.B. 401. The procedures for obtaining opinion letters for prototype trusts under §408(k) are contained in Rev. Proc. 87-50, as modified by Rev. Proc. 91-44 (as modified by Rev. Proc. 2008-8) and Rev. Proc. 2002-10. The procedures for obtaining opinion letters for SIMPLE IRAs under §408(p) are contained in Rev. Proc. 97-29, 1997-1 C.B. 698. The procedures for obtaining opinion letters for Roth IRAs under §408A are contained in Rev. Proc. 98-59, 1998-2 C.B. 727.



Closing agreement program for defined contribution plans that purchased GICs or GACs

.03 Rev. Proc. 95-52, 1995-1 C.B. 439, restates and extends for an indefinite period the closing agreement program for defined contribution plans that purchased guaranteed investment contracts (GICs) or group annuity contracts (GACs) from troubled life insurance companies.



Employee Plans Compliance Resolution System

.04 The procedures for obtaining compliance statements, etc., for certain failures of plans qualified under § 401(a), § 403(b) plans, SEPs and § 457 plans under the Employee Plans Compliance Resolution System (EPCRS) are contained in Rev. Proc. 2006-27.



Chief Counsel

.05 The procedures for obtaining rulings, closing agreements, and information letters on issues within the jurisdiction of the Chief Counsel are contained in Rev. Proc. 2008-1, page 1, this Bulletin, including tax issues involving interpreting or applying the federal tax laws and income tax treaties relating to international transactions.



Alcohol, tobacco, and firearms taxes

.06 The procedures for obtaining letter rulings, etc., that apply to federal alcohol, tobacco, and firearms taxes under subtitle E of the Internal Revenue Code are under the jurisdiction of the Alcohol and Tobacco Tax and Trade Bureau within the Treasury Department.



SECTION 6. UNDER WHAT CIRCUMSTANCES DOES TE/GE ISSUE LETTER RULINGS?



In exempt organizations matters

.01 In exempt organizations matters, the Exempt Organizations Technical Office issues letter rulings on proposed transactions and on completed transactions if the request is submitted before the return is filed for the year in which the transaction that is the subject of the request was completed. Exempt Organizations Technical issues letter rulings involving:

(1) Organizations exempt from tax under § 501, including private foundations;

(2) Organizations described in § 170(b)(1)(A) (except clause (v));

(3) Political organizations described in § 527;

(4) Qualified tuition programs described in § 529 other than state run programs;

(5) Trusts described in § 4947(a);

(6) Other matters including issues under §§ 501 through 514, 4911, 4912, 4940 through 4948, 4955, 4958, 4976, 6033, 6104, 6113, and 6115.



In employee plans matters

.02 In employee plans matters, the Employee Plans Technical Office issues letter rulings on proposed transactions and on completed transactions either before or after the return is filed. Employee Plans Technical issues letter rulings involving:

(1) §§ 72, 101(d), 219, 381(c)(11), 402, 403(b), 404, 408, 408A, 412, 414(e), 419, 419A, 511 through 514, 4971, 4972, 4973, 4974, 4978, 4979, and 4980;

(2) Waiver of the minimum funding standard ( See Rev. Proc. 2004-15, 2004-1 C.B. 490), and changes in funding methods and actuarial assumptions under § 412(c)(5);

(3) Waiver of the liquidity shortfall (as that term is defined in § 412(m)(5)) excise tax under § 4971(f)(4);

(4) Waiver under § 4980F(c)(4) of all or part of the excise tax imposed for failure to satisfy the notice requirements described in § 4980F(e);

(5) Whether a plan amendment is reasonable and provides for only de minimis increases in plan liabilities in accordance with §§ 401(a)(33) and 412(f)(2)(A) of the Code ( See Rev. Proc. 79-62, 1979-2 C.B. 576);

(6) A change in the plan year of an employee retirement plan and the trust year of a tax-exempt employees' trust ( See Rev. Proc. 87-27, 1987-1 C.B. 769);

(7) The tax consequences of prohibited transactions under §§ 503 and 4975;

(8) Whether individual retirement accounts established by employers or associations of employees meet the requirements of § 408(c). ( See Rev. Proc. 87-50, as modified by Rev. Proc. 91-44 (as modified by Rev. Proc. 2008-8) and Rev. Proc. 92-38);

(9) With respect to employee stock ownership plans and tax credit employee stock ownership plans, §§ 409(l), 409(m), and 4975(d)(3). Other subsections of §§ 409 and 4975(e)(7) involve qualification issues within the jurisdiction of EP Determinations.

(10) Where the Commissioner, Tax Exempt and Government Entities Division has authority to grant extensions of certain periods of time within which the taxpayer must perform certain transactions (for example, the 90-day period for reinvesting in employer securities under § 1.46-8(e)(10) of the regulations), the taxpayer's request for an extension of such time period must be postmarked (or received, if hand delivered to the headquarters office) no later than the expiration of the original time period. Thus, for example, a request for an extension of the 90-day period under § 1.46-8(e)(10) must be made before the expiration of this period. However, see section 6.04 below with respect to elections under § 301.9100-1 of the Procedure and Administration Regulations.



In qualifications matters

.03 The Employee Plans Technical office ordinarily will not issue letter rulings on matters involving a plan's qualified status under §§ 401 through 420 and § 4975(e)(7). These matters are generally handled by the Employee Plans Determinations program as provided in Rev. Proc. 2008-6, this Bulletin, Rev. Proc. 93-10 and Rev. Proc. 93-12. Although the Employee Plans Technical office will not ordinarily issue rulings on matters involving plan qualification, a ruling may be issued where, (1) the taxpayer has demonstrated to the Service's satisfaction that the qualification issue involved is unique and requires immediate guidance, (2) as a practical matter, it is not likely that such issue will be addressed through the determination letter process, and (3) the Service determines that it is in the interest of good tax administration to provide guidance to the taxpayer with respect to such qualification issue.



Request for extension of time for making an election or for other relief under § 301.9100-1 of the Procedure and Administration Regulations

.04 Employee Plans Technical or Exempt Organizations Technical will consider a request for an extension of time for making an election or other application for relief under § 301.9100-1 of the Procedure and Administration Regulations even if submitted after the return covering the issue presented in the § 301.9100-1 request has been filed and even if submitted after an examination of the return has begun or after the issues in the return are being considered by an appeals office or a federal court. In such a case, EP or EO Technical will notify the Director, EP or EO Examinations.

Except for those requests pertaining to applications for recognition of exemption, § 301.9100-1 requests, even those submitted after the examination of the taxpayer's return has begun, are letter ruling requests and therefore should be submitted pursuant to this revenue procedure, and require payment of the applicable user fee, referenced in section 9.02(14) of this revenue procedure. In addition, the taxpayer must include the information required by § 301.9100-3(e).

However, an election made pursuant to § 301.9100-2 is not a letter ruling and does not require payment of any user fee. See § 301.9100-2(d). Such an election pertains to an automatic extension of time under § 301.9100-1.



Issuance of a letter ruling before the issuance of a regulation or other published guidance

.05 Unless the issue is covered by section 8 of this procedure, a letter ruling may be issued before the issuance of a temporary or final regulation or other published guidance that interprets the provisions of any act under the following conditions:

(1) Answer is clear or is reasonably certain. If the letter ruling request presents an issue for which the answer seems clear by applying the statute to the facts or for which the answer seems reasonably certain but not entirely free from doubt, a letter ruling will be issued.

(2) Answer is not reasonably certain. The Service will consider all letter ruling requests and use its best efforts to issue a letter ruling even if the answer does not seem reasonably certain where the issuance of a letter ruling is in the best interest of tax administration.

(3) Issue cannot be readily resolved before a regulation or any other published guidance is issued. A letter ruling will not be issued if the letter ruling request presents an issue that cannot be readily resolved before a regulation or any other published guidance is issued.



Issues in prior return

.06 The Service ordinarily does not issue rulings if, at the time the ruling is requested, the identical issue is involved in the taxpayer's return for an earlier period, and that issue --

(1) is being examined by the Director, EP or EO Examinations,

(2) is being considered by an appeals office,

(3) is pending in litigation in a case involving the taxpayer or related taxpayer, or

(4) has been examined by the Director, EP or EO Examinations or considered by an appeals office, and the statutory period of limitation has not expired for either assessment or filing a claim for a refund or a closing agreement covering the issue of liability has not been entered into by the Director, EP or EO Rulings and Agreements or by an appeals office.

If a return dealing with an issue for a particular year is filed while a request for a ruling on that issue is pending, EP or EO Technical will issue the ruling unless it is notified by the taxpayer that an examination of that issue or the identical issue on an earlier year's return has been started by the Director, EP or EO Examinations. See section 9.05. However, even if an examination has begun, EP or EO Technical ordinarily will issue the letter ruling if the Director, EP or EO Examinations agrees, by memorandum, to permit the ruling to be issued.



Generally not to business associations or groups

.07 EP or EO Technical does not issue letter rulings to business, trade, or industrial associations or to similar groups concerning the application of the tax laws to members of the group. But groups and associations may submit suggestions of generic issues that would be appropriately addressed in revenue rulings. See Rev. Proc. 89-14, which states objectives of, and standards for, the publication of revenue rulings and revenue procedures in the Internal Revenue Bulletin.

EP or EO Technical, however, may issue letter rulings to groups or associations on their own tax status or liability if the request meets the requirements of this revenue procedure.



Generally not to foreign governments

.08 EP or EO Technical does not issue letter rulings to foreign governments or their political subdivisions about the U.S. tax effects of their laws. However, EP or EO Technical may issue letter rulings to foreign governments or their political subdivisions on their own tax status or liability under U.S. law if the request meets the requirements of this revenue procedure.



Generally not on federal tax consequences of proposed legislation

.09 EP or EO Technical does not issue letter rulings on a matter involving the federal tax consequences of any proposed federal, state, local, municipal, or foreign legislation. EP or EO Technical, however, may provide general information in response to an inquiry.



Not on certain matters under § 53.4958-6 of the Foundation and Similar Excise Taxes Regulations

.10 EO Technical does not issue letter rulings as to whether a compensation or property transaction satisfies the rebuttable presumption that the transaction is not an excess benefit transaction as described in § 53.4958-6 of the Foundation and Similar Excise Taxes Regulations.



Not on stock options

.11 EP Technical does not issue letter rulings on the income tax (including unrelated business income tax) or excise tax consequences of the contribution of stock options to, or their subsequent exercise from, plans described in Part I of Subchapter D of Subtitle A of the Code.



Generally not on EO joint venture with a for-profit organization

.12 With the exception of when the issue is present in an initial application for recognition of exemption, EO Technical does not issue letter rulings as to whether a joint venture with a for-profit organization affects an organization's exempt status or results in unrelated business income.



Not on qualification of state run programs under § 529

.13 EO Technical will not issue letter rulings as to whether a state run tuition program qualifies under § 529.



Not on UBIT issues involving certain investments of a charitable lead trust

.14 EO Technical will not issue letter rulings pertaining to unrelated business income tax issues arising when charitable lead trust assets are invested with charitable organizations.



Not on issues under § 4965

.15 The Service will not issue letter rulings under § 4965, as added by section 516 of the Tax Increase Prevention and Reconciliation Act of 2005, before the issuance of temporary or final regulations or other published guidance that interprets the provision.



Not on issues under § 4966 or § 4967

.16 EO Technical will not issue letter rulings under § 4966 or § 4967, as added by section 1231 of the Pension Protection Act of 2006, before the issuance of temporary or final regulations or other published guidance that interprets these provisions.



Not on issues under § 507, § 4941 or § 4945

.17 EO Technical will not issue letter rulings under § 507, § 4941 or § 4945 pertaining to the tax consequences of the termination of a charitable remainder trust (as defined in § 664) before the end of the trust term as defined in the trust's governing instrument in a transaction in which the trust beneficiaries receive their actuarial shares of the value of the trust assets.



SECTION 7. UNDER WHAT CIRCUMSTANCES DOES EP OR EO DETERMINATIONS ISSUE DETERMINATION LETTERS?



Circumstances under which determination letters are issued

.01 Employee Plans or Exempt Organizations Determinations issues determination letters only if the question presented is specifically answered by a statute, tax treaty, or regulation, or by a conclusion stated in a revenue ruling, opinion, or court decision published in the Internal Revenue Bulletin.



In general

.02 In employee plans and exempt organizations matters, the EP or EO Determinations office issues determination letters in response to taxpayers' written requests on completed transactions. However, see section 13.08 of this revenue procedure. A determination letter usually is not issued for a question concerning a return to be filed by the taxpayer if the same question is involved in a return under examination.

In situations involving continuing transactions, such as whether an ongoing activity is an unrelated trade or business, EP or EO Technical would issue a ruling covering future tax periods and periods for which a return had not yet been filed.

EP or EO Determinations does not issue determination letters on the tax consequences of proposed transactions, except as provided in sections 7.03 and 7.04 below.

Under no circumstances will EP or EO Determinations issue a determination letter unless it is clearly shown that the request concerns a return that has been filed or is required to be filed.



In employee plans matters

.03 In employee plans matters, the Employee Plans Determinations office issues determination letters on the qualified status of employee plans under §§ 401, 403(a), 409 and 4975(e)(7), and the exempt status of any related trust under § 501. See Rev. Proc. 2008-6, this Bulletin, Rev. Proc. 93-10 and Rev. Proc. 93-12.



In exempt organizations matters

.04 In exempt organizations matters, the Exempt Organizations Determinations office issues determination letters involving:

(1) Initial qualification for exempt status of organizations described in §§ 501 and 521 to the extent provided in Rev. Proc. 2007-52, 2007-30 I.R.B. 222.

(2) Updated exempt status letter to reflect changes to an organization's name or address, or to replace a lost exempt status letter, but not to approve or disapprove any completed transaction or the effect of changes in activities on exempt status, except in the situations specifically listed in paragraphs (3) through (12) below;

(3) Classification of private foundation status as provided in Rev. Proc. 76-34, 1976-2 C.B. 656;

(4) Reclassification of private foundation status, including update of private foundation status at the end of an organization's advance ruling period and private operating foundation status;

(5) Recognition of unusual grants to certain organizations under §§ 170(b)(1)(A)(vi) and 509(a)(2);

(6) Requests for relief under § 301.9100-1 of the Procedure and Administration Regulations in connection with applications for recognition of exemption;

(7) Advance approval of terminations under § 507(b)(1)(B);

(8) Whether certain organizations qualify as exempt operating foundations described in § 4940(d);

(9) Advance approval of certain set-asides described in § 4942(g)(2);

(10) Advance approval under § 4945 of organizations' grant making procedures;

(11) Advance approval of voter registration activities described in § 4945(f); and

(12) Whether an organization is exempt from filing annual information returns under § 6033 as provided in Rev. Procs. 83-23, 1983-1 C.B. 687, 95-48, 1995-2 C.B. 418, and 96-10, 1996-1 C.B. 577;



Circumstances under which determination letters are not issued

.05 EP or EO Determinations will not issue a determination letter in response to any request if --

(1) it appears that the taxpayer has directed a similar inquiry to EP or EO Technical;

(2) the same issue involving the same taxpayer or a related taxpayer is pending in a case in litigation or before an appeals office;

(3) the determination letter is requested by an industry, trade association, or similar group on behalf of individual taxpayers within the group (other than subordinate organizations covered by a group exemption letter); or

(4) the request involves an industry-wide problem.



Requests involving returns already filed

.06 A request received by the Service on a question concerning a return that is under examination, will be, in general, considered in connection with the examination of the return. If a response is made to the request before the return is examined, it will be considered a tentative finding in any later examination of that return.



Attach a copy of determination letter to taxpayer's return

.07 A taxpayer who, before filing a return, receives a determination letter about any transaction that has been consummated and that is relevant to the return being filed should attach a copy of the determination letter to the return when it is filed.



Review of determination letters

.08 Determination letters issued under sections 7.02 through 7.04 of this revenue procedure are not reviewed by EP or EO Technical before they are issued. If a taxpayer believes that a determination letter of this type is in error, the taxpayer may ask EP or EO Determinations to reconsider the matter or to request technical advice from EP or EO Technical as explained in Rev. Proc. 2008-5, page 164, this Bulletin.

(1) In employee plans matters, the procedures for review of determination letters relating to the qualification of employee plans involving §§ 401 and 403(a) are provided in Rev. Proc. 2008-6, Rev. Proc. 93-10 and Rev. Proc. 93-12.

(2) In exempt organizations matters, the procedures for the review of determination letters relating to the exemption from federal income tax of certain organizations under §§ 501 and 521 are provided in Rev. Proc. 2007-52.



SECTION 8. UNDER WHAT CIRCUMSTANCES DOES THE SERVICE HAVE DISCRETION TO ISSUE LETTER RULINGS AND DETERMINATION LETTERS?



Ordinarily not in certain areas because of factual nature of the problem

.01 The Service ordinarily will not issue a letter ruling or determination letter in certain areas because of the factual nature of the problem involved or because of other reasons. The Service may decline to issue a letter ruling or a determination letter when appropriate in the interest of sound tax administration or on other grounds whenever warranted by the facts or circumstances of a particular case.



No "comfort" letter rulings

.02 No letter ruling will be issued with respect to an issue that is clearly and adequately addressed by statute, regulations, decision of a court of appropriate jurisdiction, revenue ruling, revenue procedure, notice or other authority published in the Internal Revenue Bulletin. Instead of issuing a letter ruling, the Service may, when it is considered appropriate and in the best interests of the Service, issue an information letter calling attention to well-established principles of tax law.



Not on alternative plans or hypothetical situations

.03 A letter ruling or a determination letter will not be issued on alternative plans of proposed transactions or on hypothetical situations.



Ordinarily not on part of an integrated transaction

.04 The Service ordinarily will not issue a letter ruling on only part of an integrated transaction. If, however, a part of a transaction falls under a no-rule area, a letter ruling on other parts of the transaction may be issued. Before preparing the letter ruling request, a taxpayer should call the office having jurisdiction for the matters on which the taxpayer is seeking a letter ruling to discuss whether the Service will issue a letter ruling on part of the transaction.



Not on partial terminations of employee plans

.05 The Service will not issue a letter ruling on the partial termination of an employee plan. Determination letters involving the partial termination of an employee plan may be issued.



Law requires ruling letter

.06 The Service will issue rulings on prospective or future transactions if the law or regulations require a determination of the effect of a proposed transaction for tax purposes.



Issues under consideration by PBGC or DOL

.07 A letter ruling or determination letter relating to an issue that is being considered by the Pension Benefit Guaranty Corporation (PBGC) or the Department of Labor (DOL), and involves the same taxpayer, shall be issued at the discretion of the Service.



Cafeteria plans

.08 The Service does not issue letter rulings or determination letters on whether a cafeteria plan satisfies the requirements of § 125. See also Rev. Proc. 2008-3, also in this Bulletin, for areas under the jurisdiction of the Division Counsel/ Associate Chief Counsel (Tax Exempt and Government Entities) involving cafeteria plans in which advance rulings or determination letters will not be issued.



Determination letters

.09 See section 3.02 of Rev. Proc. 2008-6 for employee plans matters on which determination letters will not be issued.



Domicile in a foreign jurisdiction

.10

(1) The Service is ordinarily unwilling to rule in situations where a taxpayer or a related party is domiciled or organized in a foreign jurisdiction with which the United States does not have an effective mechanism for obtaining tax information with respect to civil tax examinations and criminal investigations, which would preclude the Service from obtaining information located in such jurisdiction that is relevant to the analysis or examination of the tax issues involved in the ruling request.

(2) The provisions of sub section 8.10(1) above shall not apply if the taxpayer or affected related party (a) consents to the disclosure of all relevant information requested by the Service in processing the ruling request or in the course of an examination to verify the accuracy of the representations made and to otherwise analyze or examine the tax issues involved in the ruling request, and (b) waives all claims to protection of bank and commercial secrecy laws in the foreign jurisdiction with respect to the information requested by the Service. In the event the taxpayer's or related party's consent to disclose relevant information or to waive protection of bank or commercial secrecy is determined by the Service to be ineffective or of no force and effect, then the Service may retroactively rescind any ruling rendered in reliance on such consent.



Employee Stock Ownership Plans

.11

(1) The Service does not issue a letter ruling on whether or not the renewal, extension or refinancing of an exempt loan satisfies the requirements of § 4975(d)(3) of the Internal Revenue Code.

(2) The Service does not issue a letter ruling on whether the pre-payment of ESOP loans satisfies the requirements of § 4975(d)(3) other than with respect to plan termination.



Governmental Plans

.12 The Service does not issue a letter ruling on whether or not a plan is a governmental plan under § 414(d).



SECTION 9. WHAT ARE THE GENERAL INSTRUCTIONS FOR REQUESTING LETTER RULINGS AND DETERMINATION LETTERS?



In general

.01 This section explains the general instructions for requesting letter rulings and determination letters on all matters. Requests for letter rulings and determination letters require the payment of the applicable user fee discussed in section 9.02(14) of this revenue procedure.

Specific and additional instructions also apply to requests for letter rulings and determination letters on certain matters. Those matters are listed in section 10 of this revenue procedure followed by a reference (usually to another revenue procedure) where more information can be obtained.



Certain information required in all requests

.02



Facts

(1) Complete statement of facts and other information. Each request for a letter ruling or a determination letter must contain a complete statement of all facts relating to the transaction. These facts include --

(a) names, addresses, telephone numbers, and taxpayer identification numbers of all interested parties. (The term "all interested parties" does not mean all shareholders of a widely held corporation requesting a letter ruling relating to a reorganization, or all employees where a large number may be involved.);

(b) a complete statement of the business reasons for the transaction; and

(c) a detailed description of the transaction.

The Service will usually not rule on only one step of a larger integrated transaction. See section 8.04 of this revenue procedure. However, if such a letter ruling is requested, the facts, circumstances, true copies of relevant documents, etc., relating to the entire transaction must be submitted.



Documents

(2) Copies of all contracts, wills, deeds, agreements, instruments, plan documents, and other documents. True copies of all contracts, wills, deeds, agreements, instruments, plan documents, trust documents, proposed disclaimers, and other documents pertinent to the transaction must be submitted with the request.

Each document, other than the request, should be labelled alphabetically and attached to the request in alphabetical order. Original documents, such as contracts, wills, etc., should not be submitted because they become part of the Service's file and will not be returned.



Analysis of material facts

(3) Analysis of material facts. All material facts in documents must be included rather than merely incorporated by reference, in the taxpayer's initial request or in supplemental letters. These facts must be accompanied by an analysis of their bearing on the issue or issues, specifying the provisions that apply.



Same issue in an earlier return

(4) Statement regarding whether same issue is in an earlier return. The request must state whether, to the best of the knowledge of both the taxpayer and the taxpayer's representatives, the same issue is in an earlier return of the taxpayer (or in a return for any year of a related taxpayer within the meaning of § 267, or of a member of an affiliated group of which the taxpayer is also a member within the meaning of § 1504).

If the statement is affirmative, it must specify whether the issue --

(a) is being examined by the Service;

(b) has been examined and if so, whether or not the statutory period of limitations has expired for either assessing tax or filing a claim for refund or credit of tax;

(c) has been examined and if so, whether or not a closing agreement covering the issue or liability has been entered into by the Service;

(d) is being considered by an appeals office in connection with a return from an earlier period;

(e) has been considered by an appeals office in connection with a return from an earlier period and if so, whether or not the statutory period of limitations has expired for either assessing tax or filing a claim for refund or credit of tax;

(f) has been considered by an appeals office in connection with a return from an earlier period and whether or not a closing agreement covering the issue or liability has been entered into by an appeals office;

(g) is pending in litigation in a case involving the taxpayer or a related taxpayer; or

(h) in employee plans matters, is being considered by the Pension Benefit Guaranty Corporation or the Department of Labor.



Same or similar issue previously submitted or currently pending

(5) Statement regarding whether same or similar issue was previously ruled on or requested, or is currently pending. The request must also state whether, to the best of the knowledge of both the taxpayer and the taxpayer's representatives --

(a) the Service previously ruled on the same or similar issue for the taxpayer (or a related taxpayer within the meaning of § 267, or a member of an affiliated group of which the taxpayer is also a member within the meaning of § 1504) or a predecessor;

(b) the taxpayer, a related taxpayer, a predecessor, or any representatives previously submitted the same or similar issue to the Service but withdrew the request before a letter ruling or determination letter was issued;

(c) the taxpayer, a related taxpayer, or a predecessor previously submitted a request involving the same or a similar issue that is currently pending with the Service; or

(d) at the same time as this request, the taxpayer or a related taxpayer is presently submitting another request involving the same or a similar issue to the Service.

If the statement is affirmative for (a), (b), (c), or (d) of this section 9.02(5), the statement must give the date the request was submitted, the date the request was withdrawn or ruled on, if applicable, and other details of the Service's consideration of the issue.



Statement of authorities supporting taxpayer's views

(6) Statement of supporting authorities. If the taxpayer advocates a particular conclusion, an explanation of the grounds for that conclusion and the relevant authorities to support it must also be included. Even if not advocating a particular tax treatment of a proposed transaction, the taxpayer must still furnish views on the tax results of the proposed transaction and a statement of relevant authorities to support those views.

In all events, the request must include a statement of whether the law in connection with the request is uncertain and whether the issue is adequately addressed by relevant authorities.



Statement of authorities contrary to taxpayer's views

(7) Statement of contrary authorities. The taxpayer is also encouraged to inform the Service about, and discuss the implications of, any authority believed to be contrary to the position advanced, such as legislation (or pending legislation), tax treaties, court decisions, regulations, revenue rulings, revenue procedures, notices or announcements. If the taxpayer determines that there are no contrary authorities, a statement in the request to this effect would be helpful. If the taxpayer does not furnish either contrary authorities or a statement that none exists, the Service in complex cases or those presenting difficult or novel issues may request submission of contrary authorities or a statement that none exists. Failure to comply with this request may result in the Service's refusal to issue a letter ruling or determination letter.

Identifying and discussing contrary authorities will generally enable Service personnel to understand the issue and relevant authorities more quickly. When Service personnel receive the request, they will have before them the taxpayer's thinking on the effect and applicability of contrary authorities. This information should make research easier and lead to earlier action by the Service. If the taxpayer does not disclose and distinguish significant contrary authorities, the Service may need to request additional information, which will delay action on the request.



Statement identifying pending legislation

(8) Statement identifying pending legislation. At the time of filing the request, the taxpayer must identify any pending legislation that may affect the proposed transaction. In addition, if applicable legislation is introduced after the request is filed but before a letter ruling or determination letter is issued, the taxpayer must notify the Service.



Deletions statement required by § 6110

(9) Statement identifying information to be deleted from copy of letter ruling or determination letter for public inspection. The text of certain letter rulings and determination letters is open to public inspection under § 6110. The Service makes deletions from the text before it is made available for inspection. To help the Service make the deletions required by § 6110(c), a request for a letter ruling or determination letter must be accompanied by a statement indicating the deletions desired ("deletions statement"). If the deletions statement is not submitted with the request, a Service representative will tell the taxpayer that the request will be closed if the Service does not receive the deletions statement within 30 calendar days. See section 11.03 of this revenue procedure.

(a) Format of deletions statement. A taxpayer who wants only names, addresses, and identifying numbers to be deleted should state this in the deletions statement. If the taxpayer wants more information deleted, the deletions statement must be accompanied by a copy of the request and supporting documents on which the taxpayer should bracket the material to be deleted. The deletions statement must indicate the statutory basis under § 6110(c) for each proposed deletion.

If the taxpayer decides to ask for additional deletions before the letter ruling or determination letter is issued, additional deletions statements may be submitted.

(b) Location of deletions statement. The deletions statement must not appear in the request, but instead must be made in a separate document and placed on top of the request for a letter ruling or determination letter.

(c) Signature. The deletions statement must be signed and dated by the taxpayer or the taxpayer's authorized representative. A stamped or faxed signature is not permitted.

(d) Additional information. The taxpayer should follow the same procedures above to propose deletions from any additional information submitted after the initial request. An additional deletions statement, however, is not required with each submission of additional information if the taxpayer's initial deletions statement requests that only names, addresses, and identifying numbers are to be deleted and the taxpayer wants only the same information deleted from the additional information.

(e) Taxpayer may protest deletions not made. After receiving from the Service the notice under § 6110(f)(1) of intention to disclose the letter ruling or determination letter (including a copy of the version proposed to be open to public inspection and notation of third-party communications under § 6110(d)), the taxpayer may protest the disclosure of certain information in the letter ruling or determination letter. The taxpayer must send a written statement within 20 calendar days to the Service office indicated on the notice of intention to disclose. The statement must identify those deletions that the Service has not made and that the taxpayer believes should have been made. The taxpayer must also submit a copy of the version of the letter ruling or determination letter and bracket the deletions proposed that have not been made by the Service. Generally, the Service will not consider deleting any material that the taxpayer did not propose to be deleted before the letter ruling or determination letter was issued.

Within 20 calendar days after the Service receives the response to the notice under § 6110(f)(1), the Service will mail to the taxpayer its final administrative conclusion regarding the deletions to be made. The taxpayer does not have the right to a conference to resolve any disagreements concerning material to be deleted from the text of the letter ruling or determination letter. However, these matters may be taken up at any conference that is otherwise scheduled regarding the request.

(f) Taxpayer may request delay of public inspection. After receiving the notice under § 6110(f)(1) of intention to disclose, but within 60 calendar days after the date of notice, the taxpayer may send a request for delay of public inspection under either § 6110(g)(3) or (4). The request for delay must be sent to the Service office indicated on the notice of intention to disclose. A request for delay under § 6110(g)(3) must contain the date on which it is expected that the underlying transaction will be completed. The request for delay under § 6110(g)(4) must contain a statement from which the Commissioner of Internal Revenue may determine that there are good reasons for the delay.

Section 6110(1)(1) states that § 6110 disclosure provisions do not apply to any matter to which § 6104 applies. Therefore, letter rulings, determination letters, technical advice memoranda, and related background file documents dealing with the following matters (covered by § 6104) are not subject to § 6110 disclosure provisions --

(i) An approved application for exemption under § 501(a) as an organization described in § 501(c) or (d), or notice of status as a political organization under § 527, together with any papers submitted in support of such application or notice;

(ii) An application for exemption under § 501(a) with respect to the qualification of a pension, profit-sharing or stock bonus plan, or an individual retirement account described in § 408 or § 408A, whether the plan or account has more than 25 or less than 26 participants, or any application for exemption under § 501(a) by an organization forming part of such a plan or an account;

(iii) Any document issued by the Internal Revenue Service in which the qualification or exempt status of a plan or account is granted, denied, or revoked or the portion of any document in which technical advice with respect thereto is given;

(iv) Any application filed and any document issued by the Internal Revenue Service with respect to the qualification or status of EP master and prototype plans; and

(v) The portion of any document issued by the Internal Revenue Service with respect to the qualification or exempt status of a plan or account of a proposed transaction by such plan, or account.



Signature on request

(10) Signature by taxpayer or authorized representative. The request for a letter ruling or determination letter must be signed and dated by the taxpayer or the taxpayer's authorized representative. Neither a stamped signature nor a faxed signature is permitted.



Authorized representatives

(11) Authorized representatives. To sign the request or to appear before the Service in connection with the request, the representative must be:



Attorney

(a) An attorney who is a member in good standing of the bar of the highest court of any state, possession, territory, commonwealth, or the District of Columbia and who is not currently under suspension or disbarment from practice before the Service. He or she must file a written declaration with the Service showing current qualification as an attorney and current authorization to represent the taxpayer;



Certified public accountant

(b) A certified public accountant who is qualified to practice in any state, possession, territory, commonwealth, or the District of Columbia and who is not currently under suspension or disbarment from practice before the Service. He or she must file a written declaration with the Service showing current qualification as a certified public accountant and current authorization to represent the taxpayer;



Enrolled agent

(c) An enrolled agent who is a person, other than an attorney or certified public accountant, that is currently enrolled to practice before the Service and is not currently under suspension or disbarment from practice before the Service, including a person enrolled to practice only for employee plans matters. He or she must file a written declaration with the Service showing current enrollment and authorization to represent the taxpayer. Either the enrollment number or the expiration date of the enrollment card must be included in the declaration. For the rules on who may practice before the Service, see Treasury Department Circular No. 230;



Enrolled actuary

(d) An enrolled actuary who is a person enrolled as an actuary by the Joint Board for the Enrollment of Actuaries pursuant to 29 U.S.C. 1242 and qualified to practice in any state, possession, territory, commonwealth, or the District of Columbia and who is not currently under suspension or disbarment from practice before the Service. He or she must file a written declaration with the Service showing current qualification as an enrolled actuary and current authorization to represent the taxpayer. Practice as an enrolled actuary is limited to representation with respect to issues involving the following statutory provisions: §§ 401, 403(a), 404, 412, 413, 414, 4971, 6057, 6058, 6059, 6652(d), 6652(e), 6692, 7805(b), and 29 U.S.C. 1083;



A person with a "Letter of Authorization"

(e) Any other person, including a foreign representative who has received a "Letter of Authorization" from the Director, Office of Professional Responsibility under section 10.7(d) of Treasury Department Circular No. 230. A person may make a written request for a "Letter of Authorization" to: Office of Director, Office of Professional Responsibility, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, DC 20224. Section 10.7(d) of Circular No. 230 authorizes the Commissioner to allow an individual who is not otherwise eligible to practice before the Service to represent another person in a particular matter. For additional information, see section 9.02(12) below.



Employee, general partner, bona fide officer, administrator, trustee, etc.

(f) The above requirements do not apply to a regular full-time employee representing his or her employer, to a general partner representing his or her partnership, to a bona fide officer representing his or her corporation, association, or organized group, to a trustee, receiver, guardian, personal representative, administrator, or executor representing a trust, receivership, guardianship, or estate, or to an individual representing his or her immediate family. A preparer of a return (other than a person referred to in paragraph (a), (b), (c), (d) or (e) of this section 9.02(11)) who is not a full-time employee, general partner, a bona fide officer, an administrator, trustee, etc., or an individual representing his or her immediate family may not represent a taxpayer in connection with a letter ruling, determination letter or a technical advice request. See section 10.7(c) of Treasury Department Circular No. 230.



Foreign representative

(g) A foreign representative (other than a person referred to in paragraph (a), (b), (c), (d) or (e) of this section 9.02(11)) is not authorized to practice before the Service and, therefore, must withdraw from representing a taxpayer in a request for a letter ruling or a determination letter. In this situation, the nonresident alien or foreign entity must submit the request for a letter ruling or a determination letter on the individual's or entity's own behalf or through a person referred to in paragraph (a), (b), (c), (d) or (e) of this section 9.02(11).



Power of attorney and declaration of representative

(12) Power of attorney and declaration of representative. Any authorized representative, whether or not enrolled to practice, must also comply with the conference and practice requirements of the Statement of Procedural Rules (26 C.F.R. § 601.501-601.509 (2005)), which provide the rules for representing a taxpayer before the Service. In addition, an unenrolled preparer must file a Form 8821 (Rev. April 2004), Tax Information Authorization, for certain limited employee plans matters.

Form 2848 (Rev. March 2004), Power of Attorney and Declaration of Representative, must be used to provide the representative's authorization (Part I of Form 2848, Power of Attorney) and the representative's qualification (Part II of Form 2848, Declaration of Representative). The name of the person signing Part I of Form 2848 should also be typed or printed on this form. A stamped signature is not permitted. An original, a copy, or a facsimile transmission (fax) of the power of attorney is acceptable so long as its authenticity is not reasonably disputed. For additional information regarding the power of attorney form, see section 9.03(2) of this revenue procedure.

For the requirement regarding compliance with Treasury Department Circular No. 230, see section 9.09 of this revenue procedure.



Penalties of perjury statement

(13) Penalties of perjury statement.

(a) Format of penalties of perjury statement. A request for a letter ruling or determination letter and any change in the request submitted at a later time must be accompanied by the following declaration: "Under penalties of perjury, I declare that I have examined this request, or this modification to the request, including accompanying documents, and, to the best of my knowledge and belief, the request or the modification contains all the relevant facts relating to the request, and such facts are true, correct, and complete." See section 11.04 of this revenue procedure for the penalties of perjury statement applicable for submissions of additional information.

(b) Signature by taxpayer. The declaration must be signed and dated by the taxpayer, not the taxpayer's representative. Neither a stamped signature nor a faxed signature is permitted.

The person who signs for a corporate taxpayer must be an officer of the corporate taxpayer who has personal knowledge of the facts, and whose duties are not limited to obtaining a letter ruling or determination letter from the Service. If the corporate taxpayer is a member of an affiliated group filing consolidated returns, a penalties of perjury statement must also be signed and submitted by an officer of the common parent of the group.

The person signing for a trust, a state law partnership, or a limited liability company must be, respectively, a trustee, general partner, or member-manager who has personal knowledge of the facts.



Applicable user fee

(14) Applicable user fee. Section 7528 of the Code, as added by section 202 of the Temporary Assistance for Needy Families Block Grant Program and made permanent by section 8244 of the U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007, requires taxpayers to pay user fees for requests for rulings, opinion letters, determination letters, and similar requests. Rev. Proc. 2008-8 contains the schedule of fees for each type of request under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division and provides guidance for administering the user fee requirements. If two or more taxpayers are parties to a transaction and each requests a letter ruling, each taxpayer must satisfy the rules herein and additional user fees may apply.



Number of copies of request to be submitted

(15) Number of copies of request to be submitted. Generally a taxpayer needs only to submit one copy of the request for a letter ruling or determination letter. If, however, more than one issue is presented in the letter ruling request, the taxpayer is encouraged to submit additional copies of the request.

Further, two copies of the request for a letter ruling or determination letter are required if --

(a) the taxpayer is requesting separate letter rulings or determination letters on different issues as explained later under section 9.03(1) of this revenue procedure;

(b) the taxpayer is requesting deletions other than names, addresses, and identifying numbers, as explained in section 9.02(9) of this revenue procedure. (One copy is the request for the letter ruling or determination letter and the second copy is the deleted version of such request.); or

(c) a closing agreement (as defined in section 3.03 of this revenue procedure) is being requested on the issue presented.



Sample of a letter ruling request

(16) Sample format for a letter ruling request. To assist a taxpayer or the taxpayer's representative in preparing a letter ruling request, a sample format for a letter ruling request is provided in Appendix A. This format is not required to be used by the taxpayer or the taxpayer's representative. If the letter ruling request is not identical or similar to the format in Appendix A, the different format will neither defer consideration of the letter ruling request nor be cause for returning the request to the taxpayer or taxpayer's representative.



Checklist

(17) Checklist for letter ruling requests. The Service will be able to respond more quickly to a taxpayer's letter ruling request if it is carefully prepared and complete. The checklist in Appendix B of this revenue procedure is designed to assist taxpayers in preparing a request by reminding them of the essential information and documents to be furnished with the request. The checklist in Appendix B must be completed to the extent required by the instructions in the checklist, signed and dated by the taxpayer or the taxpayer's representative, and placed on top of the letter ruling request. If the checklist in Appendix B is not received, a group representative will ask the taxpayer or the taxpayer's representative to submit the checklist, which may delay action on the letter ruling request. A photocopy of this checklist may be used.



Additional information required in certain circumstances

.03



Multiple issues

(1) To request separate letter rulings for multiple issues in a single situation. If more than one issue is presented in a request for a letter ruling, the Service generally will issue a single ruling letter covering all the issues. However, if the taxpayer requests separate letter rulings on any of the issues (because, for example, one letter ruling is needed sooner than another), the Service will usually comply with the request unless it is not feasible or not in the best interests of the Service to do so. A taxpayer who wants separate letter rulings on multiple issues should make this clear in the request and submit two copies of the request. Additional checklists are solely for the specific issues designated.

In issuing each letter ruling, the Service will state that it has issued separate letter rulings or that requests for other letter rulings are pending.



Power of attorney

(2) Recipient of original letter ruling or determination letter. The Service will send the original of the letter ruling or determination letter to the taxpayer and a copy of the letter ruling or determination letter to the taxpayer's representative. In this case, the letter ruling or determination letter is addressed to the taxpayer. A Form 2848, Power of Attorney and Declaration of Representative (Rev. March 2004), must be used to provide the representative's authorization except in certain employee plans matters. See section 9.02(12) of this revenue procedure.



Copies of letter ruling or determination letter sent to multiple representatives

(a) To have copies sent to multiple representatives. When a taxpayer has more than one representative, the Service will send the copy of the letter ruling or determination letter to the first representative named on the most recent power of attorney. If the taxpayer wants an additional copy of the letter ruling or determination letter sent to the second representative listed in the power of attorney, the taxpayer must check the appropriate box on Form 2848. If this form is not used, the taxpayer must state in the power of attorney that a copy of the letter ruling or determination letter is to be sent to the second representative listed in the power of attorney. Copies of the letter ruling or determination letter, however, will be sent to no more than two representatives.



Copy of letter ruling or determination letter sent to taxpayer's representative

(b) To have copy sent to taxpayer's representative.

A copy of the letter ruling or determination letter will be sent to the taxpayer's representative.

If the taxpayer wants a copy of the letter ruling or determination letter sent to the taxpayer's second representative, the taxpayer must check the appropriate box on Form 2848.



No copy of letter ruling or determination letter sent to taxpayer's representative

(c) To have no copy sent to taxpayer's representative. If a taxpayer does not want a copy of the letter ruling or determination letter sent to any representative, the taxpayer must check the appropriate box on Form 2848.



Expedited handling

(3) To request expedited handling. The Service ordinarily processes requests for letter rulings and determination letters in order of the date received. Expedited handling means that a request is processed ahead of the regular order. Expedited handling is granted only in rare and unusual cases, both out of fairness to other taxpayers and because the Service seeks to process all requests as expeditiously as possible and to give appropriate deference to normal business exigencies in all cases not involving expedited handling.

A taxpayer who has a compelling need to have a request processed ahead of the regular order may request expedited handling. This request must explain in detail the need for expedited handling. The request must be made in writing, preferably in a separate letter with, or soon after filing, the request for the letter ruling or determination letter. If the request is not made in a separate letter, then the letter in which the letter ruling or determination letter request is made should say, at the top of the first page: "Expedited Handling Is Requested. See page ___of this letter."

A request for expedited handling will not be forwarded to the appropriate group for action until the check or money order for the user fee in the correct amount is received.

Whether the request will be granted is within the Service's discretion. The Service may grant a request when a factor outside a taxpayer's control creates a real business need to obtain a letter ruling or determination letter before a certain time in order to avoid serious business consequences. Examples include situations in which a court or governmental agency has imposed a specific deadline for the completion of a transaction, or a transaction must be completed expeditiously to avoid an imminent business emergency (such as the hostile takeover of a corporate taxpayer), provided that the taxpayer can demonstrate that the deadline or business emergency, and the need for expedited handling, resulted from circumstances that could not reasonably have been anticipated or controlled by the taxpayer. To qualify for expedited handling in such situations, the taxpayer must also demonstrate that the taxpayer submitted the request as promptly as possible after becoming aware of the deadline or emergency. The extent to which the letter ruling or determination letter complies with all of the applicable requirements of this revenue procedure, and fully and clearly presents the issues, is a factor in determining whether expedited treatment will be granted. When the Service agrees to process a request out of order, it cannot give assurance that any letter ruling or determination letter will be processed by the time requested. The scheduling of a closing date for a transaction or a meeting of the board of directors or shareholders of a corporation, without regard for the time it may take to obtain a letter ruling or determination letter, will not be considered a sufficient reason to process a request ahead of its regular order. Also, the possible effect of fluctuation in the market price of stocks on a transaction will not be considered a sufficient reason to process a request out of order.

Because most requests for letter rulings and determination letters cannot be processed ahead of their regular order, the Service urges all taxpayers to submit their requests well in advance of the contemplated transaction. In addition, in order to facilitate prompt action on letter ruling requests taxpayers are encouraged to ensure that their initial submissions comply with all of the requirements of this revenue procedure (including the requirements of other applicable guidelines set forth in section 10 of this revenue procedure), and to provide any additional information requested by the Service promptly.



Facsimile transmission (fax)

(4) To receive a letter ruling or submit a request for a letter ruling by facsimile transmission (fax).

(a) To receive a letter ruling by fax. A letter ruling ordinarily is not sent by fax. However, if the taxpayer requests, a copy of a letter ruling may be faxed to the taxpayer or the taxpayer's authorized representative. A letter ruling, however, is not issued until the ruling is mailed. See § 301.6110-2(h).

A request to fax a copy of the letter ruling to the taxpayer or the taxpayer's authorized representative must be made in writing, either as part of the original letter ruling request or prior to the approval of the letter ruling. The request must contain the fax number of the taxpayer or the taxpayer's authorized representative to whom the letter ruling is to be faxed.

The Service will take certain precautions to protect confidential information. For example, the Service will use a cover sheet that identifies the intended recipient of the fax and the number of pages transmitted. The cover sheet, if possible, will not identify the specific taxpayer by name, and it will be the first page covering the letter ruling being faxed.

(b) To submit a request for a letter ruling by fax. Original letter ruling requests sent by fax are discouraged because such requests must be treated in the same manner as requests by letter. For example, the faxed letter ruling request will not be forwarded to the applicable office for action until the check for the user fee is received.



Requesting a conference

(5) To request a conference. A taxpayer who wants to have a conference on the issues involved should indicate this in writing when, or soon after, filing the request. See also sections 12.01, 12.02, and 13.09(2) of this revenue procedure.



Address to send the request

.04



Requests for letter rulings

(1) Requests for letter rulings should be sent to the following offices (as appropriate):

Internal Revenue Service
Attention: EP Letter Rulings
P.O. Box 27063
McPherson Station
Washington, DC 20038
Internal Revenue Service
Attention: EO Letter Rulings
P.O. Box 27720
McPherson Station
Washington, DC 20038
Hand delivered requests must be marked RULING REQUEST SUBMISSION. The delivery should be made between the hours of 8:30 a.m. and 4:00 p.m.; where a receipt will be given:

Courier's Desk
Internal Revenue Service
Attention: SE:T:EP:RA or SE:T:EO:RA
1111 Constitution Avenue, NW - PE
Washington, DC 20224


Requests for information letters

(2) Requests for information letters on either employee plans matters or exempt organizations matters should be sent to Employee Plans or Exempt Organizations (as appropriate):

Internal Revenue Service
Commissioner, TE/GE
Attention: SE:T:EP:RA or SE:T:EO:RA
1111 Constitution Avenue, NW - PE
Washington, DC 20224


Requests for determination letters

(3) Requests for determination letters should be sent to:

Internal Revenue Service
P.O. Box 192
Covington, KY 41012-0192
For fees required with determination letter requests, see section 6 of Rev. Proc. 2008-8.



Pending letter ruling requests

.05

(1) Circumstances under which the taxpayer must notify EP or EO Technical. The taxpayer must notify EP or EO Technical if, after the letter ruling request is filed but before a letter ruling is issued, the taxpayer knows that --

(a) an examination of the issue or the identical issue on an earlier year's return has been started by an EP or EO Examinations office;

(b) in employee plans matters, the issue is being considered by the Pension Benefit Guaranty Corporation or the Department of Labor; or

(c) legislation that may affect the transaction has been introduced ( see section 9.02(8) of this revenue procedure).

(2) Taxpayer must notify EP or EO Technical if return is filed and must attach request to return. If the taxpayer files a return before a letter ruling is received from EP or EO Technical concerning the issue, the taxpayer must notify EP or EO Technical that the return has been filed. The taxpayer must also attach a copy of the letter ruling request to the return to alert the EP or EO Examinations office and thereby avoid premature EP or EO Examinations office action on the issue.



When to attach letter ruling to return

.06 A taxpayer who receives a letter ruling before filing a return about any transaction that is relevant to the return being filed must attach a copy of the letter ruling to the return when it is filed.



How to check on status of request

.07 The taxpayer or the taxpayer's authorized representative may obtain information regarding the status of a request by calling the person whose name and telephone number are shown on the acknowledgement of receipt of the request.



Request may be withdrawn or EP or EO Technical may decline to issue letter ruling

.08

(1) In general. A taxpayer may withdraw a request for a letter ruling or determination letter at any time before the letter ruling or determination letter is signed by the Service. Correspondence and exhibits related to a request that is withdrawn or related to a letter ruling request for which the Service declines to issue a letter ruling will not be returned to the taxpayer. See section 9.02(2) of this revenue procedure. In appropriate cases, the Service may publish its conclusions in a revenue ruling or revenue procedure.

A request for a letter ruling will not be suspended in EP or EO Technical at the request of a taxpayer.

(2) Notification of Director, EP or EO Examinations. If a taxpayer withdraws a request for a letter ruling or if EP or EO Technical declines to issue a letter ruling, EP or EO Technical will notify the Director, EP or EO Examinations and may give its views on the issues in the request to the Director, EP or EO Examinations to consider in any later examination of the return.

(3) Refunds of user fee. The user fee will not be returned for a letter ruling request that is withdrawn. If the Service declines to issue a letter ruling on all of the issues in the request, the user fee will be returned. If the Service, however, issues a letter ruling on some, but not all, of the issues, the user fee will not be returned. See section 10 of Rev. Proc. 2008-8 for additional information regarding refunds of user fees.



Compliance with Treasury Department Circular No. 230

.09 The taxpayer's authorized representative, whether or not enrolled, must comply with Treasury Department Circular No. 230, which provides the rules for practice before the Service. In those situations when EP or EO Technical believes that the taxpayer's representative is not in compliance with Circular No. 230, EP or EO Technical will bring the matter to the attention of the Director, Office of Professional Responsibility.

For the requirement regarding compliance with the conference and practice requirements, see section 9.02(12) of this revenue procedure.



SECTION 10. WHAT SPECIFIC, ADDITIONAL PROCEDURES APPLY TO CERTAIN REQUESTS?



In general

.01 Specific revenue procedures supplement the general instructions for requests explained in section 9 of this revenue procedure and apply to requests for letter rulings or determination letters regarding the Code sections and matters listed in this section.



Exempt Organizations

.02 If the request is for the qualification of an organization for exemption from federal income tax under § 501 or 521, see Rev. Proc. 72-5, 1972-1 C.B. 709, regarding religious and apostolic organizations; Rev. Proc. 80-27, 1980-1 C.B. 677, concerning group exemptions; and Rev. Proc. 2007-52 , regarding applications for recognition of exemption, determinations for which § 7428 applies, and conference protest and appeal rights.



Employee Plans

.03

(1) For requests to obtain approval for a retroactive amendment described in § 412(c)(8) of the Code and section 302(c)(8) of the Employee Retirement Income Security Act of 1974 (ERISA) that reduces accrued benefits, see Rev. Proc. 94-42, 1994-1 C.B. 717.

(2) For requests for a waiver of the minimum funding standard, see Rev. Proc. 2004-15.

(3) For requests for a waiver of the 100 percent tax imposed under § 4971(b) of the Code on a pension plan that fails to meet the minimum funding standards of § 412, see Rev. Proc. 81-44, 1981-2 C.B. 618.

(4) For requests for a determination that a plan amendment is reasonable and provides for only de minimis increases in plan liabilities in accordance with §§ 401(a)(33) and 412(f)(2)(A), see Rev. Proc. 79-62, 1979-2 C.B. 576.

(5) For requests to obtain approval for an extension of an amortization period of any unfunded liability in accordance with § 412(e), see Rev. Proc. 2004-44, 2004-2 C.B. 134.

(6) For requests by administrators or sponsors of a defined benefit plan to obtain approval for a change in funding method, see Rev. Proc. 2000-41, 2000-2 C.B. 371.

(7) For requests for the return to the employer of certain nondeductible contributions, see Rev. Proc. 90-49, 1990-2 C.B. 620 (as modified by Rev. Proc. 2008-8).

(8) For requests for determination letters for plans under §§ 401, 403(a), 409, and 4975(e)(7), and for the exempt status of any related trust under § 501, see Rev. Proc. 2008-6, Rev. Proc. 93-10 and Rev. Proc. 93-12.



SECTION 11. HOW DOES EP OR EO TECHNICAL HANDLE LETTER RULING REQUESTS?



In general

.01 The Service will issue letter rulings on the matters and under the circumstances explained in sections 4 and 6 of this revenue procedure and in the manner explained in this section and section 13 of this revenue procedure.



Is not bound by informal opinion expressed

.02 The Service will not be bound by the informal opinion expressed by the group representative or any other authorized Service representative under this procedure, and such an opinion cannot be relied upon as a basis for obtaining retroactive relief under the provisions of § 7805(b).



Tells taxpayer if request lacks essential information during initial contact

.03 If a request for a letter ruling or determination letter does not comply with all the provisions of this revenue procedure, the request will be acknowledged and the Service representative will tell the taxpayer during the initial contact which requirements have not been met.



Information must be submitted within 30 calendar days

If the request lacks essential information, which may include additional information needed to satisfy the procedural requirements of this revenue procedure, as well as substantive changes to transactions or documents needed from the taxpayer, the Service representative will tell the taxpayer during the initial contact that the request will be closed if the Service does not receive the information within 30 calendar days unless an extension of time is granted. See section 11.04 of this revenue procedure for information on extension of time and instructions on submissions of additional information.



Letter ruling request mistakenly sent to EP or EO Determinations Processing

A request for a letter ruling sent to EP/EO Determinations Processing that does not comply with the provisions of this revenue procedure will be returned by EP/EO Determinations Processing so that the taxpayer can make corrections before sending it to EP or EO Technical.



Requires prompt submission of additional information requested after initial contact

.04 Material facts furnished to the Service by telephone or fax, or orally at a conference, must be promptly confirmed by letter to the Service. This confirmation and any additional information requested by the Service that is not part of the information requested during the initial contact must be furnished within 21 calendar days to be considered part of the request.

Additional information submitted to the Service must be accompanied by the following declaration: "Under penalties of perjury, I declare that I have examined this information, including accompanying documents, and, to the best of my knowledge and belief, the information contains all the relevant facts relating to the request for the information, and such facts are true, correct, and complete." This declaration must be signed in accordance with the requirements in section 9.02(13)(b) of this revenue procedure. A taxpayer who submits additional factual information on several occasions may provide one declaration subsequent to all submissions that refers to all submissions.



Encourage use of fax

(1) To facilitate prompt action on letter ruling requests, taxpayers are encouraged to submit additional information by fax as soon as the information is available. The Service representative who requests additional information can provide a telephone number to which the information can be faxed. A copy of this information and a signed perjury statement, however, must be mailed or delivered to the Service.



Address to send additional information

(2) Additional information should be sent to the same address as the original letter ruling request. See section 9.04. However, the additional information should include the name, office symbols, and room number of the Service representative who requested the information and the taxpayer's name and the case control number (which the Service representative can provide).



Number of copies of additional information to be submitted

(3) Generally, a taxpayer needs only to submit one copy of the additional information. However, in appropriate cases, the Service may request additional copies of the information.



30-day or 21-day period may be extended if justified and approved

(4) An extension of the 30-day period under section 11.03 or the 21-day period under section 11.04, will be granted only if justified in writing by the taxpayer and approved by the manager of the group to which the case is assigned. A request for extension should be submitted before the end of the 30-day or 21-day period. If unusual circumstances close to the end of the 30-day or 21-day period make a written request impractical, the taxpayer should notify the Service within the 30-day or 21-day period that there is a problem and that the written request for extension will be coming soon. The taxpayer will be told promptly, and later in writing, of the approval or denial of the requested extension. If the extension request is denied, there is no right of appeal.



If taxpayer does not submit additional information

(5) If the taxpayer does not follow the instructions for submitting additional information or requesting an extension within the time provided, a letter ruling will be issued on the basis of the information on hand, or, if appropriate, no letter ruling will be issued. When the Service decides not to issue a letter ruling because essential information is lacking, the case will be closed and the taxpayer notified in writing. If the Service receives the information after the letter ruling request is closed, the request may be reopened and treated as a new request. However, the taxpayer must pay another user fee before the case can be reopened.



Near the completion of the ruling process, advises taxpayer of conclusions and, if the Service will rule adversely, offers the taxpayer the opportunity to withdraw the letter ruling request

.05 Generally, after the conference of right is held before the letter ruling is issued, the Service representative will inform the taxpayer or the taxpayer's authorized representative of the Service's final conclusions. If the Service is going to rule adversely, the taxpayer will be offered the opportunity to withdraw the letter ruling request. If the taxpayer or the taxpayer's representative does not promptly notify the Service representative of a decision to withdraw the ruling request, the adverse letter will be issued. The user fee will not be refunded for a letter ruling request that is withdrawn. See section 10 of Rev. Proc. 2008-8.



May request draft of proposed letter ruling near the completion of the ruling process

.06 To accelerate issuance of letter rulings, in appropriate cases near the completion of the ruling process, the Service representative may request that the taxpayer or the taxpayer's representative submit a proposed draft of the letter ruling on the basis of discussions of the issues. The taxpayer, however, is not required to prepare a draft letter ruling in order to receive a letter ruling.

The format of the submission should be discussed with the Service representative who requests the draft letter ruling. The representative usually can provide a sample format of a letter ruling and will discuss the facts, analysis, and letter ruling language to be included.



Taxpayer may also submit draft on a word processing disk

In addition to a typed draft, taxpayers are encouraged to submit this draft on a disk or CD Rom in Rich Text Format. The typed draft will become part of the permanent files of the Service, and the word processing disk will not be returned. If the Service representative requesting the draft letter ruling cannot answer specific questions about the format of the word processing disk, the questions can be directed to Frances Sloan at (202) 283-9626 (Employee Plans), or Ted Lieber at (202) 283-8999 (Exempt Organizations) (not toll-free calls).

The proposed letter ruling (both typed draft and word processing disk) should be sent to the same address as any additional information and contain in the transmittal the information that should be included with any additional information (for example, a penalties of perjury statement is required). See section 11.04 of this revenue procedure.



SECTION 12. HOW ARE CONFERENCES SCHEDULED?



Schedules a conference if requested by taxpayer

.01 A taxpayer may request a conference regarding a letter ruling request. Normally, a conference is scheduled only when the Service considers it to be helpful in deciding the case or when an adverse decision is indicated. If conferences are being arranged for more than one request for a letter ruling involving the same taxpayer, they will be scheduled so as to cause the least inconvenience to the taxpayer. As stated in section 9.03(5) of this revenue procedure, a taxpayer who wants to have a conference on the issue or issues involved should indicate this in writing when, or soon after, filing the request.

If a conference has been requested, the taxpayer will be notified by telephone, if possible, of the time and place of the conference, which must then be held within 21 calendar days after this contact. Instructions for requesting an extension of the 21-day period and notifying the taxpayer or the taxpayer's representative of the Service's approval or denial of the request for extension are the same as those explained in section 11.04 of this revenue procedure regarding providing additional information.



Permits taxpayer one conference of right

.02 A taxpayer is entitled, as a matter of right, to only one conference, except as explained under section 12.05 of this revenue procedure. This conference normally will be held at the group level and will be attended by a person who, at the time of the conference, has the authority to sign the ruling letter in his or her own name or for the group manager.

When more than one group has taken an adverse position on an issue in a letter ruling request, or when the position ultimately adopted by one group will affect that adopted by another, a representative from each group with the authority to sign in his or her own name or for the group manager will attend the conference. If more than one subject is to be discussed at the conference, the discussion will constitute a conference on each subject.

To have a thorough and informed discussion of the issues, the conference usually will be held after the group has had an opportunity to study the case. However, at the request of the taxpayer, the conference of right may be held earlier.

No taxpayer has a right to appeal the action of a group to any other official of the Service. But see section 12.05 of this revenue procedure for situations in which the Service may offer additional conferences.



Disallows verbatim recording of conferences

.03 Because conference procedures are informal, no tape, stenographic, or other verbatim recording of a conference may be made by any party.



Makes tentative recommendations on substantive issues

.04 The senior Service representative present at the conference ensures that the taxpayer has the opportunity to present views on all the issues in question. A Service representative explains the Service's tentative decision on the substantive issues and the reasons for that decision. If the taxpayer asks the Service to limit the retroactive effect of any letter ruling or limit the revocation or modification of a prior letter ruling, a Service representative will discuss the recommendation concerning this issue and the reasons for the recommendation. The Service representatives will not make a commitment regarding the conclusion that the Service will finally adopt.



May offer additional conferences

.05 The Service will offer the taxpayer an additional conference if, after the conference of right, an adverse holding is proposed, but on a new issue, or on the same issue but on different grounds from those discussed at the first conference. There is no right to another conference when a proposed holding is reversed at a higher level with a result less favorable to the taxpayer, if the grounds or arguments on which the reversal is based were discussed at the conference of right.

The limit on the number of conferences to which a taxpayer is entitled does not prevent the Service from offering additional conferences, including conferences with an official higher than the group level, if the Service decides they are needed. Such conferences are not offered as a matter of course simply because the group has reached an adverse decision. In general, conferences with higher level officials are offered only if the Service determines that the case presents significant issues of tax policy or tax administration and that the consideration of these issues would be enhanced by additional conferences with the taxpayer.



Requires written confirmation of information presented at conference

.06 The taxpayer should furnish to the Service any additional data, reasoning, precedents, etc., that were proposed by the taxpayer and discussed at the conference but not previously or adequately presented in writing. The taxpayer must furnish the additional information within 21 calendar days from the date of the conference. See section 11.04 of this revenue procedure for instructions on submission of additional information. If the additional information is not received within that time, a ruling will be issued on the basis of the information on hand or, if appropriate, no ruling will be issued.

Procedures for requesting an extension of the 21-day period and notifying the taxpayer or the taxpayer's representative of the Service's approval or denial of the requested extension are the same as those stated in section 11.04 of this revenue procedure regarding submitting additional information.



May schedule a pre-submission conference

.07 Sometimes it will be advantageous to both the Service and the taxpayer to hold a conference before the taxpayer submits the letter ruling request to discuss substantive or procedural issues relating to a proposed transaction. These conferences are held only if the identity of the taxpayer is provided to the Service, only if the taxpayer actually intends to make a request, only if the request involves a matter on which a letter ruling is ordinarily issued, and only at the discretion of the Service and as time permits. For example, a pre-submission conference will not be held on an income tax issue if, at the time the pre-submission conference is requested, the identical issue is involved in the taxpayer's return for an earlier period and that issue is being examined. See section 6 of this revenue procedure. Generally, the taxpayer will be asked to provide before the pre-submission conference a statement of whether the issue is an issue on which a letter ruling is ordinarily issued and a draft of the letter ruling request or other detailed written statement of the proposed transaction, issue, and legal analysis. If the taxpayer's representative will attend the pre-submission conference, a power of attorney form is required. A Form 2848, Power of Attorney and Declaration of Representative, must be used to provide the representative's authorization.

Any discussion of substantive issues at a pre-submission conference is advisory only, is not binding on the Service, and cannot be relied upon as a basis for obtaining retroactive relief under the provisions of § 7805(b). A letter ruling request submitted following a pre-submission conference will not necessarily be assigned to the group that held the pre-submission conference.



Under limited circumstances, may schedule a conference to be held by telephone

.08 A taxpayer may request that their conference of right be held by telephone. This request may occur, for example, when a taxpayer wants a conference of right but believes that the issue involved does not warrant incurring the expense of traveling to Washington, DC. If a taxpayer makes such a request, the group manager will decide if it is appropriate in the particular case to hold the conference of right by telephone. If the request is approved by the group manager, the taxpayer will be advised when to call the Service representatives (not a toll-free call).



Conference rules for EO determination letters not subject to § 7428 or § 501 or § 521

.09 The procedures for requesting a conference for determination letters that are not subject to § 7428 or § 501 or § 521 are the same as described in this section, except that generally conferences will be held by telephone.



SECTION 13. WHAT EFFECT WILL A LETTER RULING HAVE?



May be relied on subject to limitations

.01 A taxpayer ordinarily may rely on a letter ruling received from the Service subject to the conditions and limitations described in this section.



Will not apply to another taxpayer

.02 A taxpayer may not rely on a letter ruling issued to another taxpayer. See § 6110(k)(3).



Will be used by the Director, EP or EO Examinations in examining the taxpayer's return

.03 When determining a taxpayer's liability, the Director, EP or EO Examinations must ascertain whether --

(1) the conclusions stated in the letter ruling are properly reflected in the return;

(2) the representations upon which the letter ruling was based reflected an accurate statement of the material facts;

(3) the transaction was carried out substantially as proposed; and

(4) there has been any change in the law that applies to the period during which the transaction or continuing series of transactions were consummated.

If, when determining the liability, the Director, EP Examinations finds that a letter ruling should be revoked or modified, unless a waiver is obtained from EP Technical, the findings and recommendations of the Director, EP Examinations will be forwarded to EP Technical for consideration before further action is taken by the Director, EP Examinations. Such a referral to EP Technical will be treated as a request for technical advice and the procedures of Rev. Proc. 2008-5 will be followed. Otherwise, the letter ruling is to be applied by the Director, EP Examinations in determining the taxpayer's liability. Appropriate coordination with EP Technical will be undertaken if any field official having jurisdiction over a return or other matter proposes to reach a conclusion contrary to a letter ruling previously issued to the taxpayer.

In certain exempt organizations cases, section 4.04 of Rev. Proc. 2008-5 provides that a request for a TAM is mandatory.



May be revoked or modified if found to be in error

.04 Unless it was part of a closing agreement as described in section 3.03 of this revenue procedure, a letter ruling found to be in error or not in accord with the current views of the Service may be revoked or modified. If a letter ruling is revoked or modified, the revocation or modification applies to all years open under the statute of limitations unless the Service uses its discretionary authority under § 7805(b) to limit the retroactive effect of the revocation or modification.

A letter ruling may be revoked or modified due to --

(1) a notice to the taxpayer to whom the letter ruling was issued;

(2) the enactment of legislation or ratification of a tax treaty;

(3) a decision of the United States Supreme Court;

(4) the issuance of temporary or final regulations; or

(5) the issuance of a revenue ruling, revenue procedure, notice, or other statement published in the Internal Revenue Bulletin.

Consistent with these provisions, if a letter ruling relates to a continuing action or a series of actions, it ordinarily will be applied until any one of the events described above occurs or until it is specifically withdrawn.

Publication of a notice of proposed rulemaking will not affect the application of any letter ruling issued under this revenue procedure.



Not generally revoked or modified retroactively

.05 Except in rare or unusual circumstances, the revocation or modification of a letter ruling will not be applied retroactively to the taxpayer for whom the letter ruling was issued or to a taxpayer whose tax liability was directly involved in the letter ruling provided that --

(1) there has been no misstatement or omission of material facts;

(2) the facts at the time of the transaction are not materially different from the facts on which the letter ruling was based;

(3) there has been no change in the applicable law;

(4) the letter ruling was originally issued for a proposed transaction; and

(5) the taxpayer directly involved in the letter ruling acted in good faith in relying on the letter ruling, and revoking or modifying the letter ruling retroactively would be to the taxpayer's detriment. For example, the tax liability of each employee covered by a ruling relating to a qualified plan of an employer is directly involved in such ruling. However, the tax liability of a member of an industry is not directly involved in a letter ruling issued to another member and, therefore, the holding in a revocation or modification of a letter ruling to one member of an industry may be retroactively applied to other members of the industry. By the same reasoning, a tax practitioner may not extend to one client the non-retroactive application of a revocation or modification of a letter ruling previously issued to another client.

If a letter ruling is revoked or modified by letter with retroactive effect, the letter will, except in fraud cases, state the grounds on which the letter ruling is being revoked or modified and explain the reasons why it is being revoked or modified retroactively.



Retroactive effect of revocation or modification applied only to a particular transaction

.06 A letter ruling issued on a particular transaction represents a holding of the Service on that transaction only. It will not apply to a similar transaction in the same year or any other year. And, except in unusual circumstances, the application of that letter ruling to the transaction will not be affected by the later issuance of regulations (either temporary or final), if conditions (1) through (5) in section 13.05 of this revenue procedure are met.

However, if a letter ruling on a transaction is later found to be in error or no longer in accord with the position of the Service, it will not protect a similar transaction of the taxpayer in the same year or later year.



Retroactive effect of revocation or modification applied to a continuing action or series of actions

.07 If a letter ruling is issued covering a continuing action or series of actions and the letter ruling is later found to be in error or no longer in accord with the position of the Service, the Commissioner, Tax Exempt and Government Entities Division, ordinarily will limit the retroactive effect of the revocation or modification to a date that is not earlier than that on which the letter ruling is revoked or modified.



May be retroactively revoked or modified when transaction is completed without reliance on the letter ruling

.08 A taxpayer is not protected against retroactive revocation or modification of a letter ruling involving a completed transaction other than those described in section 13.07 of this revenue procedure, because the taxpayer did not enter into the transaction relying on a letter ruling.



Taxpayer may request that retroactivity be limited

.09 Under § 7805(b), the Service may prescribe any extent to which a revocation or modification of a letter ruling or determination letter will be applied without retroactive effect.

A taxpayer to whom a letter ruling or determination letter has been issued may request that the Commissioner, Tax Exempt and Government Entities Division, limit the retroactive effect of any revocation or modification of the letter ruling or determination letter.



Format of request

(1) Request for relief under § 7805(b) must be made in required format.

A request to limit the retroactive effect of the revocation or modification of a letter ruling must be in the general form of, and meet the general requirements for, a letter ruling request. These requirements are given in section 9 of this revenue procedure. Specifically, the request must also --

(a) state that it is being made under § 7805(b);

(b) state the relief sought;

(c) explain the reasons and arguments in support of the relief requested (including a discussion of the five items listed in section 13.05 of this revenue procedure and any other factors as they relate to the taxpayer's particular situation); and

(d) include any documents bearing on the request. A request that the Service limit the retroactive effect of a revocation or modification of a letter ruling may be made in the form of a separate request for a letter ruling when, for example, a revenue ruling has the effect of revoking or modifying a letter ruling previously issued to the taxpayer, or when the Service notifies the taxpayer of a change in position that will have the effect of revoking or modifying the letter ruling. However, when notice is given by the Director, EP or EO Examinations during an examination of the taxpayer's return or by an Appeals Area Director, or the Appeals Area Director, LMSB, during consideration of the taxpayer's return before an appeals office, a request to limit retroactive effect must be made in the form of a request for technical advice as explained in section 19 of Rev. Proc. 2008-5.

When germane to a pending letter ruling request, a request to limit the retroactive effect of a revocation or modification of a letter ruling may be made as part of the request for the letter ruling, either initially or at any time before the letter ruling is issued. When a letter ruling that concerns a continuing transaction is revoked or modified by, for example, a subsequent revenue ruling, a request to limit retroactive effect must be made before the examination of the return that contains the transaction that is the subject of the letter ruling request.

Consideration of relief under § 7805(b) will be included as one of the taxpayer's steps in exhausting administrative remedies only if the taxpayer has requested such relief in the manner described in this revenue procedure. If the taxpayer does not complete the applicable steps, the taxpayer will not have exhausted the taxpayer's administrative remedies as required by § 7428(b)(2) and § 7476(b)(3) and will, thus, be precluded from seeking a declaratory judgment under § 7428 or § 7476. Where the taxpayer has requested § 7805(b) relief, the taxpayer's administrative remedies will not be considered exhausted until the Service has had a reasonable time to act upon the request.



Request for conference

(2) Taxpayer may request a conference on application of § 7805(b).

A taxpayer who requests the application of § 7805(b) in a separate letter ruling request has the right to a conference in EP or EO Technical as explained in sections 12.01, 12.02, 12.03, 12.04 and 12.05 of this revenue procedure. If the request is made initially as part of a pending letter ruling request or is made before the conference of right is held on the substantive issues, the § 7805(b) issue will be discussed at the taxpayer's one conference of right as explained in section 12.02 of this revenue procedure. If the request for the application of § 7805(b) relief is made as part of a pending letter ruling request after a conference has been held on the substantive issue and the Service determines that there is justification for having delayed the request, the taxpayer is entitled to one conference of right concerning the application of § 7805(b), with the conference limited to discussion of this issue only.



SECTION 14. WHAT EFFECT WILL A DETERMINATION LETTER HAVE?



Has same effect as a letter ruling

.01 A determination letter issued by EP or EO Determinations has the same effect as a letter ruling issued to a taxpayer under section 13 of this revenue procedure.

If the Director, EP or EO Examinations proposes to reach a conclusion contrary to that expressed in a determination letter, he or she need not refer the matter to EP or EO Technical. However, the Director, EP or EO Examinations must refer the matter to EP or EO Technical if the Director, EP or EO Examinations desires to have the revocation or modification of the determination letter limited under § 7805(b).



Taxpayer may request that retroactive effect of revocation or modification be limited

.02 The Director, EP or EO Examinations does not have authority under § 7805(b) to limit the revocation or modification of the determination letter. Therefore, if the Director, EP or EO Examinations proposes to revoke or modify a determination letter, the taxpayer may request limitation of the retroactive effect of the revocation or modification by asking EP or EO Determinations to seek technical advice from EP or EO Technical. See section 19 of Rev. Proc. 2008-5.



Format of request

(1) Request for relief under § 7805(b) must be made in required format.

A taxpayer's request to limit the retroactive effect of the revocation or modification of the determination letter must be in the form of, and meet the general requirements for, a technical advice request. See section 18.06 of Rev. Proc. 2008-5. The request must also --

(a) state that it is being made under § 7805(b);

(b) state the relief sought;

(c) explain the reasons and arguments in support of the relief sought (including a discussion of the five items listed in section 13.05 of this revenue procedure and any other factors as they relate to the taxpayer's particular situation); and

(d) include any documents bearing on the request.



Request for conference

(2) Taxpayer may request a conference on application of § 7805(b).

When technical advice is requested regarding the application of § 7805(b), the taxpayer has the right to a conference in EP or EO Technical to the same extent as does any taxpayer who is the subject of a technical advice request. See section 11 of Rev. Proc. 2008-5.



Exhaustion of administrative remedies

(3) Taxpayer steps in exhausting administrative remedies.

Consideration of relief under § 7805(b) will be included as one of the taxpayer's steps in exhausting administrative remedies only if the taxpayer has requested such relief in the manner described in this revenue procedure. If the taxpayer does not complete the applicable steps, the taxpayer will not have exhausted the taxpayer's administrative remedies as required by § 7428(b)(2) and § 7476(b)(3) and will, thus, be precluded from seeking a declaratory judgment under § 7428 or § 7476. Where the taxpayer has requested § 7805(b) relief, the taxpayer's administrative remedies will not be considered exhausted until the Service has had a reasonable time to act upon the request.



SECTION 15. UNDER WHAT CIRCUMSTANCES ARE MATTERS REFERRED BETWEEN DETERMINATIONS AND TECHNICAL?



Requests for determination letters

.01 Requests for determination letters received by EP or EO Determinations that, under the provisions of this revenue procedure, may not be issued by EP or EO Determinations, will be forwarded to EP or EO Technical for reply. EP or EO Determinations will notify the taxpayer that the matter has been referred.

EP or EO Determinations will also refer to EP or EO Technical any request for a determination letter that in its judgment should have the attention of EP or EO Technical.



No-rule areas

.02 If the request involves an issue on which the Service will not issue a letter ruling or determination letter, the request will not be forwarded to EP or EO Technical. EP or EO Determinations will notify the taxpayer that the Service will not issue a letter ruling or a determination letter on the issue. See section 8 of this revenue procedure for a description of no-rule areas.



Requests for letter rulings

.03 Requests for letter rulings received by EP or EO Technical that, under section 6 of this revenue procedure, may not be acted upon by EP or EO Technical will be forwarded to the Director, EP or EO Examinations. The taxpayer will be notified of this action. If the request is on an issue or in an area of the type discussed in section 8 of this revenue procedure, and the Service decides not to issue a letter ruling or an information letter, EP or EO Technical will notify the taxpayer and will then forward the request to the Director, EP or EO Examinations for association with the related return.



SECTION 16. WHAT ARE THE GENERAL PROCEDURES APPLICABLE TO INFORMATION LETTERS ISSUED BY THE HEADQUARTERS OFFICE?



Will be made available to the public

.01 Information letters that are issued by the headquarters office to members of the public will be made available to the public. These documents provide general statements of well-defined law without applying them to a specific set of facts. See section 3.06 of this revenue procedure. Information letters that are issued by the field, however, will not be made available to the public.

The following documents also will not be available for public inspection as part of this process:

(1) letters that merely transmit Service publications or other publicly available material, without significant legal discussion;

(2) responses to taxpayer or third party contacts that are inquiries with respect to a pending request for a letter ruling, technical advice memorandum, or Chief Counsel Advice (whose public inspection is subject to § 6110); and

(3) responses to taxpayer or third party communications with respect to any investigation, audit, litigation, or other enforcement action.



Deletions made under the Freedom of Information Act

.02 Before any information letter is made available to the public, the headquarters office will delete any name, address, and other identifying information as appropriate under the Freedom of Information Act ("FOIA") (for example, FOIA personal privacy exemption of 5 U.S.C. § 552(b)(6) and tax details exempt pursuant to § 6103, as incorporated into FOIA by 5 U.S.C. § 552(b)(3). Because information letters do not constitute written determinations (including Chief Counsel Advice) as defined in § 6110, these documents are not subject to public inspection under § 6110.



Effect of information letters

.03 Information letters are advisory only and have no binding effect on the Service. See section 3.06 of this revenue procedure. If the headquarters office issues an information letter in response to a request for a letter ruling that does not meet the requirements of this revenue procedure, the information letter is not a substitute for a letter ruling.



SECTION 17. WHAT IS THE EFFECT OF THIS REVENUE PROCEDURE ON OTHER DOCUMENTS?

Rev. Proc. 2007-4 is superseded.



SECTION 18. EFFECTIVE DATE

This revenue procedure is effective January 7, 2008.



SECTION 19. PAPERWORK REDUCTION ACT

The collections of information contained in this revenue procedure have been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. § 3507) under control number 1545-1520.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number.

The collections of information in this revenue procedure are in sections 7.07, 9.02, 9.03, 9.04, 9.05, 9.06, 10.02, 10.03, 11.03, 11.04(1)-(5), 11.06, 12.01, 12.06, 12.07, 13.09(1), 14.02(1), and in Appendices B, C, D and E. This information is required to evaluate and process the request for a letter ruling or determination letter. In addition, this information will be used to help the Service delete certain information from the text of the letter ruling or determination letter before it is made available for public inspection, as required by § 6110. The collections of information are required to obtain a letter ruling or determination letter. The likely respondents are businesses or other for-profit institutions.

The estimated total annual reporting and/or recordkeeping burden is 12,650 hours.

The estimated annual burden per respondent/recordkeeper varies from 15 minutes to 16 hours, depending on individual circumstances and the type of request involved, with an estimated average burden of 6.01 hours. The estimated number of respondents and/or recordkeepers is 2,103.

The estimated annual frequency of responses is one request per applicant, except that a taxpayer requesting a letter ruling may also request a presubmission conference.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by § 6103.



DRAFTING INFORMATION

The principal author of this revenue procedure is Ingrid Grinde of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding how this revenue procedure applies to employee plans matters, contact the Employee Plans Customer Assistance Service at 877-829-5500 (a toll-free call). For employee plans matters, Ms. Grinde can be emailed at RetirementPlanQuestions@irs.gov. For exempt organization matters, please contact Mr. Ted Lieber at (202) 283-8999 (not a toll-free call).
INDEX



--additional information
........................ sec. 9.02(9), 9.03, 11.03, 11.04

--closing agreement ... sec. 3.03, 6.06(4), 9.02(4), 9.02(15), 13.04

--conference .......... sec. 9.02(9), 9.03(5), 12.01-.09, 13.09(2), 14.02(2)

--disclose ............ sec. 9.02(9)

--exempt organization ... sec. 6.01

--expeditious handling ... sec. 9.03(3)

--extension ............ sec. 6.02, 6.04, 11.04, 12.01, 12.06

--fax ................. sec. 9.03(4), 11.04

--fee ................. sec. 9.02(14), 11.04(5)

--hand delivered ...... 9.04(1)

--information letter ... sec. 3.07, 8.01, 15.03

--no rule ............. sec. 8, 15.02

--perjury statement ... sec. 9.02(13), 11.04, 11.06

--power of attorney ... sec. 9.02(12), 9.03(2)

--reliance ............ sec. 3.09, 11.02, 12.07, 13, 14

--representatives ..... sec. 3.09, 9.02(10)-(11), 9.03(2)

--retroactive ......... sec. 11.02, 12.04, 12.07, 13, 14

--revenue ruling ...... sec. 3.07, 13.04, 13.09(1)

--section 6110 ........ sec. 9.02(9), 13.02

--status .............. sec. 9.07

--technical advice ..... sec. 7.08, 13.03, 13.09(1), 14

--telephone ........... sec. 9.02(1), 11.04, 12.01, 12.08

--where to send ....... sec. 9.04

--withdraw ............. sec. 9.08




APPENDIX A

SAMPLE FORMAT FOR A LETTER RULING REQUEST

( Insert the date of request)

Internal Revenue Service
Commissioner, TE/GE
Attention: SE:T:EP:RA
P.O. Box 27063
McPherson Station
Washington, DC 20038
Dear Sir or Madam:

( Insert the name of the taxpayer) (the "Taxpayer") requests a ruling on the proper treatment of ( insert the subject matter of the letter ruling request) under § ( insert the number) of the Internal Revenue Code.

[ If the taxpayer is requesting expedited handling, the letter ruling request must contain a statement to that effect. This statement must explain the need for expeditious handling. See section 9.03(3).]


A. STATEMENT OF FACTS




1. Taxpayer Information

[Provide the statements required by sections 9.02(1)(a), (b), and (c) of Rev. Proc. 2008-4, 2008-1 I.R.B. 121]. (Hereafter, all references are to Rev. Proc. 2008-4 unless otherwise noted.)]

For example, a taxpayer that maintains a qualified employee retirement plan and files an annual Form 5500 series of returns may include the following statement to satisfy sections 9.02(1)(a), (b), and (c):

The Taxpayer is a construction company with principal offices located at 100 Whatever Drive, Wherever, Maryland 12345, and its telephone number is (123) 456-7890. The Taxpayer's federal employer identification number is 00-1234567. The Taxpayer uses the Form 5500 series of returns on a calendar year basis to report its qualified employee retirement plan and trust.



2. Detailed Description of the Transaction.

[The ruling request must contain a complete statement of the facts relating to the transaction that is the subject of the letter ruling request. This statement must include a detailed description of the transaction, including material facts in any accompanying documents, and the business reasons for the transaction. See sections 9.02(1)(b), 9.02(1)(c), and 9.02(2).]


B. RULING REQUESTED


[The ruling request should contain a concise statement of the ruling requested by the taxpayer.]


C. STATEMENT OF LAW


[The ruling request must contain a statement of the law in support of the taxpayer's views or conclusion, including any authorities believed to be contrary to the position advanced in the ruling request. This statement must also identify any pending legislation that may affect the proposed transaction. See sections 9.02(6), 9.02(7), and 9.02(8).]


D. ANALYSIS


[The ruling request must contain a discussion of the facts and an analysis of the law. See sections 9.02(3), 9.02(6), 9.02(7), and 9.02(8).]


E. CONCLUSION


[The ruling request should contain a statement of the taxpayer's conclusion on the ruling requested.]


F. PROCEDURAL MATTERS




1. Rev. Proc. 2008-4 statements

a. [The statement required by section 9.02(4).]

b. [The statement required by section 9.02(5).]

c. [The statement required by section 9.02(6) regarding whether the law in connection with the letter ruling request is uncertain and whether the issue is adequately addressed by relevant authorities.]

d. [The statement required by section 9.02(7) when the taxpayer determines that there are no contrary authorities.]

e. [If the taxpayer wants to have a conference on the issues involved in the letter ruling request, the ruling request should contain a statement to that effect. See section 9.03(5).]

f. [If the taxpayer is requesting the letter ruling to be issued by fax, the ruling request should contain a statement to that effect. See section 9.03(4).]

g. [If the taxpayer is requesting separate letter rulings on multiple issues, the letter ruling request should contain a statement to that effect. See section 9.03(1).]



2. Administrative

a. A Power of Attorney is enclosed. [See sections 9.02(12) and 9.03(2).]

b. The deletions statement and checklist required by Rev. Proc. 2008-4 are enclosed. [See sections 9.02(9) and 9.02(17).]

c. The required user fee is enclosed. [See section 9.02(14).]
Very truly yours,

( Insert the name of the taxpayer or the taxpayer's authorized representative)

By:

____________________

Signature Date

Typed or printed name of person signing request

DECLARATION: [See section 9.02(13).]

Under penalties of perjury, I declare that I have examined this request, including accompanying documents, and to the best of my knowledge and belief, the request contains all the relevant facts relating to the request and such facts are true, correct, and complete.

( Insert the name of the taxpayer)

By:

____________________

Signature
Title Date

Typed or printed name of person signing declaration


APPENDIX B



CHECKLIST IS YOUR RULING REQUEST COMPLETE?




INSTRUCTIONS

The Service will be able to respond more quickly to your letter ruling request if it is carefully prepared and complete. To ensure that your request is in order, use this checklist. Complete the four items of information requested before the checklist. Answer each question by circling "Yes," "No," or "N/A." When a question contains a place for a page number, insert the page number (or numbers) of the request that gives the information called for by a yes answer to a question. Sign and date the checklist (as taxpayer or authorized representative) and place it on top of your request.

If you are an authorized representative submitting a request for a taxpayer, you must include a completed checklist with the request, or the request will either be returned to you or substantive consideration of it will be deferred until a completed checklist is submitted. If you are a taxpayer preparing your own request without professional assistance, an incomplete checklist will not be cause for returning your request or deferring substantive consideration of the request. However, you should still complete as much of the checklist as possible and submit it with your request.

TAXPAYER'S NAME ...

TAXPAYER'S I.D. No. ...

ATTORNEY/P.O.A. ...

PRIMARY CODE SECTION ...


CIRCLE ONE ITEM

Yes No N/A 1. Does your request involve an issue under the
jurisdiction of the Commissioner, Tax Exempt and
Government Entities Division? See section 5 of Rev. Proc.
2008-4, 2008-1 I.R.B. 121, for issues under the
jurisdiction of other offices. (Hereafter, all references
are to Rev. Proc. 2008-4 unless otherwise noted.)




Yes No N/A 2. If your request involves a matter on which letter
rulings are not ordinarily issued, have you given
compelling reasons to justify the issuance of a private
letter ruling? Before preparing your request, you may want
to call the office responsible for substantive
interpretations of the principal Internal Revenue Code
section on which you are seeking a letter ruling to
discuss the likelihood of an exception. The appropriate
office to call for this information may be obtained by
calling (202) 283-9660 (Employee Plans matters), or (202)
283-2300 (Exempt Organizations matters) (not toll-free
calls).




Yes No N/A Page ____ 3. If the request involves an employee plans qualification
matter under § 401(a), § 409, or § 4975(e)(7), have you
demonstrated that the request satisfies the three criteria
in section 6.03 for a headquarters office ruling?




Yes No N/A Page ____ 4. If the request deals with a completed transaction, have
you filed the return for the year in which the transaction
was completed? See sections 6.01 and 6.02.




Yes No 5. Are you requesting a letter ruling on a hypothetical
situation or question? See section 8.03.




Yes No 6. Are you requesting a letter ruling on alternative plans
of a proposed transaction? See section 8.03.




Yes No 7. Are you requesting the letter ruling for only part of
an integrated transaction? See section 8.04.




Yes No 8. Have you submitted another letter ruling request for
the transaction covered by this request?




Yes No 9. Are you requesting the letter ruling for a business,
trade, industrial association, or similar group concerning
the application of tax law to its members? See section
6.07.




Yes No Pages ____ 10. Have you included a complete statement of all the
facts relevant to the transaction? See section 9.02(1).




Yes No N/A 11. Have you submitted with the request true copies of all
wills, deeds, plan documents, and other documents relevant
to the transaction, and labeled and attached them in
alphabetical sequence? See section 9.02(2).




Yes No Page ____ 12. Have you included, rather than merely by reference,
all material facts from the documents in the request? Are
they accompanied by an analysis of their bearing on the
issues that specifies the document provisions that apply?
See section 9.02(3).




Yes No Page ____ 13. Have you included the required statement regarding
whether the same issue in the letter ruling request is in
an earlier return of the taxpayer or in a return for any
year of a related taxpayer? See section 9.02(4).




Yes No Page ____ 14. Have you included the required statement regarding
whether the Service previously ruled on the same or
similar issue for the taxpayer, a related taxpayer, or a
predecessor? See section 9.02(5).




Yes No Page ____ 15. Have you included the required statement regarding
whether the taxpayer, a related taxpayer, a predecessor,
or any representatives previously submitted the same or
similar issue but withdrew it before the letter ruling was
issued? See section 9.02(5).




Yes No Page ____ 16. Have you included the required statement regarding
whether the law in connection with the request is
uncertain and whether the issue is adequately addressed by
relevant authorities? See section 9.02(6).




Yes No Page ____ 17. Have you included the required statement of relevant
authorities in support of your views? See section 9.02(6).




Yes No N/A Page ____ 18. Does your request discuss the implications of any
legislation, tax treaties, court decisions, regulations,
notices, revenue rulings, or revenue procedures you
determined to be contrary to the position advanced? See
section 9.02(7), which states that taxpayers are
encouraged to inform the Service of such authorities.




Yes No N/A Page ____ 19. If you determined that there are no contrary
authorities, have you included a statement to this effect
in your request? See section 9.02(7).




Yes No N/A Page ____ 20. Have you included in your request a statement
identifying any pending legislation that may affect the
proposed transaction? See section 9.02(8).




Yes No 21. Is the request accompanied by the deletions statement
required by § 6110? See section 9.02(9).




Yes No N/A Page ____ 22. Have you (or your authorized representative) signed
and dated the request? See section 9.02(10).




Yes No N/A 23. If the request is signed by your representative, or if
your representative will appear before the Service in
connection with the request, is the request accompanied by
a properly prepared and signed power of attorney with the
signatory's name typed or printed? See section 9.02(12).




Yes No N/A Page ____ 24. Have you included, signed and dated, the penalties of
perjury statement in the form required by section
9.02(13)?




Yes No N/A 25. Have you included the correct user fee with the
request and made your check or money order payable to the
United States Treasury? See section 9.02(14) and
Rev. Proc. 2008-8, page 233, this Bulletin, for the
correct amount and additional information on user fees.




Yes No N/A 26. Are you submitting your request in duplicate if
necessary? See section 9.02(15).




Yes No N/A Page ____ 27. If you are requesting separate letter rulings on
different issues involving one factual situation, have you
included a statement to that effect in each request? See
section 9.03(1).




Yes No N/A 28. If you do not want a copy of the letter ruling to be
sent to any representative, does the power of attorney
contain a statement to that effect? See section 9.03(2).




Yes No N/A Page ____ 29. If you have more than one representative, have you
designated whether the second representative listed on the
power of attorney is to receive a copy of the letter
ruling? See section 9.03(2).




Yes No N/A 30. If you want your letter ruling request to be processed
ahead of the regular order or by a specific date, have you
requested expedited handling in the form required by
section 9.03(3) and stated a compelling need for such
action in the request?




Yes No N/A 31. If you want to have a conference on the issues
involved in the request, have you included a request for
conference in the ruling request? See section 9.03(5).




Yes No N/A 32. If your request is covered by any of the guideline
revenue procedures or other special requirements listed in
section 10 of Rev. Proc. 2008-4, have you complied with
all of the requirements of the applicable revenue
procedure?




Yes No N/A Page ____ 33. If you are requesting relief under § 7805(b)
(regarding retroactive effect), have you complied with all
of the requirements in section 13.09?




Yes No N/A 34. Have you addressed your request to the appropriate
office listed in section 9.04? Improperly addressed
requests may be delayed (sometimes for over a week) in
reaching the appropriate office for initial processing.





________________________________ ________________________________ _______________
Signature Title or authority Date



___________________________________

Typed or printed name of person signing checklist


APPENDIX C



Additional Checklist for Roth IRA Recharacterization Ruling Requests


In order to assist EP Technical in processing a ruling request involving a Roth IRA recharacterization, in addition to the items in Appendix B, please check the following list.


Yes No N/A 1. Did you include the name(s) of trustee and/or custodian
Page _____ of the traditional individual retirement account (IRA)
(generally, a financial institution)?

Yes No N/A 2. Is each IRA identification number present?
Page ____

Yes No N/A 3. If the ruling request involves Roth conversions both of
Page ____ a husband and wife, is the necessary information with
respect to each IRA of each party present?
Note: as long as husband and wife file a joint federal
Form 1040, the Service can issue one ruling covering both
parties. Furthermore, if a joint federal income tax return
has been filed for the year or years in question, the
Service only requires one user fee even if both husband
and wife had failed conversions.

Yes No N/A 4. If there was one or more attempted conversions, are the
Page ____ applicable dates on which the attempted IRA conversion(s)
occurred included?

Yes No N/A 5. If the reason that a conversion failed is that the
Page ____ taxpayer or related taxpayers relied upon advice of a tax
professional such as a CPA, an attorney, or an enrolled
actuary, is the name and occupation of that adviser
included?

Yes No N/A 6. Is certification that the taxpayer or taxpayers timely
Page ____ filed the relevant federal tax return(s) present?

Yes No N/A 7. Is there a short statement of facts with respect to the
Page ____ conversion? For example, if the ruling request involves a
conversion attempted in 1998, there should be a statement
of the facts that includes a representation of why the due
date(s) found in Announcement 99-57 and
Announcement 99-104 were not met.

Yes No N/A 8. If the taxpayer recharacterized his/her Roth IRA to a
Page ____ traditional IRA prior to submitting a request for § 9100
relief, are the date(s) of the recharacterization(s),
name(s) of trustees and/or custodians, and the
identification numbers of the traditional IRA(s) present?

Yes No N/A 9. Does the request include the type of contribution (
Page ____ i.e., regular or conversion) and amount of the
contribution being recharacterized?




APPENDIX D



Additional Checklist for Government Pick-Up Plan Ruling Requests


In order to assist EP Technical in processing a ruling request involving government pick-up plans, in addition to the items in Appendix B please check the following list.


Yes No N/A 1. Is the plan qualified under § 401(a) of the Code?
Page _____ (Evidence of qualification or representation that the plan
is qualified.)

Yes No N/A 2. Is the organization that established the plan a State
Page _____ or political subdivision thereof, or any agency or
instrumentality of the foregoing? An example of this would
be a representation that the organization that has
established the plan is a political subdivision or
municipality of the State.

Yes No N/A 3. Is there specific information regarding who are the
Page _____ eligible participants?

Yes No N/A 4. Are the contributions that are the subject of the
Page _____ ruling request mandatory employee contributions? These
contributions must be for a specified dollar amount or a
specific percentage of the participant's compensation and
the dollar amount or percentage of compensation cannot be
subject to change.

Yes No N/A 5. Does the plan provide that the participants do not have
Page _____ the election to opt in and/or out of the plan?

Yes No N/A 6. Are copies of the enacting legislation providing that
Page _____ the contributions although designated as employee
contributions are being paid by the employer in lieu of
contributions by the employee included?

Yes No N/A 7. Are copies of the specific enabling authorization that
Page _____ provides the employee must not have the option of choosing
to receive the contributed amounts directly instead of
having them paid by the employer to the plan included? For
example, a resolution, ordinance, plan provision, or
collective bargaining agreement could specify this
information.




APPENDIX E



Additional Checklist for Church Plan Ruling Requests


In order to assist EP Technical in processing a church plan ruling request, in addition to the items in Appendix B, please check the following list.


Yes No N/A 1. Is there specific information showing that the
Page _____ submission is on behalf of a plan established by a named
church or convention or association of churches? The
information must show how the sponsoring organization is
controlled by, or associated with, the named church or
convention or association of churches. For example, the
sponsoring organization might be listed in the church's
official directory of related organizations whose mission
is to further the objectives of the church. In order to be
considered associated with a church or convention or
association of churches, the organization must share
common religious bonds and convictions with that church or
convention or association of churches.

Yes No N/A 2. Is there specific information showing that the
Page _____ organization that has established the plan is a tax-exempt
organization as described in § 501 of the Code?

Yes No N/A 3. Is there representation that the plan for which the
Page _____ ruling is being requested is qualified under § 401(a) of
the Code or meets the requirements of § 403(b) of the
Code?

Yes No N/A 4. Does the ruling clearly state who are the eligible
Page _____ participants and the name of the employer of these
eligible participants?

Yes No N/A 5. Is there a representation that none of the eligible
Page _____ participants are or can be considered employed in
connection with one or more unrelated trades or businesses
within the meaning of § 513 of the Code?

Yes No N/A 6. Is there a representation that all of the eligible
Page _____ participants are or will be employed by the named church
or convention or association of churches, and will not
include employees of forprofit entities? An example of an
eligible employee includes a duly ordained, commissioned,
or licensed minister of a church in the exercise of his or
her ministry.

Yes No N/A 7. Is there specific information showing an existing plan
Page _____ committee whose principal purpose or function is the
administration or funding of the plan. This committee must
be controlled by or associated with the named church or
convention or association of churches?

Yes No N/A 8. Is the composition of the committee stated?
Page _____

Miscellaneous Itemized Deductions – U.S. Supreme Court – Absence of InvestmentObjectives

Individuals may subtract from their federal taxable income certain itemized deductions, 26 U. S. C. §63(d), but only to the extent the deductions exceed 2% of adjusted gross income, §67(a). A trust may also take such deductions subject to the 2% floor, §67(e) , except that when the relevant cost is "paid or incurred in connection with the administration of the...trust" and "would not have been incurred if the property were not held in such trust," the cost may be deducted without regard to the floor, §67(e)(1). After petitioner Knight (Trustee), the trustee of a testamentary trust (Trust), hired the Warfield firm to advise as to Trust investments, the Trust deducted in full on its fiduciary income tax return the investment advisory fees paid to Warfield. Respondent Commissioner found the fees subject to the 2%floor and therefore allowed the deduction only to the extent the fees exceeded 2% of the Trust's adjusted gross income. The Tax Court decided for the Commissioner, and the Second Circuit affirmed, holding that because such fees were costs of a type that could be incurred if the property were held individually rather than in trust, their deduction by the Trust was subject to the 2% floor.




Michael J. Knight, Trustee of the William L. Rudkin Testamentary Trust, Petitioner v. Commissioner of Internal Revenue.

U.S. Supreme Court; 06-1286, January 16, 2008.

Affirming CA-2, 2006-2 USTC ¶50,569.

[ Code Sec. 67]

Miscellaneous itemized deductions: Testamentary trust: Investment advice fees: Two-percent floor. --

SUPREME COURT OF THE UNITED STATES. OCTOBER TERM, 2007. Syllabus. NOTE: Where it is feasible, a syllabus (headnote) will be released, as is being done in connection with this case, at the time the opinion is issued.The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the convenience of the reader. See United States v. Detroit Timber & Lumber Co., 200 U. S. 321, 337. CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT. No. 06-1286. Argued November 27, 2007 --Decided January 16, 2008. NOTICE: This opinion is subject to formal revision before publication in the preliminary print of the United States Reports. Readers are requested to notify the Reporter of Decisions, Supreme Court of the United States, Washington, D. C. 20543, of any typographical or other formal errors, in order that corrections may be made before the preliminary print goes to press. ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT. [January 16, 2008].


Syllabus


Held: Investment advisory fees generally are subject to the 2% floor when incurred by a trust. Pp. 5-13.
(a) In asking whether a particular type of cost incurred by a trust "would not have been incurred" if the property were held by an individual, §67(e)(1) excepts from the 2% floor only those costs that it would be uncommon (or unusual, or unlikely) for such a hypothetical individual to incur. The question whether a trust-related expense is fully deductible turns on a prediction about what would happen if a fact were changed --specifically, if the property were held by an individual rather than by a trust. Predictions are based on what would customarily or commonly occur. Thus, in the context of making such a prediction, when there is uncertainty about the answer, the word"would" is best read to express concepts such as custom, habit, natural disposition, or probability. Although the statutory text does not expressly ask whether expenses are "customarily" incurred outside of trusts, that is the direct import of the language in context. The Second Circuit's approach, which asks whether the cost at issue could have been incurred by an individual, flies in the face of the statutory language. Had Congress intended the Court of Appeals' reading, it easily could have replaced "would" with "could" in §67(e)(1), and presumably would have. The Trustee's argument that the proper inquiry is whether a particular expense of a particular trust was caused by the fact that the property was held in trust fails because the statute by its terms does not establish a straightforward causation test, but instead looks to the counter factual question whether an individual would have incurred such costs in the absence of a trust. Further, under the Trustee's approach, every trust-related expense would be fully deductible, thus allowing the exception to the 2% floor in §67(e)(1) to swallow the general rule. Pp. 5-10.

(b) The Trust's investment advisory fees are subject to the 2% floor. The Trustee --who has the burden of establishing entitlement to the deduction, see, e.g., INDOPCO, Inc. v. Commissioner, 503 U. S. 79, 84 --has not demonstrated that it is uncommon or unusual for individuals to hire an investment adviser. His argument is that individuals cannot incur trust investment advisory fees, not that individuals do not commonly incur investment advisory fees. Indeed, his essential point is that he engaged an investment adviser because of his fiduciary duties under Connecticut law, which requires a trustee to invest and manage trust assets "as a prudent investor would." This prudent investor standard plainly does not refer to a prudent trustee, but looks instead to what a prudent investor with the same investment objectives handling his own affairs would do --i.e., a prudent individual investor. Because a hypothetical prudent investor in petitioner's position would reasonably have solicited investment advice, it is quite difficult to say that the investment advisory fees "would not have been incurred" --i.e., that it would be unusual or uncommon for such fees to have been incurred --if the property were held by an individual investor with the same objectives as the Trust in handling his own affairs. While Congress's decision to phrase the pertinent inquiry in terms of a prediction about a hypothetical situation inevitably entails some uncertainty, that is no excuse for judicial amendment of the statute. The Code elsewhere poses similar questions, see, e.g., §§162(a), 212, and the inquiry is in any event what §67(e)(1) requires. Although some trust-related investment advisory fees may be fully deductible if an investment adviser were to impose a special, additional charge applicable only to its fiduciary accounts, there is nothing in the record to suggest that Warfield did so, or treated the Trust any differently than it would have treated an individual with similar objectives, because of the Trustee's fiduciary obligations. Nor does the Trust assert that its investment objectives or balancing of competing interests were so distinctive that any comparison with those of an individual investor would be improper. Pp. 10-13.

467 F. 3d 149, affirmed.

ROBERTS, C. J., delivered the opinion for a unanimous Court.


Opinion of the Court


CHIEF JUSTICE ROBERTS delivered the opinion of the Court.

Under the Internal Revenue Code, individuals may subtract from their taxable income certain itemized deductions, but only to the extent the deductions exceed 2% of adjusted gross income. A trust may also claim those deductions, also subject to the 2% floor, except that costs incurred in the administration of the trust, which would not have been incurred if the trust property were not held by a trust, may be deducted without regard to the floor. In the case of individuals, investment advisory fees are subject to the 2% floor; the question presented is whether such fees are also subject to the floor when incurred by a trust. We hold that they are and therefore affirm the judgment below, albeit for different reasons than those given by the Court of Appeals.

I

The Internal Revenue Code imposes a tax on the "taxable income" of both individuals and trusts. 26 U. S. C. §1(a). The Code instructs that the calculation of taxable income begins with a determination of "gross income,"capaciously defined as "all income from whatever source derived." §61(a). "Adjusted gross income" is then calculated by subtracting from gross income certain "above-the-line" deductions, such as trade and business expenses and losses from the sale or exchange of property. §62(a). Finally, taxable income is calculated by subtracting from adjusted gross income "itemized deductions" --also known as "below-the-line" deductions --defined as all allowable deductions other than the "above-the-line" deductions identified in §62(a) and the deduction for personal exemptions allowed under §151 (2000 ed. and Supp. V). §63(d)(2000 ed.).

Before the passage of the Tax Reform Act of 1986, 100 Stat. 2085, below-the-line deductions were deductible in full. This system resulted in significant complexity and potential for abuse, requiring "extensive [taxpayer] recordkeeping with regard to what commonly are small expenditures," as well as "significant administrative and enforcement problems for the Internal Revenue Service." H. R. Rep. No. 99-426, p. 109 (1985).

In response, Congress enacted what is known as the "2%floor" by adding §67 to the Code. Section 67(a) provides that "the miscellaneous itemized deductions for any taxable year shall be allowed only to the extent that the aggregate of such deductions exceeds 2 percent of adjusted gross income." The term "miscellaneous itemized deductions" is defined to include all itemized deductions other than certain ones specified in §67(b). Investment advisory fees are deductible pursuant to 26 U. S. C. §212. Because §212 is not listed in §67(b) as one of the categories of expenses that may be deducted in full, such fees are "miscellaneous itemized deductions" subject to the 2% floor. 26 CFR §1.67-1T(a)(1)(ii) (2007).

Section 67(e) makes the 2% floor generally applicable not only to individuals but also to estates and trusts, 1 with one exception relevant here. Under this exception, "the adjusted gross income of an estate or trust shall be computed in the same manner as in the case of an individual,except that...the deductions for costs which are paid or incurred in connection with the administration of the estate or trust and which would not have been incurred if the property were not held in such trust or estate...shall be treated as allowable" and not subject to the 2% floor. §67(e)(1).

Petitioner Michael J. Knight is the trustee of the William L. Rudkin Testamentary Trust, established in the State of Connecticut in 1967. In 2000, the Trustee hired Warfield Associates, Inc., to provide advice with respect to investing the Trust's assets. At the beginning of the tax year, the Trust held approximately $2.9 million in marketable securities, and it paid Warfield $22,241 in investment advisory fees for the year. On its fiduciary income tax return for 2000, the Trust reported total income of $624,816, and it deducted in full the investment advisory fees paid to Warfield. After conducting an audit, respondent Commissioner of Internal Revenue found that these investment advisory fees were miscellaneous itemized deductions subject to the 2% floor. The Commissioner therefore allowed the Trust to deduct the investment advisory fees, which were the only claimed deductions subject to the floor, only to the extent that they exceeded 2% of the Trust's adjusted gross income. The discrepancy resulted in a tax deficiency of $4,448.

The Trust filed a petition in the United States Tax Court seeking review of the assessed deficiency. It argued that the Trustee's fiduciary duty to act as a "prudent investor" under the Connecticut Uniform Prudent Investor Act, Conn. Gen. Stat. §§45a-541a to 45a-541l (2007), 2 required the Trustee to obtain investment advisory services, and therefore to pay investment advisory fees. The Trust argued that such fees are accordingly unique to trusts and therefore fully deductible under 26 U. S. C. §67(e)(1). The Tax Court rejected this argument, holding that §67(e)(1) allows full deductibility only for expenses that are not commonly incurred outside the trust setting. Because investment advisory fees are commonly incurred by individuals, the Tax Court held that they are subject to the 2% floor when incurred by a trust. Rudkin Testamentary Trust v. Commissioner, 124 T. C. 304, 309-311 (2005).

The Trust appealed to the United States Court of Appeals for the Second Circuit. The Court of Appeals concluded that, in determining whether costs such as investment advisory fees are fully deductible or subject to the2% floor, §67(e) "directs the inquiry toward the counter factual condition of assets held individually instead of in trust," and requires "an objective determination of whether the particular cost is one that is peculiar to trusts and one that individuals are incapable of incurring." 467 F. 3d 149, 155, 156 (2006). The court held that because investment advisory fees were "costs of a type that could be incurred if the property were held individually rather than in trust," deduction of such fees by the Trust was subject to the 2% floor. Id., at 155-156.

The Courts of Appeals are divided on the question presented. The Sixth Circuit has held that investment advisory fees are fully deductible. O'Neill v. Commissioner, 994 F. 2d 302, 304 (1993). In contrast, both the Fourth and Federal Circuits have held that such fees are subject to the 2% floor, because they are "commonly" or "customarily" incurred outside of trusts. See Scott v. United States, 328 F. 3d 132, 140 (CA4 2003); Mellon Bank, N. A. v. United States, 265 F. 3d 1275, 1281 (CA Fed. 2001).The Court of Appeals below came to the same conclusion, but as noted announced a more exacting test, allowing"full deduction only for those costs that could not have been incurred by an individual property owner." 467 F. 3d, at 156 (emphasis added). We granted the Trustee's petition for certiorari to resolve the conflict, 551 U. S. __ (2007), and now affirm.

II

"We start, as always, with the language of the statute." Williams v. Taylor, 529 U. S. 420, 431 (2000). Section 67(e) sets forth a general rule: "[T]he adjusted gross income of [a]...trust shall be computed in the same manner as in the case of an individual." That is, trusts can ordinarily deduct costs subject to the same 2% floor that applies to individuals' deductions. Section 67(e) provides for an exception to the 2% floor when two conditions are met. First, the relevant cost must be "paid or incurred in connection with the administration of the...trust." §67(e)(1). Second, the cost must be one "which would not have been incurred if the property were not held in such trust." Ibid.

In applying the statute, the Court of Appeals below asked whether the cost at issue could have been incurred by an individual. 3 This approach flies in the face of the statutory language. The provision at issue asks whether the costs "would not have been incurred if the property were not held" in trust, ibid., not, as the Court of Appeals would have it, whether the costs "could not have been incurred" in such a case, 467 F. 3d, at 156. The fact that an individual could not do something is one reason he would not, but not the only possible reason. If Congress had intended the Court of Appeals' reading, it easily could have replaced "would" in the statute with "could," and presumably would have. The fact that it did not adopt this readily available and apparent alternative strongly supports rejecting the Court of Appeals' reading. 4

Moreover, if the Court of Appeals' reading were correct,it is not clear why Congress would have included in the statute the first clause of §67(e)(1). If the only costs that are fully deductible are those that could not be incurred outside the trust context --that is, that could only be incurred by trusts --then there would be no reason to place the further condition on full deductibility that the costs be "paid or incurred in connection with the administration of the...trust," §67(e)(1). We can think of no expense that could be incurred exclusively by a trust but would nevertheless not be "paid or incurred in connection with" its administration.

The Trustee argues that the exception in §67(e)(1) "establishes a straightforward causation test." Brief for Petitioner 22. The proper inquiry, the Trustee contends, is"whether a particular expense of a particular trust or estate was caused by the fact that the property was held in the trust or estate." Ibid. Investment advisory fees incurred by a trust, the argument goes, meet this test because these costs are caused by the trustee's obligation "to obtain advice on investing trust assets in compliance with the Trustees' particular fiduciary duties." Ibid. We reject this reading as well.

On the Trustee's view, the statute operates only to distinguish costs that are incurred by virtue of a trustee's fiduciary duties from those that are not. But all (or nearly all) of a trust's expenses are incurred because the trustee has a duty to incur them; otherwise, there would be no reason for the trust to incur the expense in the first place. See G. Bogert & G. Bogert, Law of Trusts and Trustees §801, p. 134 (2d rev. ed. 1981) ("[T]he payment for expenses must be reasonably necessary to facilitate administration of the trust"). As an example of a type of trust-related expense that would be subject to the 2% floor, the Trustee offers "expenses for routine maintenance of real property" held by a trust. Brief for Petitioner 23. But such costs would appear to be fully deductible under the trustee's own reading, because a trustee is obligated to incur maintenance expenses in light of the fiduciary duty to maintain trust property. See 1 Restatement (Second) of Trusts §176, p. 381 (1957) ("The trustee is under a duty to the beneficiary to use reasonable care and skill to preserve the trust property").

Indeed, the Trustee's formulation of its argument is circular: "Trust investment advice fees are caused by the fact the property is held in trust." Brief for Petitioner 19. But "trust investment advice fees" are only aptly described as such because the property is held in trust; the statute asks whether such costs would be incurred by an individual if the property were not. Even when there is a clearly analogous category of costs that would be incurred by individuals, the Trustee's reading would exempt most or all trust costs as fully deductible merely because they derive from a trustee's fiduciary duty. Adding the modifier "trust" to costs that otherwise would be incurred by an individual surely cannot be enough to escape the 2% floor.

What is more, if the Trustee's position were correct,then only the first clause of §67(e)(1) --providing that the cost be "incurred in connection with the administration of the...trust" --would be necessary. The statute's second, limiting condition --that the cost also be one "which would not have been incurred if the property were not held in such trust" --would do no work; we see no difference in saying, on the one hand, that costs are "caused by" the fact that the property is held in trust and, on the other, that costs are incurred "in connection with the administration" of the trust. Thus, accepting the Trustee's approach"would render part of the statute entirely superfluous,something we are loath to do." Cooper Industries, Inc. v. Aviall Services, Inc., 543 U. S. 157, 166 (2004).

The Trustee's reading is further undermined by our inclination, "[i]n construing provisions...in which a general statement of policy is qualified by an exception,[to] read the exception narrowly in order to preserve the primary operation of the provision." Commissioner v. Clark, 489 U. S. 726, 739 (1989). As we have said, §67(e) sets forth a general rule for purposes of the 2% floor established in §67(a): "For purposes of this section, the adjusted gross income of an estate or trust shall be computed in the same manner as in the case of an individual." Under the Trustee's reading, §67(e)(1)'s exception would swallow the general rule; most (if not all) expenses incurred by a trust would be fully deductible. "Given that Congress has enacted a general rule..., we should not eviscerate that legislative judgment through an expansive reading of a somewhat ambiguous exception." Ibid.

More to the point, the statute by its terms does not"establis[h] a straightforward causation test," Brief for Petitioner 22, but rather invites a hypothetical inquiry into the treatment of the property were it held outside a trust. The statute does not ask whether a cost was incurred because the property is held by a trust; it asks whether a particular cost "would not have been incurred if the property were not held in such trust," §67(e)(1). "Far from examining the nature of the cost at issue from the perspective of whether it was caused by the trustee's duties, the statute instead looks to the counter factual question of whether individuals would have incurred such costs in the absence of a trust." Brief for Respondent 9.

This brings us to the test adopted by the Fourth and Federal Circuits: Costs incurred by trusts that escape the 2% floor are those that would not "commonly" or "customarily" be incurred by individuals. See Scott, 328 F. 3d, at 140 ("Put simply, trust-related administrative expenses are subject to the 2% floor if they constitute expenses commonly incurred by individual taxpayers"); Mellon Bank, 265 F. 3d, at 1281 ( §67(e) "treats as fully deductible only those trust-related administrative expenses that are unique to the administration of a trust and not customarily incurred outside of trusts"). The Solicitor General also accepts this view as an alternative reading of the statute. See Brief for Respondent 20-21. We agree with this approach.

The question whether a trust-related expense is fully deductible turns on a prediction about what would happen if a fact were changed --specifically, if the property were held by an individual rather than by a trust. In the context of making such a prediction, when there is uncertainty about the answer, the word "would" is best read as "express[ing] concepts such as custom, habit, natural disposition, or probability." Scott, supra, at 139. See Webster's Third New International Dictionary 2637-2638(1993); American Heritage Dictionary 2042, 2059 (3d ed.1996). The Trustee objects that the statutory text "does not ask whether expenses are `customarily' incurred outside of trusts," Reply Brief for Petitioner 15, but that is the direct import of the language in context. The text requires determining what would happen if a fact were changed;such an exercise necessarily entails a prediction; and predictions are based on what would customarily or commonly occur. Thus, in asking whether a particular type of cost "would not have been incurred" if the property were held by an individual, §67(e)(1) excepts from the 2% floor only those costs that it would be un common (or unusual,or unlikely) for such a hypothetical individual to incur.

III

Having decided on the proper reading of §67(e)(1), we come to the application of the statute to the particular question in this case: whether investment advisory fees incurred by a trust escape the 2% floor.

It is not uncommon or unusual for individuals to hire an investment adviser. Certainly the Trustee, who has the burden of establishing its entitlement to the deduction,has not demonstrated that it is. See INDOPCO, Inc. v. Commissioner, 503 U. S. 79, 84 (1992) (noting the "`familiar rule' that `an income tax deduction is a matter of legislative grace and that the burden of clearly showing the right to the claimed deduction is on the taxpayer' " (quoting Interstate Transit Lines v. Commissioner, 319 U. S. 590, 593 (1943))); Tax Court Rule 142(a)(1) (stating that the "burden of proof shall be upon the petitioner," with certain exceptions not relevant here). The Trustee's argument is that individuals cannot incur trust investment advisory fees, not that individuals do not commonly incur investment advisory fees.

Indeed, the essential point of the Trustee's argument is that he engaged an investment adviser because of his fiduciary duties under Connecticut's Uniform Prudent Investor Act, Conn. Gen. Stat. §45a-541a(a) (2007). The Act eponymously requires trustees to follow the "prudent investor rule." See n. 2, supra. To satisfy this standard, a trustee must "invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements and other circumstances of the trust." §45a-541b(a) (emphasis added). The prudent investor standard plainly does not refer to a prudent trustee; it would not be very helpful to explain that a trustee should act as a prudent trustee would. Rather, the standard looks to what a prudent investor with the same investment objectives handling his own affairs would do --i.e., a prudent individual investor. See Restatement (Third) of Trusts (Prudent Investor Rule) Reporter's Notes on §227, p. 58 (1990) ("The prudent investor rule of this Section has its origins in the dictum of Harvard College v. Amory, 9 Pick. (26 Mass.) 446, 461 (1830), stating that trustees must `observe how men of prudence, discretion, and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested' "). See also, e.g., In re Musser's Estate, 341 Pa. 1, 9-10, 17 A. 2d 411, 415 (1941) (noting the "general rule" that "a trustee must exercise such prudence and diligence in conducting the affairs of the trust as men of average diligence and discretion would employ in their own affairs"). And we have no reason to doubt the Trustee's claim that a hypothetical prudent investor in his position would have solicited investment advice, just as he did. Having accepted all this,it is quite difficult to say that investment advisory fees"would not have been incurred" --that is, that it would be unusual or uncommon for such fees to have been incurred --if the property were held by an individual investor with the same objectives as the Trust in handling his own affairs.

We appreciate that the inquiry into what is common may not be as easy in other cases, particularly given the absence of regulatory guidance. But once you depart in the name of ease of administration from the language chosen by Congress, there is more than one way to skin the cat: The Trustee raises administrability concerns in support of his causation test, Reply Brief for Petitioner 6, but so does the Government in explaining why it prefers the Court of Appeals' approach to the one it has successfully advanced before the Tax Court and two Federal Circuits. Congress's decision to phrase the pertinent inquiry in terms of a prediction about a hypothetical situation inevitably entails some uncertainty, but that is no excuse for judicial amendment of the statute. The Code elsewhere poses similar questions --such as whether expenses are "ordinary," see §§162(a), 212; see also Deputy, Administratrix v. Du Pont, 308 U. S. 488, 495 (1940) (noting that "[o]rdinary has the connotation of normal, usual, or customary") --and the inquiry is in any event what §67(e)(1) requires.

As the Solicitor General concedes, some trust-related investment advisory fees may be fully deductible "if an investment advisor were to impose a special, additional charge applicable only to its fiduciary accounts." Brief for Respondent 25. There is nothing in the record, however,to suggest that Warfield charged the Trustee anything extra, or treated the Trust any differently than it would have treated an individual with similar objectives, because of the Trustee's fiduciary obligations. See App. 24-27. It is conceivable, moreover, that a trust may have an unusual investment objective, or may require a specialized balancing of the interests of various parties, such that a reasonable comparison with individual investors would be improper. In such a case, the incremental cost of expert advice beyond what would normally be required for the ordinary taxpayer would not be subject to the 2% floor. Here, however, the Trust has not asserted that its investment objective or its requisite balancing of competing interests was distinctive. Accordingly, we conclude that the investment advisory fees incurred by the Trust are subject to the 2% floor.

The judgment of the Court of Appeals is affirmed.

It is so ordered.

1 Because this case is only about trusts, we generally refer to trusts throughout, but the analysis applies equally to estates.

2 Forty-four States and the District of Columbia have adopted versions of the Uniform Prudent Investor Act. See 7B U. L. A. 1-2 (2006)(listing States that have enacted the Uniform Prudent Investor Act).Five of the remaining six States have adopted their own versions of the prudent investor standard. See Del. Code Ann., Tit. 12, §3302 (1995 ed.and 2006 Supp.); Ga. Code Ann. §53-12-287 (1997); La. Stat. Ann. §9:2127 (West 2005); Md. Est. & Trusts Code Ann. §15-114 (Lexis 2001); S. D. Codified Laws §55-5-6 (2004). Kentucky, the only remaining State, applies the prudent investor standard only in certain circumstances. See Ky. Rev. Stat. Ann. §286.3-277 (Lexis 2007 Cum. Supp.); §§386.454(1), 386.502 (Supp. 2007).

3 The Solicitor General embraces this position in this Court, arguing that the Court of Appeals' approach represents the best reading of the statute and establishes an easily administrable rule. See Brief for Respondent 17-20, 22. Indeed, after the Court of Appeals' decision, the Commissioner adopted that court's reading of the statute in a proposed regulation. See Section 67 Limitations on Estates or Trusts, 72 Fed. Reg. 41243, 41245 (2007) (notice of proposed rulemaking) (a trust-related cost is exempted from the 2% floor only if "an individual could not have incurred that cost in connection with property not held in an estate or trust" (emphasis added)). The Government did not advance this argument before the Court of Appeals. See Brief for Appellee in No. 05-5151-AG (CA2), pp. 3-4, 22-24. In fact, the notice of proposed rulemaking appears to be the first time the Government has ever taken this position, and we are the first Court to which the argument has been made in a brief. See Brief for United States in Mellon Bank v. United States, No. 01-5015 (CA Fed.), p. 27 ( "[I]f a trust-related administrative expense is also customarily or habitually incurred outside of trusts, then it is subject to the two-percent floor"); Brief for United States in Scott v. United States, No. 02-1464 (CA4), p. 27 (same).

4 In pressing the Court of Appeals' approach, the Solicitor General argues that "to say that a team would not have won the game if it were not for the quarterback's outstanding play is to say that the team could not have won without the quarterback." Brief for Respondent 19. But the Solicitor General simply posits the truth of a proposition --that the team would not have won the game if it were not for the quarterback's outstanding play --and then states its equivalent. The statute, in contrast, does not posit any proposition. Rather, it asks a question: whether a particular cost would have been incurred if the property were held by an individual instead of a trust.

Sentencing guidelines – sentence reviewed for reasonableness in light of the 18 U.S.C. §3553(a) factors, applying an abuse-of-discretion standard. See United States v. Booker, 543 U.S. 220, 261-62 (2005); United States v. Boss, 493 F.3d 986, 987 (8th Cir. 2007).

United States of America, Appellee v. Chad Wetzel, Appellant.

U.S. Court of Appeals, 8th Circuit; 07-1147, December 10, 2007.

Unpublished opinion affirming, per curiam, an unreported DC Minn. decision.

[ Code Sec. 7202]

Crimes: Tax evasion: Sentencing guidelines: Base sentence. --
A federal district court properly sentenced an individual to two concurrent 60-month terms of imprisonment and a consecutive 12-month prison term after he pleaded guilty to failure to collect and pay over taxes and theft and embezzlement from an employee benefit plan. The court took account of and weighed the relevant factors under the sentencing guidelines and considered and rejected the individual's arguments regarding mitigating circumstances before applying the advisory guidelines imprisonment range. Moreover, there was no unwarranted disparity of sentence among similar tax evaders because of the nature of the individual's case and criminal history.



Before: Bye, Riley and Melloy, Circuit Judges.

PER CURIAM: Chad Wetzel pleaded guilty to failure to collect and pay over taxes, in violation of 26 U.S.C. §7202; theft and embezzlement from an employee benefit plan, in violation of 18 U.S.C. §664; and false oath and account in a bankruptcy proceeding, in violation of 18 U.S.C. §152(2), each of which was punishable by a maximum of 5 years in prison. Using an undisputed advisory Guidelines imprisonment range of 63-78 months, and having addressed Wetzel's arguments for a lower sentence, the district court 1 imposed two concurrent 60-month prison terms and a consecutive 12-month prison term. Wetzel appeals, arguing the district court abused its discretion and imposed an unreasonable sentence by giving undue weight to the Guidelines, and by inadequately considering mitigating circumstances and the need to avoid unwarranted sentence disparities.

We review a sentence for reasonableness in light of the 18 U.S.C. §3553(a) factors, applying an abuse-of-discretion standard. See United States v. Booker, 543 U.S. 220, 261-62 (2005); United States v. Boss, 493 F.3d 986, 987 (8th Cir. 2007). We find no abuse of discretion here. First, Wetzel's disparity argument fails because, as the district court correctly determined, his case and criminal history were not at all similar to those of another individual who owned the predecessor to Wetzel's business. See 18 U.S.C. §3553(a)(6) (court is to consider "need to avoid unwarranted sentence disparities among defendants with similar records who have been found guilty of similar conduct"). Further, our review of the record convinces us that the district court considered and rejected Wetzel's arguments regarding mitigating circumstances, properly took into account only relevant section 3553(a) factors, and did not commit a clear error of judgment in weighing these factors. See United States v. Long Soldier, 431 F.3d 1120, 1123 (8th Cir. 2005) (sentencing court abuses its discretion if it fails to consider relevant factor that should have received significant weight, gives significant weight to improper or irrelevant factor, or considers only appropriate factors but commits clear error of judgment in weighing them).

Accordingly, we affirm.

1 The Honorable James M. Rosenbaum, Chief Judge, United States District Court for the District of Minnesota.

Willful Failure to File Return, Supply Information, or Pay Tax: Sentence: U.S. Sentencing Commission Guidelines: Base sentence

The U.S. Sentencing Commission Guidelines (Sentencing Reform Act of 1984, P.L. 98-473, codified at 18 U.S.C. §1335 --3742 and 28 U.S.C. §991 --998), apply to crimes committed on or after November 1, 1987. --CCH.

Taxpayer was properly sentenced under the U.S. Sentencing Guidelines.

J.J. Feola, CA-2, 2002-1 USTC ¶50,157, 275 F3d 216, aff'g, per curiam, an unreported District Court decision.

C.A. Willis, CA-8, 2002-1 USTC ¶50,207, 277 F3d 1026.

An individual who was convicted of conspiracy to defraud the government of taxes was properly sentenced under the U.S. Sentencing Guidelines. His base level for sentencing was the amount of tax loss attributable to him from all acts and omissions occurring as part of the same course of conduct or common plan and not just as part of those occasions where the individual and his co-conspirators were together or acted in unison. Further, the trial court did not err in denying a downward departure in the sentencing level for acceptance of responsibility.

H.D. Fleschner, CA-4, 96-2 USTC ¶50,536, 98 F3d 155.

The district court properly calculated an individual's base offense level according to the sentencing guidelines. The amount of the tax loss caused by his offense was based on stipulated facts. Moreover, the increase in the base offense level for concealing his crime by sophisticated means did not violate his plea agreement. Also, he began engaging in criminal conduct related to his offense as soon as he started receiving the unreported income, rather than when his return was due. Finally, his admission of wrongdoing did not constitute an acceptance of responsibility, especially in light of his continued assertion that he did not owe taxes on the unreported income.

J.E. Worthen, CA-10 (unpublished opinion), 99-2 USTC ¶50,788, aff'g an unreported District Court decision.

The lower court improperly calculated a doctor's offense level for the one count of tax evasion that fell under the federal sentencing guidelines by failing to examine the doctor's leadership role as it related to the specific offense charged. However, the one count that fell under the sentencing guidelines had no limiting effect on the lower court's discretion to impose consecutive sentences under the counts that fell outside of the guidelines.

W. Pollen, CA-3, 92-2 USTC ¶50,614, 978 F2d 78. Cert. denied, 5/17/93.

The appellate court vacated the lower court's application of the sentencing guidelines to the offenses committed by the individuals. The lower court's reference to an offense for which the individuals were not charged or convicted resulted in improperly calculated sentences.

L.G. Schmidt, CA-4, 93-1 USTC ¶50,074, 935 F2d 1440.

An individual who pled guilty to conspiracy to defraud the government and to tax evasion could not appeal the trial court's decision not to depart from the U.S. Sentencing Guidelines (USSG) in imposing a sentence. Judicial precedent on the standard for review of a court's decision to depart from the USSG did not establish a review standard for a court's decision not to depart. Moreover, despite the court's stated dissatisfaction with the prescribed sentence, the sentence could not be vacated because the court was aware of its authority to depart downward in appropriate circumstances.

D. Brown, CA-2, 96-2 USTC ¶50,557, aff'g, per curiam, an unreported District Court decision.

An individual's sentence for criminal tax evasion was based on his responsibility for both an understatement of tax for a corporation and himself as an individual. The tax loss was calculated by first determining the total hidden revenue, then applying the corporate tax rate to the amount that would have been corporate income, and applying the individual rate to the dividend (as reduced by the imputed corporate taxes). Also, all hidden funds were considered in determining the sentence, whether or not they were part of the evasion charged in this case, because the sentencing authority may consider all relevant conduct including the whole scheme of the taxpayer's activity.

J. Harvey, CA-7, 93-2 USTC ¶50,368, 996 F2d 919.

The Sentencing Guidelines, which became effective November 1, 1987, should have been applied to the taxpayers' conspiracy convictions. Even though no overt acts in furtherance of their conspiracies occurred after the effective date, the conspiracies continued past that date and therefore the guidelines applied.

W.J. Alt, CA-6, 93-2 USTC ¶50,385, 996 F2d 827.

A taxpayer's conviction by a district court for willful tax evasion, which was appealed on the ground that the sentencing guidelines were improperly applied, was affirmed. The sentencing guidelines allow all acts that are part of the same course of conduct to be included in the base offense level calculation. Accordingly, the court correctly included both the tax evaded for which the taxpayer was convicted, and the tax evaded for which the taxpayer was not charged in the indictment, in the base offense level calculation.

J.D. Meek, Jr., CA-10, 93-2 USTC ¶50,409, 998 F2d 776.

The trial court did not err by failing to hold an evidentiary hearing to resolve each controverted matter in the presentence report of an attorney who was convicted of failure to file tax returns. Further, imposing an enhancement for obstruction of justice based on the attorney checking into a hospital shortly before trial was not in error. Finally, contentions that the U.S. Sentencing Guidelines were misapplied in computing the offense level or that the corresponding fines were erroneous could not be raised for the first time on appeal.

G.V. Dubin, CA-9 (unpublished opinion), 96-2 USTC ¶50,541, 77 F3d 490. Cert. denied, 10/7/96. Rehearing denied, 1/21/97.

The sentence of an individual who pled guilty to willfully failing to account for and pay over certain taxes withheld from his employees was upheld. The addition of two points to the individual's criminal history score under the U.S. Sentencing Guidelines (USSG) for an offense committed while on probation did not violate his cooperation agreement. The government knew about the individual's employees before he made disclosures under the protection of the agreement.

D.M. Haught, CA-4 (unpublished opinion), 96-2 USTC ¶50,542, 98 F3d 1336, aff'g, per curiam, an unreported District Court decision.

The trial court appropriately enhanced an attorney's base offense level under the U.S. Sentencing Guidelines (USSG) for his role as a manager of a conspiracy through which his client fraudulently concealed assets. The base offense level was determined under the proper USSG subsection, the court's estimate of the tax loss was reasonable, and it did not err in refusing to make a downward departure based on the claimed atypical nature of the case. No upward adjustment was made for the attorney's alleged use of sophisticated means in evading tax because his personal involvement was minimal. Finally, a downward adjustment for acceptance of responsibility was not erroneous.

J.B. Kraig, CA-6, 96-2 USTC ¶50,616, 99 F3d 1361.

A married couple's sentences for tax evasion were vacated and remanded because it was unclear whether the trial court reached an adequate conclusion on the couple's willfulness in attempting to evade all or specific amounts of taxes when determining their base offense level under the U.S. Sentencing Guidelines. The court could not rely on a presentence investigation report (PSR) that did not resolve all the disputed factual issues.

A.G. Olbres, CA-1, 96-2 USTC ¶50,670, 99 F3d 28.

A subcontractor was properly convicted and sentenced for tax evasion and failure to file returns. The trial court did not err in using the government's evidence of the tax loss for which the individual was responsible in determining his base offense level for sentencing. The government attempted to measure the individual's income and expenses accurately while the individual gave speculative testimony. Further, the court did not violate the subcontractor's due process rights when it considered his gross income for closed tax years because the statute of limitations does not limit what actions a court may consider as relevant conduct when sentencing a defendant.

R.A. Valenti, CA-7, 97-2 USTC ¶50,629, 121 F3d 327.

An individual's sentence for obstructing the IRS, failing to pay over withheld taxes, and currency structuring was substantially less than that set forth in the U.S. Sentencing Guidelines for the most similar offense of tax evasion. Thus, the decision was vacated and remanded for the sentencing court to reconsider the taxpayer's intent and to explain any departure from the guidelines. It did not appear that the individual intended to repay all of the government's losses, he made false statements, and the structuring offenses alone should have produced a longer sentence.

J.A. Brennick, CA-1, 98-1 USTC ¶50,275, 134 F3d 10.

In determining the base offense level of an individual who was convicted of willfully evading the payment of taxes and filing false statements, the trial court erroneously included interest and penalties in the amount of the tax loss caused by his actions. Although the language of the U.S. Sentencing Guidelines was ambiguous, the commentary stated that tax loss does not include interest and penalties.

G.R. Hunerlach, CA-11, 99-2 USTC ¶51,009, 197 F3d 1059.

In determining the base offense sentencing level, the trial court did not error when it calculated the tax loss of a printer's filing of false returns and attempted tax evasion by taking into account losses arising from his failure to file timely returns for several tax years after he committed his crimes. Since his refusal to file also violated the tax code, it constituted part of a continuing course of conduct with his criminal activities.

J.E. Codner, CA-10 (unpublished opinion), 2000-1 USTC ¶50,389, aff'g an unreported District Court decision.

The district court improperly enhanced an individual's sentence for tax fraud under the U.S. Sentencing Guidelines by separately considering his conversion and mail fraud offenses, rather than aggregating the total loss derived from all conduct relevant to the tax evasion, for purposes of determining the base offense level. Because the guidelines for tax evasion, fraud and conversion measure harm by reference to the amount of monetary loss and because the offenses were of the same general type, they should have been aggregated for sentencing purposes. Moreover, the offenses were committed as part of a common scheme or plan, so that a large portion of the taxpayer's unreported income was derived from the fraud and conversion.

T. Fitzgerald, CA-2, 2001-1 USTC ¶50,245, 232 F3d 315.

Taxpayer was properly convicted of filing false returns in connection with improper deductions for purported business expenses that were personal in nature. Although the appellate courts have been divided on the question of whether the application of a revised edition of the guidelines to offenses that both predate and postdate the revision violates the Ex Post Facto Clause, the Fourth Circuit upheld the district court's retrospective application of the increased base level for filing a false tax return as set forth in the revised guidelines to her first offense. Because the taxpayer's later acts of tax evasion occurred after the enhancement was in effect, she was provided with ample warning that those acts would cause her sentence for earlier offenses to be determined in accordance with guidelines applicable to later offenses.

V.M. Lewis, CA-4, 2001-1 USTC ¶50,252, 235 F3d 215.

An individual who willfully committed numerous affirmative acts of tax evasion in connection with her scheme to divert her deceased mother's retirement benefits was properly convicted of tax evasion. However, the taxpayer's sentence was vacated and the case was remanded for analysis under the U.S. Sentencing Guidelines. The trial court was directed to determine on remand if there was only one victim, if the taxpayer's offenses were part of a single act or transaction, and whether grouping would be appropriate.

A.E. Corbett, CA-3 (unpublished opinion), 2002-2 USTC ¶50,576, 44 FedAppx 563, aff'g in part, vac'g and rem'g in part, an unreported District Court decision.

An individual's sentence for structuring and conspiracy to defraud the IRS and subscribing to a false return was properly calculated. The guideline for structuring invokes the application of the appropriate guideline for tax-related violations. In calculating the tax loss the District Court reasonably included: (1) the unpaid taxes of subcontractors, and (2) unreported income attributable to checks made out to subcontractors that were deposited in to the individual's personal bank account. There was no proof that the amounts deposited into his personal bank account were loan repayments. Finally, his claims that a portion of the tax loss was diverted income and, therefore, only a percentage was includible in calculating the tax loss, was rejected.

T. Kosinski, CA-6 (unpublished opinion), 2005-1 USTC ¶50,241 aff'g an unreported DC Mich. decision.

An individual's conviction for tax evasion and willful failure to account for and pay over payroll taxes was affirmed. However, the taxpayer's sentence was vacated and the case remanded for resentencing because the district court erroneously treated the U.S. Sentencing Guidelines as mandatory.

M.W. May, CA-6 (unpublished opinion),2006-1 USTC ¶50,260, aff'g, per curiam, an unreported DC Ohio decision.

A federal district court's interpretation and application of the sentencing guidelines regarding the conviction of an owner of a corporation for willful failure to pay employment tax was proper. The court was not obligated to give the owner credit for time served on his earlier convictions because all his offenses were unrelated and arose out of separate arrests and constituted separate offenses.

A.M. Armstrong, CA-8 (unpublished opinion), 2007-1USTC ¶50,105, aff'g, per curiam, an unreported DC Iowa decision.

A federal district court properly calculated an individual's offense level for filing a fraudulent income tax return. It also used the correct version of the sentencing guidelines in determining his sentence.

D. Musurlian, CA-7 (unpublished opinion), 2007-1 USTC ¶50,161, 209 FedAppx 592, aff'g an unreported DC Wis. decision.

A sentence imposed on an individual convicted for tax evasion that was substantially below the applicable Sentencing Guidelines range was unreasonable. The trial court reduced the sentence by placing too much weight on the individual's family circumstances and age without giving adequate weight to the other sentencing factors. Further, the sentence did not reflect the seriousness of the individual's tax evasion offense and it took into consideration an irrelevant variable of how much the IRS would collect him.

B. Trupin, CA-2, 2007-1 USTC ¶50,354, 475 F3d 71.

A federal district court did not err in calculating the amount of tax loss while determining the base offense level in sentencing an individual who pleaded guilty to conspiracy to defraud the government. The individual caused corporate monies to be falsely reported as wages paid to his family members. The amount of the tax loss that the individual intended to cause could not be reduced simply because his scheme to defraud inadvertently caused payment of excess social security taxes. The tax loss was properly calculated based on the intended tax loss, not on the government's actual tax loss.

C. Phelps, Jr., CA-5, 2007-1 USTC ¶50,377, 478 F3d 680, aff'g, per curiam, an unreported DC Texas decision.

The sentence imposed on an individual for tax evasion and for submitting a false declaration under oath was reasonable. The trial court properly relied on a post-verdict calculation of the amount of tax loss as part of the process of calculating the advisory guideline range and included interest and penalties in the amount of the tax loss. However, the case was remanded for an explanation regarding fines in excess of the guidelines' recommended range.

M.D. Greene, CA-10 (unpublished opinion), 2007-2 USTC ¶50,634, aff'g in part, rem'g in part, an unreported DC Okla. decision.

The sentence imposed by a federal district court on an individual who knowingly and voluntarily pleaded guilty to income tax evasion was proper. The court did not err in calculating the amount of tax loss while determining the individual's base offense level. The money that the individual received from his business associate constituted unreported income, and the expenses incurred in furtherance of his illegal activities were not deductible.

D.L. Lukasik, CA-6 (unpublished opinion), 2007-2USTC ¶50,738, aff'g an unreported DC Mich. decision.

The sentence imposed on an individual for tax evasion and willful failure to file an income tax return was proper because the state tax loss was relevant for calculating his base offense level under the sentencing guidelines. The individual's tax offenses were committed as part of a common scheme or plan.

W.M. Maken, CA-6, 2008-1 USTC ¶50,110.

A married couple was properly convicted and sentenced for tax evasion. The trial court did not err in using the government's evidence of the tax loss for which the couple was responsible in determining their base offense level for sentencing. The tax loss was calculated based on the tax amount which the government would have been deprived of if the couple's tax evasion scheme had been successful. Because the couple failed to file their income tax returns and refused to cooperate with the initial IRS audit, they forfeited their opportunity to claim deductions for the years at issue before the tax loss was determined.

J.D. Delfino, CA-4, 2008-1 USTC ¶50,114.

Section 7431 and section 7433 damages – IRS disclosure
An individual was not entitled to damages under Code Sec. 7431 for allegedly unlawful disclosures by the IRS of his confidential tax return information through the filing of notices of federal tax liens. Code Sec. 7433 provides the exclusive remedy for such alleged disclosures made in connection with tax-collection activity. Since the damages sought were for alleged disclosures made in an IRS notice of federal tax lien, the disclosures were made in connection with tax-collection activity. Moreover, the individual could not bring an action against the state (Hawaii) and its Department of Taxation because Code Sec. 7431 did not authorize a right of action against a state, its agencies or state employees sued in their official capacities.

Michael Robert Marsoun, Plaintiff v. United States of America, et al., Defendants.

U.S. District Court, D.C.; Civil Action No. 07-0355 (JDB), December 14, 2007.

[ Code Sec. 7431]

Tax return information: Damages: Disclosure by IRS: Filing of liens. --
MEMORANDUM OPINION


BATES, United States District Judge: Plaintiff seeks damages against the United States pursuant to 26 U.S.C. §7431(a)(1) based on alleged unlawful disclosures of confidential tax return information by the Internal Revenue Service ("IRS") when it caused notices of federal tax liens against plaintiff to be recorded in the public record and disclosed information to the State of Hawaii and its agents. See Compl. ¶ ¶4-5. 1 Plaintiff also seeks damages against the State of Hawaii, the Hawaii Department of Taxation, and two of its employees (collectively, "State defendants") for allegedly inspecting and disclosing his confidential tax return information. Id. ¶ ¶4-6. The United States and the State defendants have each moved to dismiss for lack of subject matter jurisdiction or, in the alternative, for failure to state a claim upon which relief can be granted. The two state employees, Roy Hamakawa and Marian Shioji, also have moved to dismiss for lack of personal jurisdiction. 2


BACKGROUND


Plaintiff alleges that, without evidence of lawful tax assessments, the IRS recorded notices of federal tax liens against plaintiff with the County Recorder in Orange County, California, on May 15, 1994, and February 11, 1998, and with the Department of Land and Natural Resources Bureau of Conveyances in Honolulu, Hawaii on various dates in 2005 and 2006. See Compl. ¶5. Each notice asserts that "taxes...have been assessed against" plaintiff and that the tax "remains unpaid," and declares a lien in favor of the United States against the property. See Compl., Exhibits A, B, C-2, D-2, and E-2. 3 Plaintiff further alleges that six IRS employees disclosed unidentified confidential information to the State of Hawaii Department of Taxation and the Acting District Tax Manager Roy Hamakawa in the absence of a written agreement required by the Internal Revenue Code, and that Hamakawa, in turn, unlawfully inspected and disclosed that information to another employee, M. Shioji. Compl. ¶6. As a result of the alleged unlawful inspections and disclosures, plaintiff alleges that he has suffered substantial mental and emotional distress and has been exposed to the risk of identity theft. Id. ¶ ¶7-9.

Pursuant to 26 U.S.C. §7431, plaintiff seeks damages in the amount of $1,000 for each disclosure and punitive damages in an amount yet to be determined. Id. ¶ ¶19-20. This provision of the Internal Revenue Code creates a damages action for unlawful disclosures of confidential tax return information, and states, in relevant part:
(1) Inspection or disclosure by employee of United States. --If any officer or employee of the United States knowingly, or by reason of negligence, inspects or discloses any return or return information with respect to a taxpayer in violation of any provision of section 6103, such taxpayer may bring a civil action for damages against the United States in a district court of the United States.

(2) Inspection or disclosure by a person who is not an employee of United States. --If any person who is not an officer or employee of the United States knowingly, or by reason of negligence, inspects or discloses any return or return information with respect to a taxpayer in violation of any provision of section 6103, such taxpayer may bring a civil action for damages against such person in a district court of the United States.

Section 6103, in turn, provides that tax returns and return information shall be kept confidential subject to several enumerated exceptions. 26 U.S.C. §6103.

A separate provision of the Internal Revenue Code, 26 U.S.C. §7433, authorizes a damages action for unlawful collection actions by the IRS. That provision states:
If, in connection with any collection of Federal tax with respect to a taxpayer, any officer or employee of the Internal Revenue Service recklessly or intentionally, or by reason of negligence disregards any provision of this title, or any regulation promulgated under this title, such taxpayer may bring a civil action for damages against the United States in a district court of the United States. Except as provided in section 7432, such civil action shall be the exclusive remedy for recovering damages resulting from such actions.

26 U.S.C. §7433(a). Thus, a violation of section 6103 (unauthorized disclosure of confidential information) "in connection with any collection of Federal tax" is actionable under section 7433. It bears noting that plaintiff has filed a separate complaint against the United States seeking damages under section 7433 for allegedly disregarding the Internal Revenue Code "while engaged in collection activity" against plaintiff. See Marsoun v. United States, No. 07-2078 (D.D.C. filed Nov. 13, 2007).


STANDARD OF REVIEW


"[I]n passing on a motion to dismiss, whether on the ground of lack of jurisdiction over the subject matter or for failure to state a cause of action, the allegations of the complaint should be construed favorably to the pleader." Scheuer v. Rhodes, 416 U.S. 232, 236 (1974); see Leatherman v. Tarrant Cty. Narcotics and Coordination Unit, 507 U.S. 163, 164 (1993); Phillips v. Bureau of Prisons, 591 F.2d 966, 968 (D.C. Cir. 1979). Therefore, the factual allegations must be presumed true, and plaintiffs must be given every favorable inference that may be drawn from the allegations of fact. Scheuer, 416 U.S. at 236; Sparrow v. United Air Lines, Inc., 216 F.3d 1111, 1113 (D.C. Cir. 2000). However, the Court need not accept as true "a legal conclusion couched as a factual allegation," nor inferences that are unsupported by the facts set out in the complaint. Trudeau v. Federal Trade Comm'n, 456 F.3d 178, 193 (D.C. Cir. 2006) (quoting Papasan v. Allain, 478 U.S. 265, 286 (1986)).

Here, defendants' contention that plaintiff is precluded from bringing the right of action created by 26 U.S.C. §7431 does not present a jurisdictional issue because it concerns the boundaries of the right of action under section 7431 in light of section 7433, in contrast to a statutory provision speaking to the jurisdiction of the district courts. See Arbaugh v. Y&H Corp., 126 S. Ct. 1235, 1245 (2006) ("when Congress does not rank a statutory limitation as...jurisdictional, courts should treat the restriction as non-jurisdictional in nature"); see also Trudeau, 456 F.3d at 188, 191 (observing that whether a statute authorizes a cause of action presents a question of whether plaintiff states a claim upon which relief can be granted, rather than jurisdiction). Hence, this aspect of defendants' motions is best characterized as seeking dismissal for failure to state a claim upon which relief can be granted.

In considering a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), the Court is mindful that all that the Federal Rules of Civil Procedure require of a complaint is that it contain "a short and plain statement of the claim showing that the pleader is entitled to relief,' in order to `give the defendant fair notice of what the...claim is and the grounds upon which it rests.' " Bell Atl. Corp. v. Twombly, 550 U.S. ___, 127 S. Ct. 1955, 1964 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)); accord Erickson v. Pardus, 551 U.S. ___, 127 S. Ct. 2197, 2200 (2007) (per curiam). Although "detailed factual allegations" are not necessary to withstand a Rule 12(b)(6) motion to dismiss, to provide the "grounds" of "entitle[ment] to relief," a plaintiff must furnish "more than labels and conclusions" or "a formulaic recitation of the elements of a cause of action." Bell Atl. Corp., 127 S. Ct. at 1964-65; see also Papasan, 478 U.S. at 286. Instead, the complaint's "[f]actual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true (even if doubtful in fact)." Bell Atl. Corp., 127 S. Ct. at 1965 (citations omitted).

On the matter of personal jurisdiction over the two State employees, however, plaintiff's burden is greater. Plaintiff bears the burden of establishing personal jurisdiction, and must allege specific facts on which personal jurisdiction can be based; he cannot rely on conclusory allegations. See Mwani v. Bin Laden, 417 F.3d 1, 7 (D.C. Cir. 2005); Crane v. New York Zoological Soc'y, 894 F.2d 454, 456 (D.C. Cir. 1990). When considering personal jurisdiction, the Court need not treat all of the plaintiff's allegations as true. Instead, the court "may receive and weigh affidavits and other relevant matter to assist in determining the jurisdictional facts." United States v. Philip Morris Inc., 116 F. Supp. 2d 116, 120 n. 4 (D.D.C. 2000); see also Capital Bank Int'l, Ltd. v. Citigroup, Inc., 276 F. Supp. 2d 72, 74 (D.D.C. 2003). When receiving such materials in the absence of an evidentiary hearing, the Court is to resolve factual discrepancies in favor of the plaintiff. Mwani, 417 F.3d at 7; Crane, 894 F.2d at 456.


ANALYSIS




I. United States' Motion to Dismiss

The United States contends that plaintiff's complaint must be dismissed because 26 U.S.C. §7433 provides the exclusive remedy for allegedly unauthorized or improper collection actions by the IRS, including those collection actions involving unlawful disclosures of confidential tax return information. See United States' Mem. at 6-10. Plaintiff responds that the United States has, in effect, asked the Court to take on the legislative task of modifying the right of action set forth in section 7431. Pl.'s Opp. at 1-2. The Court refers the parties to its analysis of this issue in Evans v. United States, 478 F. Supp. 2d 68 (D.D.C. 2007), and Martin v. United States, No. 06-1624, 2007 WL 891666, at *2-4 (D.D.C. Mar. 21, 2007), which concluded that similarly situated plaintiffs alleging unlawful disclosures of confidential tax return information in connection with tax collection activity did not state a legally cognizable claim under 26 U.S.C. §7431. The Court adopts that reasoning in finding that plaintiff in this case also is precluded from bringing an action under section 7431.

Stated succinctly, the plain language of 26 U.S.C. §7433 precludes a plaintiff from bringing an action for unlawful disclosure of confidential information under section 7431 where the alleged disclosure occurs "in connection with any collection of Federal tax." Evans, 478 F. Supp. 2d at 71-72; Martin, 2007 WL 891666, at *2-4. This follows from the language in section 7433 broadly authorizing a damages action where the IRS "in connection with any collection of Federal tax ...recklessly or intentionally, or by reason of negligence disregards any provision of this title, or any regulation promulgated under this title," and in the same subsection providing that, with an exception not relevant here, 4 "such civil action shall be the exclusive remedy for recovering damages resulting from such actions. " 26 U.S.C. §7433(a) (emphasis added); see Evans, 478 F. Supp. 2d at 71-72. Indeed, every judge of this Court who has considered the issue has concluded that disclosures of tax return information made in connection with the collection of a federal tax are not actionable under section 7431. See Wesselman v. United States, 498 F. Supp. 2d 326, 327 (D.D.C. 2007) (Huvelle, J.); Miller v. United States, 496 F. Supp. 2d 129, 132 (D.D.C. 2007) (Urbina, J.); Powell v. United States, 478 F. Supp. 2d 66, 67-68 (D.D.C. 2007) (Leon, J.); Rhodes v. United States, No. 06-1840, 2007 WL 3196483, at *2-3 (D.D.C. 2007) (Sullivan, J.); see also Shwarz v. United States, 234 F.3d 428, 432-33 (9th Cir. 2000). Furthermore, disclosure of tax return information in an IRS notice of federal tax lien --the type of disclosure alleged by plaintiff --is necessarily "in connection with...collection of Federal tax." See Evans, 478 F. Supp. 2d at 72 ("IRS notices of tax liens [are] a tax collection activity"); Martin, 2007 WL 891666, at *4 (same); Koerner v. United States, 471 F. Supp. 2d 125, 127 (D.D.C. 2007) (same). In light of the exclusivity provision of section 7433, even assuming all of plaintiff's factual allegations to be true, the complaint therefore fails to state a claim upon which relief can be granted under section 7431 with respect to the allegations concerning the notices of federal tax liens.

All that is left of plaintiff's claims against the United States, then, is that six IRS employees "disclosed confidential information to [the] State of Hawaii, Department of Revenue, and/or Roy Hamakawa, Acting District Tax Manager, and/or to John Doe, aka `M. Shioji,' Preparer, in the absence of a written agreement...." See Compl. ¶5(F). But this conclusory allegation is wholly devoid of the minimum factual allegations necessary to meet the notice pleading requirements of Fed. R. Civ. P. 8(a). A plaintiff must furnish "more than labels and conclusions" or "a formulaic recitation of the elements of a cause of action." Bell Atl. Corp., 127 S. Ct. at 1964-65; see also Papasan, 478 U.S. at 286. Plaintiff's allegation that the IRS employees "disclosed confidential information" to the State "in the absence of a written agreement" is nothing more than a recitation of language from statutory provision governing IRS disclosures to States, 26 U.S.C. §6103(d), in contrast to "factual allegations [that] raise a right to relief above the speculative level." See Bell Atl. Corp., 127 S. Ct. at 1965. Therefore, this part of the complaint also fails to state a claim upon which relief can be granted. 5

Defendant United States makes much of whether plaintiff's claim should be construed as a claim for damages under 26 U.S.C. §7433, and then dismissed for failure to exhaust administrative remedies. See United States' Mem. at 8-10; see also Pl.'s Opp. at 3-12. Nothing in the complaint indicates that it is brought pursuant to section 7433, and plaintiff has pending a separate lawsuit raising a section 7433 claim. See Marsoun v. United States, No. 07-2078 (D.D.C. filed Nov. 13, 2007). Thus, the Court finds no basis for further consideration of whether this case should be treated, in the alternative, as one brought pursuant to section 7433.



II. State of Hawaii's Motion to Dismiss

Defendant State of Hawaii, including its Department of Taxation, contends that the complaint must be dismissed because section 7431(a)(2) does not provide a cause of action against a state or its agencies. See State Defs.' Mem. at 6-7. The Court agrees. Section 7431(a)(2) creates a damages action for unauthorized disclosures by "any person," and permits a taxpayer "to bring a civil action against such person." Id. (emphasis added). "Person" is defined elsewhere in the Internal Revenue Code as presumptively meaning "an individual, a trust, estate, partnership, association, company, or corporation." 26 U.S.C. §7701(a)(1). Based on this definition, the Court concludes that section 7431(a)(2) does not authorize a right of action against a State, its agencies, or state employees sued in their official capacities (the latter, of course, being no different than a suit against the state). 6 Indeed, the Tenth Circuit has reached the same6 conclusion based on the plain language of sections 7431(a)(2) and 7701(a)(1). See Long, 972 F.3d at 1177 & n.4 ("§7431(a)(2) fails to confer any right of action against a state agency"). This result is consistent with the long-established precedent recognizing that "`in common usage, the term `person' does not include the sovereign, [and] statutes employing the [word] are ordinarily construed to exclude it.' " See Will v. Michigan Dep't of State Police, 491 U.S. 44, 64 (1989) (quoting Wilson v. Omaha Tribe, 442 U.S. 653, 657 (1979) (alterations in original)); see also United States v. SCS Business & Tech. Inst., Inc., 173 F.3d 870, 874 (D.C. Cir. 1999) (observing that Will and Wilson "create at minimum a default rule: states are excluded from the term person absent an affirmative contrary showing"). Accordingly, plaintiff's claims against the State of Hawaii, its Department of Taxation, and the State employees in their official capacities are dismissed for failure to state a claim upon which relief can be granted.



III. Hamakawa's and Shioji's Motion to Dismiss

To the extent plaintiff intends to bring his section 7431 claim against Hamakawa and Shioji in their individual capacities, plaintiff's complaint must be dismissed for lack of personal jurisdiction. Under the Due Process Clause, a defendant can be subject to personal jurisdiction in the forum court only if a plaintiff shows "minimum contacts between the defendant and the forum establishing that `the maintenance of the suit does not offend traditional notions of fair play and substantial justice.' " See GTE News Media Servs., Inc. v. BellSouth Corp., 199 F.3d 1343, 1347 (D.C. Cir. 2000) (quoting Int'l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945)). "[T]he defendant's conduct and connection with the forum State [must be] such that he should reasonably anticipate being haled into court there." World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297 (1980). "[T]his `fair warning' requirement is satisfied if the defendant has `purposefully directed' his activities at residents of the forum...and the litigation results from the alleged injuries that `arise out of or relate to' those activities." Burger King v. Rudzewicz, 471 U.S. 462, 472 (1985) (citations omitted). Although the defendant must intentionally establish contacts in the forum state, Asahi Metal Indus. Co. v. Superior Court, 480 U.S. 102, 108-09 (1987) (plurality opinion), it is not necessary that he physically enter the forum state as long as he "`purposefully avails [him]self of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.' " Burger King, 471 U.S. at 475 (quoting Hanson v. Denckla, 357 U.S. 235, 253 (1958)).

Plaintiff does not allege that Hamakawa or Shioji have such minimum contacts with the District of Columbia, nor can the Court discern any. The complaint states that plaintiff has at all times been a resident of California and Hawaii, and alleges that Hamakawa and Shioji received, inspected, and disclosed information as employees of the Hawaii Department of Taxation, apparently in Hawaii. See Compl. ¶ ¶3, 5, 6. Furthermore, Hamakawa and Shioji have each submitted unrebutted affidavits stating that they are residents of the State of Hawaii and have never lived in the District of Columbia, and, furthermore, that they have never owned any property nor conducted any business in the District of Columbia. See State Defs.' Mem., Exhibits A and B. Based on these affidavits, and the absence of any allegations that Hamakawa and Shioji have somehow purposefully availed themselves of the privilege of conducting activities in the District of Columbia, the Court concludes that it lacks personal jurisdiction over Hamakawa and Shioji.

Plaintiff contends that the action against them may nonetheless be sustained because they are subject to the limitations on disclosure of tax return information set forth by section 6103(d). Pl.'s Opp. at 3. That contention wholly fails to address the matter of personal jurisdiction --an issue separate from whether a person has complied with substantive provisions of the Internal Revenue Code. Plaintiff further suggests that the declarations cannot be considered because they are outside of the pleadings. Id. Again, plaintiff misunderstands the law. In considering a motion to dismiss for lack of personal jurisdiction pursuant to Fed. R. Civ. P. 12(b)(2), the Court may consider affidavits and any other relevant matter to determine whether it has personal jurisdiction. Philip Morris, Inc., 116 F. Supp. 2d at 120 n. 4.


CONCLUSION


For the foregoing reasons, the Court will grant defendants' motions to dismiss plaintiff's complaint. A separate order has been issued on this date.

1 The Court notes that plaintiff refiled his complaint on March 5, 2007 --a complaint identical to his original complaint, with the addition of his address and phone number in the caption. The record is unclear as to which complaint was served on defendants, but because they are in all other respects identical, the Court will treat the motions as addressing both.

2 For ease of reference, the Court will refer to the memorandum in support of the United States motion to dismiss as "United States' Mem." and the memorandum in support of the motion of the State defendants as "State Defs.' Mem."

3 The IRS notices attached to plaintiff's complaint are considered incorporated by reference therein. See Stewart v. Nat'l Educ. Ass'n, 471 F.3d 169, 173 (D.C. Cir. 2006).

4 The exclusivity provision in section 7433 makes an exception for an action under section 7432 --one seeking civil damages in certain circumstances based on IRS failure to release a lien.

5 Indeed, section 6103(d) indicates that many types of disclosures to State officials are lawful, making plaintiff's conclusory allegation of unlawful disclosure even more problematic for notice pleading purposes. Furthermore, the Seventh and Tenth Circuits have found that the IRS has entered into standard written Agreements on Coordination of Tax Administration with each of the 50 states and the District of Columbia, and held that such an agreement authorizes IRS disclosures to a state under section 6103(d). See Smith v. United States, 964 F.2d 630, 633 (7th Cir. 1992); Long v. United States, 927 F.2d 1174, 1177 (10th Cir. 1992).

6 "A lawsuit against a government official in his official capacity is an action against the 6 governmental entity of which the official is an agent." See Wilburn v. Robinson, 480 F.3d 1140, 1148 (D.C. Cir. 2007).

SEC. 7431. CIVIL DAMAGES FOR UNAUTHORIZED INSPECTION OR DISCLOSURE OF RETURNS AND RETURN INFORMATION.
7431(a) IN GENERAL. --

7431(a)(1) INSPECTION OR DISCLOSURE BY EMPLOYEE OF UNITED STATES. --If any officer or employee of the United States knowingly, or by reason of negligence, inspects or discloses any return or return information with respect to a taxpayer in violation of any provision of section 6103, such taxpayer may bring a civil action for damages against the United States in a district court of the United States.

7431(a)(2) INSPECTION OR DISCLOSURE BY A PERSON WHO IS NOT AN EMPLOYEE OF UNITED STATES. --If any person who is not an officer or employee of the United States knowingly, or by reason of negligence, inspects or discloses any return or return information with respect to a taxpayer in violation of any provision of section 6103 or in violation of section 6104(c), such taxpayer may bring a civil action for damages against such person in a district court of the United States.

7431(b) EXCEPTIONS. --No liability shall arise under this section with respect to any inspection or disclosure --

7431(b)(1) which results from a good faith, but erroneous, interpretation of section 6103, or

7431(b)(2) which is requested by the taxpayer.

7431(c) DAMAGES. --In any action brought under subsection (a), upon a finding of liability on the part of the defendant, the defendant shall be liable to the plaintiff in an amount equal to the sum of --

7431(c)(1) the greater of --

7431(c)(1)(A) $1,000 for each act of unauthorized inspection or disclosure of a return or return information with respect to which such defendant is found liable, or

7431(c)(1)(B) the sum of --

7431(c)(1)(B)(i) the actual damages sustained by the plaintiff as a result of such unauthorized inspection or disclosure, plus

7431(c)(1)(B)(ii) in the case of a willful inspection or disclosure or an inspection or disclosure which is the result of gross negligence, punitive damages, plus

7431(c)(2) the costs of the action, plus

7431(c)(3) in the case of a plaintiff which is described in section 7430(c)(4)(A)(ii), reasonable attorneys fees, except that if the defendant is the United States, reasonable attorneys fees may be awarded only if the plaintiff is the prevailing party (as determined under section 7430(c)(4)).

7431(d) PERIOD FOR BRINGING ACTION. --Notwithstanding any other provision of law, an action to enforce any liability created under this section may be brought, without regard to the amount in controversy, at any time within 2 years after the date of discovery by the plaintiff of the unauthorized inspection or disclosure.

7431(e) NOTIFICATION OF UNLAWFUL INSPECTION AND DISCLOSURE. --If any person is criminally charged by indictment or information with inspection or disclosure of a taxpayer's return or return information in violation of --

7431(e)(1) paragraph (1) or (2) of section 7213(a),

7431(e)(2) section 7213A(a), or

7431(e)(3) subparagraph (B) of section 1030(a)(2) of title 18, United States Code,

the Secretary shall notify such taxpayer as soon as practicable of such inspection or disclosure.

7431(f) DEFINITIONS. --For purposes of this section, the terms "inspect", "inspection", "return", and "return information" have the respective meanings given such terms by section 6103(b).

7431(g) EXTENSION TO INFORMATION OBTAINED UNDER SECTION 3406. --For purposes of this section --

7431(g)(1) any information obtained under section 3406 (including information with respect to any payee certification failure under subsection (d) thereof) shall be treated as return information, and

7431(g)(2) any inspection or use of such information other than for purposes of meeting any requirement under section 3406 or (subject to the safeguards set forth in section 6103) for purposes permitted under section 6103 shall be treated as a violation of section 6103.

For purposes of subsection (b), the reference to section 6103 shall be treated as including a reference to section 3406.

7431(h) SPECIAL RULE FOR INFORMATION OBTAINED UNDER SECTION 6103(k)(9). --For purposes of this section, any reference to section 6103 shall be treated as including a reference to section 6311(e).

Unauthorized Inspection or Disclosure of Tax Information: Application of statute

The only proper defendant to a suit alleging that the IRS violated the nondisclosure provisions in Code Sec. 6103 by sending a warning letter to investors concerning a tax shelter marketed by the taxpayer was the United States and not the individual IRS officials. However, the taxpayer sufficiently alleged that "return information" was disclosed by asserting in the complaint that the letter revealed its identity as a taxpayer and the fact that it had been under IRS investigation.

Mid-South Music Corp., CA-6, 85-1 USTC ¶9262, 756 F2d 23.

Pre-filing notification letters that were sent to investors in a tax shelter did not constitute an unauthorized disclosure of the promoter's tax return information. There was no indication from the letters that the promoter's tax returns were under investigation or examination. The primary focus of the letters was to alert the investors that deductions and credits claimed based upon their investment in that particular tax shelter would be disallowed.

Mid-South Music Corp., CA-6, 87-1 USTC ¶9317, 818 F2d 536.

The court concluded that where subject pre-filing notification letters were issued in compliance with Rev. Proc. 83-78, 1983-2 CB 595, the IRS could rely upon the good faith defense pursuant to Code Sec. 7431, which protects the government from liability for disclosures made in good faith.

Balanced Financial Management, Inc., DC Utah, 87-2 USTC ¶9378.

Statements made by a U.S. attorney at a closed hearing on a temporary restraining order applied for by a corporation undergoing an IRS investigation, which was repeated to a reporter by the attorney, would not support an action for damages for disclosing "return information." Since the corporation applied for the temporary restraining order, it was not entitled to privacy concerning the "return information" contained in the complaint.

United Energy Corp., DC Calif., 85-2 USTC ¶9557, 622 FSupp 43.

After a careful reading of the record, the court ruled as a matter of law that the disclosures by a Special Agent (and certain John Doe persons who were also Special Agents) of the taxpayers' tax return information to employees of AT&T, to a hospital, and to the taxpayers' employers were not unauthorized disclosures. Therefore, the government's motion for summary judgment was granted.

J.A. Perez, DC Fla., 85-1 USTC ¶9388.

A taxpayer's action could not be construed to fall under Code Sec. 7431 because her complaint alleged that the IRS wrongfully received, rather than wrongfully disclosed, information about her.

J.M. Newberry, DC Ark., 86-2 USTC ¶9569.

A taxpayer's motion for injunctive relief from service of notice of an IRS levy upon her employer for the debts of her deceased husband's estate was dismissed since the IRS released the levy and, thus, the action for wrongful levy was moot. Since the taxpayer's cause of action originated under Code Sec. 7426 for wrongful levy, her exclusive remedy was under that statute and she was not entitled to seek additional relief under Code Sec. 7431 for wrongful disclosure.

B.G. Haywood, DC Kan., 86-2 USTC ¶9812.

The disclosure of a civilian attorney's tax returns and return information by his employer, the United States Navy, did not constitute an unauthorized disclosure by the IRS. In examining the legislative history of Code Sec. 6103, the court noted that these provisions were intended to protect taxpayers from the distribution of return information filed by or on behalf of the taxpayer to the IRS and were not designed to prevent other governmental employees from obtaining such information through other means of civil discovery. Rather, the court concluded that this statute pertained solely to the flow of tax data to, from, or through the IRS.

S.S. Stokwitz, CA-9, 87-2 USTC ¶9606, 831 F2d 893.

Return information was not improperly disclosed by the IRS when it mailed pre-filing notification letters to individuals who invested in medical equipment that was sold or leased by the taxpayer. Even if the IRS's use of the name "Datamatic" constituted a disclosure of the name of "Datamatic Services Corporation," the letters did not refer to DSC's status as a taxpayer or its obligation to file any sort of return. Also, the IRS's statement that it would disallow certain deductions and credits "based on [its] review of [the D/T] promotion" did not constitute a disclosure, because the statement did not necessarily mean that the IRS had audited the promoter of the shelter. And, even if the use of the letters resulted in disclosures, the disclosures were not illegal, because they were made during an administrative proceeding and the IRS had acted in good faith.

Datamatic Services Corp., DC Calif., 88-1 USTC ¶9163.

The IRS was liable for making unauthorized disclosures of a couple's nonpublic tax return information to third parties as the result of alleged computer system errors; however, sanctions of costs and attorney's fees were not granted to the taxpayers. Confidential return information was not transformed into nonconfidential information by virtue of the taxpayers' petition to challenge IRS notices of deficiency. The IRS was not able to raise a good faith defense because its error was allegedly caused by the computer system rather than someone's good faith misinterpretation of Code Sec. 6103.

P.W. Husby, DC Calif., 87-2 USTC ¶9623, 672 FSupp 442.

Disclosure by the IRS of taxpayer's income tax information did not give rise to an action for civil damages where information was given to attorneys representing the FSLIC, which had instituted litigation against the taxpayer.

Crismar Corp., DC La., 89-2 USTC ¶9534.

A federal district court had jurisdiction over a suit to recover damages for disclosure of return information and the government's motion for summary judgment was denied.

J.M. Hollett, DC Calif., 89-1 USTC ¶9213, 711 FSupp 1009.

A married couple was entitled to an award for the unlawful disclosure of return information. The failure by the IRS to make a reasonable effort to locate the taxpayers' account, after receipt of a penalty check sent to the IRS that did not contain the taxpayers' tax identification number (TIN), and the failure to attempt notification of the taxpayers to aid in locating the account constituted negligence when the IRS subsequently issued a notice of levy to the wife's employer.

E.E. Chandler, DC Utah, 88-2 USTC ¶9541. Aff'd, per curiam, CA-10, 89-2 USTC ¶9609.

A professional corporation was not entitled to damages for alleged illegal disclosures of its tax return information because the IRS disclosed the information in order to carry out authorized tax levies on the corporation's bank and stock brokerage accounts.

J.H. Traxler, M.D., DC Calif., 88-2 USTC ¶9627.

The issuance by the IRS of a press release containing information about a taxpayer's tax liability drawn from a Tax Court opinion did not constitute an unauthorized disclosure of tax return information. The issue of unauthorized disclosure arises only when the immediate source of the information is a return, or some internal document based on a return, and not when the immediate source is a public document lawfully prepared by an agency, such as the Tax Court, that is separate from the IRS and has lawful access to tax returns.

P.F. Thomas, CA-7, 89-2 USTC ¶9638, 890 F2d 18.

The IRS's issuance of press releases regarding an accountant's conviction and sentencing for felony tax crimes was not an improper disclosure of return information for which the accountant and his business could recover damages. The information was gathered by an IRS employee who examined the publicly filed indictment, attended the trial and sentencing, and researched possible criminal penalties solely for the purpose of preparing the press releases. It was not gathered with respect to the parties' tax returns or potential tax liability.

J.V. Rice, CA-10, 99-1 USTC ¶50,224.

A corporate executive's award for damages for the IRS's wrongful disclosure of return information in a news release was vacated and the case was remanded and reassigned for a new trial. Although information concerning his middle initial, age, address, and occupation lost its confidentiality when published in court records, the subsequent disclosure by the IRS was wrongful and violated Code Sec. 6103 because the immediate source of the information was a return. However, information in the news release of the charge and penalties was not improper disclosure of return information, and the trial court committed reversible error by instructing the jury that the disclosures were made in violation of the law.

E.E. Johnson, CA-5, 97-2 USTC ¶50,616.

The IRS did not disclose return information about an individual or a corporation during an emergency levy and seizure of a corporation's assets for its failure to pay employee income taxes. IRS agents made efforts to avoid any disclosure to a secretary, but the corporation's officer elected not to send her home during the IRS's inventory process. An IRS agent acted properly in requesting that the El Paso police department examine gold and diamond jewelry in the corporate officer's possession. The disclosure was necessary to obtain the information that the IRS sought and was not otherwise reasonably available from a source other than the police.

A. Morales, DC Tex., 90-1 USTC ¶50,275.

Taxpayers properly alleged that the disclosure of criminal convictions for violations of tax laws violated the Code Sec. 6103 prohibition against tax information since the disclosure was inaccurate and negligently made. Thus the government's motion to dismiss for failure to state a claim upon which relief can be granted was denied.

J.G. Mallas, DC N.C., 90-2 USTC ¶50,412.

An individual's suit for damages against IRS employees for unauthorized disclosure of allegedly erroneous tax information to state tax officials was dismissed for failure to state a proper claim. The IRS is specifically authorized to disclose returns and return information to state tax officials, and the requirement of 5 U.S.C. §552 that federal agencies maintain adequate records was not relevant.

B. Case, DC Calif., 96-2 USTC ¶50,680.

Where a liaison official for the federal-state tax information exchange program sued an IRS official for wrongful disclosure, the federal government certified that the official had acted within the scope of his authority, and the U.S. was substituted as a defendant. The claims against the government were identical to those pled in T.J. Smith, DC Ill., 89-2 USTC ¶9457, and thus were dismissed without prejudice.

T.J. Smith, DC Ill., 90-1 USTC ¶50,118, 723 FSupp 1300.

An individual's suit for damages for unauthorized disclosure of return information was dismissed. The IRS sought to collect assessed tax liabilities by issuing notices of levy to various third parties, filing notices of federal tax liens, and issuing summonses to various third parties. The IRS disclosed only the return information necessary to effect those summonses, liens and levies. The disclosures were authorized under Code Sec. 6103(k)(6) and, as a matter of law, the IRS was not liable for damages.

L. Elias, DC Calif., 91-1 USTC ¶50,040. Aff'd, CA-9 (unpublished opinion 9/2/92).

Married taxpayers were not entitled to damages for the government's allegedly improper disclosure of their return information in the course of levying against their property. Even if procedural deficiencies rendered the levies defective, the disclosures, which consisted of sending notices of levy to banks and business, filing a notice of lien with a county recorder, and transmission of a notice of final demand to the husband's employer, were authorized under Code Sec. 6103(k)(6).

S.D. Mann, CA-10, 2000-1 USTC ¶50,233, 204 F3d 1012.

Followed.

D.M. Benson, DC N.M., 2000-1 USTC ¶50,367.

An airline was not entitled to damages for the alleged wrongful disclosure of tax return information when the IRS sent notices of intent to levy to third parties in order to locate assets to satisfy the taxpayer's tax deficiencies. The disclosures were necessary for IRS collection activities and exempt from damage claims even though the IRS failed to timely notify the taxpayer of its intent to levy.

Las Vegas Airlines, Inc., DC Nev., 98-1 USTC ¶50,306.

A suit brought for unauthorized disclosure of returns and return information was dismissed for lack of jurisdiction. The alleged disclosures occurred more than two years before the suit was filed. Additionally, the taxpayers did not allege that they discovered the disclosures within the two-year time period. Although some disclosures made to unnamed third parties allegedly occurred within two years prior to filing suit, they were not described with enough particularity for the court to determine that they were unauthorized.

R.P. Detrick, DC Ore., 91-1 USTC ¶50,063. Aff'd, CA-9 (unpublished opinion 5/8/92).

Numerous claims brought by an IRS employee alleging the IRS's unauthorized disclosures of his return information in the course of an audit of several tax years were dismissed as untimely. Although the employee had notice of the IRS's investigations after meetings with his supervisors and was informed that the IRS had relied on the results of its inquiries in deciding to terminate his employment, he failed to file a complaint before the limitations period expired. However, other claims could not be dismissed as untimely since the pleadings and evidence did not demonstrate when the employee gained notice of the disclosures.

B.T. Hobbs, Jr., DC Tex., 97-2 USTC ¶50,965.

Reconsideration of the unlawful disclosure claim in the above case was denied to a former IRS employee who was dismissed from his job for his failure to satisfy personal student loan and child support debts since the disclosures to an administrative tribunal constituted "routine uses" of the records under the Privacy Act, 5 U.S.C. §552a(b).

B.T. Hobbs, Jr., CA-5, 2000-1 USTC ¶50,403, 209 F3d 408.

An IRS agent's disclosure of an individual's return information to a U.S. attorney in a request for a search warrant for the taxpayer's records was permissible under Code Sec. 6103. Moreover, since the taxpayer waited more than two years after his attorney became aware of the disclosure before filing suit, his unlawful disclosure claim was barred by the statute of limitations.

A.T. McQueen, DC Tex., 98-1 USTC ¶50,388, 5 FSupp2d 473. Aff'd, per curiam, CA-5 (unpublished opinion), 99-1 USTC ¶50,367.

The taxpayer's claim for damages arising from the IRS's unauthorized disclosure of confidential information was dismissed. The District Court lacked the jurisdiction necessary to consider essential elements of the unauthorized disclosure claim.

R. James, CA-10, 92-2 USTC ¶50,389, 970 F2d 750.

On remand from R. James, above, the couple's motion for summary judgment on the issue of whether the district court should comply with the appellate court's instructions regarding their claim of unauthorized disclosure was dismissed. The appellate court ordered that the claim should be addressed only if the IRS had not sent a proper notice of intent to levy on the couple's property. Since the notice was sent, the couple's claim had to fail.

R. James, DC Wyo., 95-1 USTC ¶50,146.

A taxpayers's action seeking an award of damages for the wrongful disclosure of his tax return information by IRS employees to his customers during the course of a criminal tax investigation was properly barred by the district court. Testimony by the taxpayer's receptionist regarding his telephone conversations with numerous customers who received a circular letter from the IRS supported the inference that he had discovered the wrongful disclosure shortly after the letters were mailed; however, he delayed almost six years before filing suit. Although it was clear that the letter improperly disclosed return information to third parties, jurisdiction was lacking over the damages action because the government's waiver of its immunity from suit terminated upon the expiration of the two-year limitations period.

D.C. Gandy, CA-5, 2001-1 USTC ¶50,115.

Damages and costs awarded to married taxpayers whose oil business was destroyed by publicity surrounding an IRS investigation arising from an agent's unauthorized disclosure of search warrant information to a confidential informant were upheld. The IRS failed to establish that the agent acted in good faith. There were no prescribed regulations under Code Sec. 6103(k)(6) that allowed for the disclosure of information to confidential informants under such circumstances; thus, the agent's actions were unlawful. However, the damage award erroneously included prejudgment interest.

T.L. Jones, CA-8, 2000-1 USTC ¶50,312.

Notices of levy sent to clients of an income tax return preparer who had not filed his own returns since 1981, who had failed to collect and pay over employment taxes and who was concealing assets did not constitute the wrongful disclosure of tax return information. By sending the notices of levy to his clients, the IRS hoped to reach money that might be owed to the taxpayer for his income tax return preparation services. Any disclosures were made in connection with the IRS's attempt to levy upon valid liens upon the taxpayer's assets and were outside the reach of the wrongful disclosure provisions.

D.E. Coplin, DC Mich., 91-1 USTC ¶50,035. Aff'd, CA-6 (Unpublished opinion 12/17/91). Cert. denied, 6/8/92.

An IRS agent did not unlawfully disclose return information by serving Notices of Levy upon an individual's neighbors because the IRS agent was attempting to determine whether the neighbors had assets belonging to the individual. The only way to determine this was to serve the neighbors with the notices. The notices were based upon oil and gas leases entered into between the individual as lessee and his neighbors as lessors.

T.J. Cuda, DC Mich., 91-1 USTC ¶50,193. Aff'd CA-6 (Unpublished opinion 2/3/92). Cert. denied, 6/1/92.

The District Court had jurisdiction over a claim against the United States for an unauthorized disclosure of return information. However, an individual not represented by an attorney was permitted extra time to amend his complaint to allege what information was disclosed and the specific facts describing the alleged wrongful disclosure, as well as to send a copy of the summons to the Attorney General of the United States.

M. Yizar, DC Ga., 91-2 USTC ¶50,439. Aff'd, per curiam, on another issue, CA-11 (unpublished opinion), 97-2 USTC ¶50,564.

A taxpayer's action for damages against the United States for the alleged disclosure of return information by an IRS agent was dismissed. The taxpayer provided no information to refute the finding that any disclosure occurred pursuant to the agent's official tax collection or investigation duties. Additionally, the taxpayer did not contradict evidence that any unauthorized disclosure by the agent in testimony at the taxpayer's criminal trial was in good faith.

M. Yizar, DC Ga., 92-2 USTC ¶50,580. Aff'd, per curiam, on another issue, CA-11 (unpublished opinion), 97-2 USTC ¶50,564.

The taxpayer's action for damages against the IRS for unauthorized disclosure of return information was barred by the two-year statute of limitations. Even if the action had not been barred by the statute of limitations, the disclosures made by the IRS agents were authorized by the law since the disclosures were made in connection with the enforcement and collection of the assessment.

W. Simpson, DC Fla., 91-2 USTC ¶50,504. Aff'd, CA-11 (unpublished opinion 2/16/93). Cert. denied, 6/28/93.

The IRS did not wrongfully disclose tax information of a brother and sister who took part in a fraudulent conveyance scheme. The IRS's disclosures of the information during and after a trial for wrongful levy of the fraudulently conveyed property were authorized by Code Sec. 6103 because they occurred during a tax proceeding, there was a transactional relationship between the taxpayers and the plaintiff at trial, and the taxpayers' tax history was probative evidence. Although the taxpayers asserted that the inaccuracies of the disclosures rendered them unauthorized, Code Sec. 7431 does not protect taxpayers against unintentional inaccurate disclosures. Further, the taxpayers failed to produce evidence indicating that the IRS intentionally misstated the tax information or that the government prevented them from obtaining evidence.

J. Noske, DC Minn., 92-2 USTC ¶50,429. Aff'd, CA-8 (unpublished opinion 7/15/93).

Damages for unauthorized disclosure of return information were denied since the IRS was authorized to disclose certain information such as name, address and amount of unpaid taxes when imposing liens and levies.

D.L. Tomlinson, DC Wash., 91-2 USTC ¶50,445. Aff'd, CA-9 (unpublished opinion 9/30/92).

Because a suit was filed more than two years after a taxpayer received notice of three alleged unauthorized disclosures, his claims for damages were barred by the statute of limitations. Thus, the IRS's summary judgment motion was granted. The disclosures, which were attempts by the IRS to collect the alleged tax deficiency, were not improper as they were authorized by statute. In addition, the taxpayer's claim that the assessments against him were invalid due to procedural defects was rejected.

J.C. Chisum, DC Ariz., 92-1 USTC ¶50,032. Aff'd, CA-9 (unpublished opinion 9/13/93). Cert. denied, 10/17/94.

An IRS motion to quash a subpoena that requested documents regarding an investigation of an IRS officer was granted in part. The taxpayer claimed that the officer disclosed her confidential tax return information. Although the documents were generated to determine whether the officer wrongfully disclosed the taxpayer's return information, they were exempt from disclosure because they were return information of the officer. However, any portion of the documents containing the taxpayer's statements was not privileged information and had to be provided to her.

D.A. Conn, DC Calif., 92-1 USTC ¶50,123.

A taxpayer's suit for damages for violation of the law prohibiting disclosure of return information was dismissed because the taxpayer failed to produce information to support his allegation of IRS error. The IRS disclosed information in an attempt to collect taxes, which is allowed under the anti-disclosure statute. The taxpayer claimed that the IRS acted in error, but refused to document his contention, claiming that the information was none of the IRS officer's business. Under the law, the IRS has a right to the taxpayer's information and the taxpayer is obliged to provide it.

J.C. Bleavins, DC Ill., 92-2 USTC ¶50,549. Aff'd, CA-7 (unpublished opinion 7/16/93).

A wrongful disclosure action was dismissed because it was not improper for the IRS to disclose information about the tax preparer in order to locate resources to satisfy a lien, regardless of whether the lien was proper.

Coplin & Assoc., Inc., DC Mich., 93-1 USTC ¶50,017, 814 FSupp 643. Vac'd and rem'd, CA-9 (unpublished opinion 6/22/94).

A taxpayer's claim for damages for unauthorized disclosure due to erroneous levies on her pension fund and bank accounts was dismissed because the levies were the result of a computer error. A computer error was not the kind of conduct for which Congress intended to hold the IRS liable in enacting the unauthorized disclosure section of the Code.

L. Weiner, DC N.Y., 93-1 USTC ¶50,075. Aff'd, per curiam, CA-2, 93-1 USTC ¶50,124, 986 F2d 12.

An investment counselor's civil damage award for unauthorized disclosure of return information was sustained because IRS personnel continued to disseminate to tax shelter investors inaccurate and misleading information concerning the program after the counselor's conviction was reversed on appeal. The information constituted "return information" since the material contained in the pro forma revenue agent report was prepared by the IRS with respect to a tax return, even though it was not this taxpayer's return. The number of disclosures made for purposes of calculating the $1,000 per violation damage award was based on the number of persons to whom the information was addressed, not the number of reports sent. The taxpayer was allowed to show, on remand, whether punitive damages should be awarded in lieu of the statutory award received.

J.G. Mallas, CA-4, 93-1 USTC ¶50,302, 993 F2d 1111.

The IRS was not liable for unlawful disclosure when it reported a lien to the appropriate county recorder's office because a valid assessment actually did exist prior to disclosure.

M.J. Heun, DC Ariz., 93-2 USTC ¶50,367.

An IRS agent's failure to obtain prior approval before mailing letters to an individual's potential and known customers was not sufficient basis for a disclosure action against the IRS, because the agent operated in good faith, no other reasonable method existed by which the information could be obtained without great labor, time, and expense, and where the letter disclosed no more than the agent would have disclosed in interviewing the potential customers in person.

W. Simpson, DC Fla., 93-2 USTC ¶50,475.

The substitution of the administrator of a decedent's estate in place of the decedent as plaintiff in a suit for unauthorized disclosure of the decedent's tax return information was proper. The statutory right to bring such a suit was a property right that survived the taxpayer's death since all taxpayers, not just individuals, could sue for unauthorized disclosure. Further, allowing the right of survival advanced the legislative aim of discouraging governmental intimidation through disclosure.

M.L. Schachter, DC Calif., 94-1 USTC ¶50,034.

The IRS did not make any unauthorized disclosures of an individual's tax information when it filed a tax lien that would allow the individual to recover damages. The IRS was expressly authorized to disclose such information to establish its liens or levies.

A.P. Lutz, DC Ky., 93-2 USTC ¶50,574.

A taxpayer's claim that the IRS improperly disclosed certain tax information in the form of various lien and levy notices was without merit because Code Sec. 6103 expressly permits disclosure of return information to the extent necessary to effect a lien or levy.

J.L. Ball, CA-7 (unpublished opinion), 95-1 USTC ¶50,217.

IRS agents were authorized to disclose return information to banks and employees in carrying out their collection and enforcement activities. The disclosure was not unauthorized solely because the levy the IRS sought to enforce was defective. The determination of whether disclosure is unauthorized is not dependent on the validity of the underlying summons, lien or levy. The history and structure of the applicable Code sections indicated that the disclosure provision and the attendant remedy are distinct from and were not intended to interfere with collection actions.

D.P. Venen, CA-3, 94-1 USTC ¶50,177, 38 F3d 100.

A sole proprietor's claim for damages from unauthorized disclosure of return information was dismissed because the disclosure was not wrongful. The disclosure of her social security number, business interest, employee identification number, and purported tax liability in notices of levy were necessary to inform persons dealing with the taxpayer and her business of the IRS's liens. Even though the IRS's levy on the taxpayer's assets to collect the taxes of her alleged common-law husband may have been wrongful, the propriety of collection activities was distinct from information handling.

R.K. Wilkerson, CA-5, 95-2 USTC ¶50,569, 67 F3d 112.

An employee was not entitled to damages for wrongful disclosure of return information arising from the IRS's serving of a notice of levy on the employee's wages with his employer and the IRS's recording of a notice of tax lien. The disclosure of return information was authorized, and it was necessary for the collection of taxes.

W.C. Blankstyn, DC Ariz., 94-1 USTC ¶50,287.

A taxpayer was entitled to recover actual damages suffered when the IRS wrongfully disclosed her return information in the course of imposing improper levies. Code Sec. 7433 did not provide the sole appropriate remedy where the disclosures were made in the course of collection of an erroneous refund, as opposed to the collection of a tax. Further, while recognizing a split among the circuits regarding whether the lawfulness of the underlying levy was relevant to wrongful disclosure actions, the district court held that information cannot be properly disclosed under Code Sec. 6103 if the levy giving rise to the disclosure was improper.

I.S. Schipper, DC N.Y., 98-2 USTC ¶50,825.

A cosigner who received property subject to tax liens from the debtor-taxpayer after paying off a loan obligation was not entitled to damages for the unlawful disclosure of tax return information because any tax information released was not related to his return.

G.E. Caine, CA-10, 94-2 USTC ¶50,373.

An individual was allowed to file a counterclaim against the government for wrongful disclosures of her tax return information. Since the individual was proceeding pro se, she was accorded leniency and leave to amend pleadings.

R.W. Yoak, DC Ky., 94-2 USTC ¶50,414.

Where notices of deficiency and levy were properly mailed to the address indicated on an individual's most recently filed return, the IRS's collection activities were authorized. Thus, the lower court's award of damages for alleged unauthorized disclosure of tax return information was improper.

J.C.F. Gille, CA-10, 94-2 USTC ¶50,428. Cert. denied, 4/17/95.

The IRS did not wrongfully disclose a delinquent taxpayer's return information when it sent notices of levy to third parties in order to locate assets to satisfy the taxpayer's tax deficiencies. The IRS was not required to first send out a notice of lien before disclosing return information in the notices of levy.

Great Lakes Answering Service, Inc., DC Mich., 94-2 USTC ¶50,594.

An IRS employee did not improperly or unlawfully disclose return information about her husband when she represented him, pursuant to a power of attorney, in the course of an audit. The wife obtained the return information in the course of her marriage and as her husband's personal representative rather than in her official capacity as an IRS employee.

N.C. Girard, DC Calif., 94-2 USTC ¶50,625.

The disclosure of an individual's return information by Amtrak employees did not violate Code Sec. 6103 because the Amtrak employees were not employees of the United States and did not have "access" to the return. The employees altered a request to obtain copies of the individual's return, obtained it without his permission, and disseminated the return information within Amtrak. Although Amtrak is part of the federal government for certain purposes, it is not an agency or establishment of the United States. In addition, the employees did not have access to the return within the meaning of Code Sec. 6103(a)(3).

R. Hrubec, CA-7, 95-1 USTC ¶50,298, 49 F3d 1269.

A corporation's action for unlawful disclosure of its tax return information was time-barred because the corporation failed to name the government as a party to the litigation until after the limitations period had ended. Although the corporation stated it failed to learn of the violation until immediately prior to its filing of the complaint, internal memoranda of the corporation indicated it knew of the core facts of the violation for some time.

Amcor Capital Corp., DC Calif., 95-2 USTC ¶50,395. Aff'd, CA-9 (unpublished opinion), 97-2 USTC ¶50,512.

A claim for damages based on disclosure of the taxpayers' information in an IRS press release was dismissed because suit was filed more than two years after the individuals became aware of the disclosure. However, the taxpayers were permitted to amend their complaint to specifically assert claims based on disclosures that were not barred by the statute of limitations.

C. Bailey, DC Tex., 94-2 USTC ¶50,534.

An individual failed to state a proper claim for unauthorized disclosure of return information. Vague and conclusory statements were insufficient to permit the court to determine whether a violation occurred.

C.M. Ferrel, CA-9 (unpublished opinion), 96-1 USTC ¶50,157.

An individual failed to allege sufficient facts to state a proper claim for the IRS's unauthorized disclosures of his return information. He did not specify what information was revealed, to whom it was revealed, or under what circumstances the revelations were made. Thus, his meritless motion for summary judgment was denied, his motion for declaratory and injunctive relief was denied as moot, and his claim was dismissed.

J.R. Leonard, Sr., DC Colo., 97-2 USTC ¶50,501.

An IRS agent did not improperly disclose information of one corporation in making adjustments to the return of another dissolved corporation. Information on the possible improper diversion of funds from one company to the other was protected return information because it was analyzed by the agent with respect to a potential tax liability of the dissolved corporation. However, the information was properly disclosed to the 50% shareholder of the dissolved corporation and the corporation's accountant because the shareholder requested and had a material interest in the information and the accountant was his designee.

J.D. McAdams III, DC La., 96-1 USTC ¶50,269.

Jurisdiction was lacking over married taxpayers' suit alleging various constitutional, civil rights, and privacy violations. Their claim under the Privacy Act that the IRS improperly disclosed tax return information to a state attorney general's special counsel was dismissed because Code Sec. 7431 provided the exclusive remedy. Also, their claim that the IRS improperly disclosed information to a legal publisher was dismissed as untimely. Finally, they could not bring a Privacy Act claim for the IRS's alleged determination of their tax deficiency based on an inaccurate record.

P.J. Berridge, DC Ohio, 98-1 USTC ¶50,122, 993 FSupp 1136.

The district court lacked jurisdiction over a tax return preparer's civil damage action for unauthorized disclosure of return information. The IRS's letter alerting the preparer's clients that their returns were under audit and that the preparer was no longer eligible to represent clients before the IRS was not considered disclosure of confidential return information. Only taxpayers, not return preparers, are entitled to make a claim. Although the district court originally granted summary judgment in favor of the government, the summary judgment was vacated and judgment for dismissal for lack of jurisdiction was rendered.

D. Hernandez, CA-5, (unpublished opinion), 99-2 USTC ¶50,887, vac'g and dism'g, per curiam, DC Tex., 99-1 USTC ¶50,320.

An accountant was not entitled to civil damages with respect to the IRS disclosures of his tax information. The disclosures of confidential information by IRS employees were authorized under Code Sec. 6103 and its implementing regulations because they occurred during the course of an IRS investigation into the individual's tax returns.

W.O. Osijo, DC Calif., 99-1 USTC ¶50,344. Aff'd, CA-9 (unpublished opinion), 2000-2 USTC ¶50,711.

Government disclosures of delinquent taxpayers' return information that were made in connection with collection activities were authorized by law.

D.L. Long, DC Pa., 99-1 USTC ¶50,399. Aff'd, per curiam, CA-3 (unpublished opinion), 2000-1 USTC ¶50,497.

A taxpayer's contention that IRS employees wrongfully inspected her records during their allegedly illegal search of her home failed to state a damage claim for wrongful disclosure of return information. Code Secs. 6103 and 7431 applied only to disclosure of information in the hands of the IRS.

M.A. Tobin, DC Ky., 99-2 USTC ¶50,628.

An individual's claim for unauthorized disclosures against IRS and other government employees were dismissed because such claims may be brought only against the U.S., not against employees in their individual capacities.

M.R. Hassell, DC Tex., 99-2 USTC ¶50,671.

Similarly.

J.B. Bolin, DC Ga., 99-2 USTC ¶50,740.

A wife's claim for an award of damages based on purportedly unauthorized disclosures of information contained in the joint returns that she filed with her husband was dismissed. The government did not violate Code Sec. 6103 when it obtained the return information for use in a criminal investigation of the taxpayer's husband that resulted in his conviction on federal mail fraud charges. By filing joint returns, the wife implicitly authorized the disclosure of information in the event that her husband encountered tax problems.

J.B. Bolin, DC Ga., 2000-1 USTC ¶50,111.

Married taxpayers' contention in a quiet title action that they were entitled to damages for the disclosure of return information was rejected. The IRS's disclosures of return information in conjunction with its levy on the wife's payroll were limited to information necessary to effect its lawful liens, levies, and seizures. Thus, the disclosures were authorized under Code Sec. 6103(k)(6).

J.S. Williamson, DC N.M., 99-2 USTC ¶50,841, 84 FSupp2d 1217. Aff'd, CA-10 (unpublished opinion), 2000-1 USTC ¶50,504.

Married taxpayers could not maintain an action against a private credit reporting agency that allegedly solicited unauthorized disclosures of their return information.

R. Soghomonian, DC Calif., 2000-1 USTC ¶50,146, 82 FSupp2d 1134.

Married debtors were not entitled to damages for IRS disclosures of tax return information in connection with a tax lien and notice of levy. The IRS is permitted to disclose return information to the extent necessary to locate a taxpayer's assets, to effect a lien or levy, or to seize or sell assets to collect taxes due. While courts are split on whether the validity of the underlying action affects disclosure under Code Sec. 6103, the appellate court followed the majority position that the validity of the underlying proceeding is immaterial to a determination of liability for unauthorized disclosure. Thus, in the event it is found that the lien and notice of levy in the present case were unauthorized, that fact would be irrelevant to a determination of liability for damages under Code Sec. 7431.

A.D. Lester, CA-10 (unpublished opinion), 2000-1 USTC ¶50,255, aff'g an unreported District Court decision.

A pro se taxpayer was awarded statutory damages after the government conceded that it unlawfully disclosed his return information on three occasions when it mailed automated collection notices to his former representative whose power of attorney had been revoked.

L.D. Abel, DC Ore., 2000-1 USTC ¶50,262.

A veterinarian who marketed a book promoting the evasion of taxes failed to state a claim for unauthorized disclosures of confidential information against various IRS agents. The exclusive remedy for unauthorized disclosures is an action against the United States, rather than individual IRS agents.

D.L. Leveto, DC Pa., 2000-1 USTC ¶50,278. Aff'd, on other issues, CA-3, 2001-2 USTC ¶50,536.

An individual who claimed that his assessments were improper could not maintain a cause of action under Code Sec. 7431 in connection with the alleged release of return information in IRS levies against his property. Code Sec. 7431 does not expressly incorporate a requirement to "pay first and litigate later"; however, the Internal Revenue Code's remedial structure required the taxpayer to comply with the refund procedures of Code Sec. 7422 prior to bringing a damage claim arising out of an allegedly invalid assessment. Further, although the taxpayer could maintain a Code Sec. 7431 claim arising out of the disclosure of information in levies issued without a prior notice of intent to levy, issues of fact regarding whether such a notice was issued precluded summary judgment.

R.O. Morell, DC P.R., 2000-1 USTC ¶50,365, 91 FSupp2d 451.

An individual's claim alleging various constitutional violations against an IRS agent was properly dismissed by the district court for failure to state a claim and for lack of jurisdiction. The pro se taxpayer was not entitled to an award of damages for the disclosures of her tax information because the disclosures were made in conjunction with satisfying tax liens on her property.

L. Krieg, CA-9 (unpublished opinion), 2000-2 USTC ¶50,700, aff'g DC Calif., 2000-1 USTC ¶50,537.

A suit brought by the sole shareholders of a steam boiler and dry cleaners repair corporation for the unauthorized disclosure of tax return information under Code Sec. 7431 was dismissed for failure to state a justiciable claim. The exclusivity provision of Code Sec. 7433 barred claims under Code Sec. 7431. Suits for improper disclosure that occurred in the course of tax collection must be brought under Code Sec. 7433.

J. Shwarz, CA-9, 2001-1 USTC ¶50,111, aff'g an unreported District Court decision.

A taxpayer was not entitled to damages for unauthorized disclosure against the IRS because he lacked standing to maintain such a suit. Code Sec. 7431 restricts standing to taxpayers whose return information has been improperly disclosed; the individual's claim did not allege that his tax return was improperly disclosed, but rather that his corporation's was. Therefore, the corporation was the proper plaintiff.

N.E. Duquette, Inc., DC D.C., 2000-2 USTC ¶50,718.

Jurisdiction was lacking over an informant's claim for civil damages in connection with the IRS's alleged wrongful disclosure of his identity to the target of an investigation in which he supplied information. Although the IRS conceded that his informant status constituted return information, the information concerning the informant's status was not obtained for purposes of administering or enforcing the tax laws with respect to him. Rather, his informant status was the return information of another taxpayer who was under investigation by the IRS.

B.W. Jarvis, DC Tex., 2000-2 USTC ¶50,805.

A tax return preparer's claim that the IRS inspected his tax return for the tax year at issue without appropriate authorization under Code Sec. 7213A, although not addressed by the government in its motion for summary judgment, was not considered. The provision applied to violations occurring on or after August 5, 1997, which was almost one year after the alleged offense.

D.W. Wewee, DC Ariz., 2001-1 USTC ¶50,357.

A suit brought by an individual seeking an award of damages for the unauthorized disclosure of tax return information was barred under the exclusivity provision of Code Sec. 7433. Because the alleged disclosures occurred in connection with the collection of taxes, the taxpayer's claim fell under Code Sec. 7433, which covers unauthorized disclosures during collection proceedings.

P. Valladares, DC Calif., 2001-1 USTC ¶50,436.

The government was not liable for damages to former partners of a tax shelter for the alleged improper disclosures of partnership information made by the IRS during an audit. Because the audit was an administrative proceeding, the disclosures were exempt from the nondisclosure requirements for confidential information. The partners' claim that the IRS erred in including at-risk or basis amounts and in sending Notices of Final Partnership Administrative Adjustment to all former partners was rejected. Specific notice requirements mandate that partners receive information regarding pending administrative proceedings. Further, as persons who faced tax consequences as a result of the partnership audit, the former partners were entitled to know all of the operative facts on which the IRS relied in making its calculations.

D. Abelein, CA-9, 2003-1 USTC ¶50,331.

The allegation that the IRS made unauthorized disclosure of taxpayer return information in the notice of tax liens was dismissed. The limited information concerning the taxpayer's tax deficiencies that was included in the notices of lien and levies was necessary to IRS collection activities.

L. Opdahl, DC D.C., 2001-2 USTC ¶50,647.

An individual's claim against a casino for using his confidential tax return information in deciding whether to extend him credit at the casino, was dismissed. The individual alleged that the casino obtained his return information from an IRS agent; however, he failed to name or sue the agent and, instead, sued the casino. None of the named defendants fit the description of persons prohibited from disseminating return information under Code Sec. 6103 since none of them were federal officers or agents working for any governmental agency. Thus, the casino's use of his return information did not violate Code Sec. 6103 and Code Sec. 7431 clearly limits civil actions to such persons described in Code Sec. 6103.

R.B. Dietl, DC Nev., 2002-1 USTC ¶50,201, 180 FSupp2d 1150.

The government was not entitled to summary judgment with respect to an individual's Fourth Amendment Bivens claim that a former IRS attorney unlawfully seized financial documents in a warrantless search of her home. Although the taxpayer proffered minimal evidence, if a jury believed that the IRS agent did not schedule a meeting with the taxpayer's accountant at the taxpayer's home on the day in question, the weight of circumstantial evidence could support a finding that the IRS agent illegally entered the taxpayer's home. Consequently, any qualified immunity claim by the government could be overcome.

M.A. Tobin, DC Ky., 2002-1 USTC ¶50,260.

The president of a corporation did not have standing to sue for damages incurred in connection with collection of taxes. The IRS had taken collection actions against the corporation, not against the individual; thus, only the corporation had standing to sue for disclosure of return information.

A.R. Ruiz, DC P.R., 2003-1 USTC ¶50,161.

An action for damages as a result of the disclosure of return information was delayed six months pending a criminal investigation. Although the taxpayer was able to demonstrate damage to both her business and reputation, the interest of the IRS in maintaining the privacy of its criminal investigation outweighed the interest of the taxpayer in immediately proceeding with the action.

T.J. Turley, DC Mo., 2002-2 USTC ¶50,642.

A claim for damages based on the IRS's disclosure of an individual's tax return information to the Federal Bureau of Investigation was dismissed because suit was filed more than two years after the individual became aware of the disclosure. Moreover, the taxpayer also asserted the same claim in a suit filed six years earlier. The taxpayer's request that the trial court recognize an equitable exception to the doctrine of res judicata lacked merit.

A.T. McQueen, DC Tex., 2003-1 USTC ¶50,451.

An accountant's suit for damages alleging that the IRS made unauthorized disclosures of his return information when it solicited information from third parties was dismissed. Although Code Sec. 7431 provided a remedy for taxpayers whose return information was improperly disclosed, the disclosures at issue did not involve any information in connection with the accountant's own returns. The information allegedly disclosed to the third parties by the IRS revealed the accountant's identity and appeared to be related to the nature, source, or amount of his income.

F.L. Gonser, DC Ga., 2003-1 USTC ¶50,464.

An individual was not entitled to damages under Code Sec. 7431 for the IRS's alleged unlawful disclosures of his confidential tax return information through the filing of tax liens. Code Sec. 7433 provides the exclusive remedy where the alleged disclosures were made in connection with tax-collection activity. Since the alleged disclosures were made in connection with the filing of tax liens, they were made in connection with tax-collection activity.

P.B. Evans, DC D.C., 2007-1 USTC ¶50,418, 478 FSupp2d 68.

Similarly.

L. Martin, DC D.C., 2007-1 USTC ¶50,419.

Similarly.

L. Koerner, DC D.C., 2007-1 USTC ¶50,420, 471 FSupp2d 125.

Similarly.

E.M. Glass, DC D.C., 2007-1 USTC ¶50,472, 480 FSupp2d 162.

Similarly.

C. Radcliffe, DC D.C., 2007-1 USTC ¶50,501.

A federal district court lacked subject matter jurisdiction over an individual's Code Sec. 7431 damages claim for alleged unlawful disclosures of her confidential tax return information. Code Sec. 7433 provides the exclusive remedy for unlawful disclosures made in connection with tax-collection activity.

R.H. Miller, DC-D.C., 2007-2 USTC ¶50,589.

An individual could not claim damages for the alleged unauthorized disclosure of her income tax return information by an insurance company because the disclosure of her confidential return information was not an unauthorized disclosure by the IRS. Code Sec. 7431 was not applicable because the insurance company did not obtain the individual's return information from the IRS; rather, the individual had provided it to the insurance company for the purpose of evaluating a third-party insurance claim.

S.L. Cannon v. Zurich North America, DC Ariz., 2007-2USTC ¶50,745.


[87-2 USTC ¶9623] Paul W. Husby and Gina L. Husby, Plaintiffs v. United States of America, Defendant
U.S. District Court, No. Dist. Calif., C-87-1604 SAW, 11/6/87, 672 FSupp 442

[Code Secs. 6103 , 7430 , 7431 and Fed. R. Civ. Proc. 11--Result unchanged by the Tax Reform Act of 1986]

Treasury Department: Personnel: Disclosure of returns and return information: Civil damages: Computer system error: Sanctions: Frivolous suit: Suits by taxpayers: Courts: Award of costs and attorneys' fees.--The IRS was liable for making unauthorized disclosures of a couple's nonpublic tax return information to third parties as the result of alleged computer system errors; however, sanctions of costs and attorney's fees were not granted to the taxpayers. Confidential return information was not transformed into nonconfidential information by virtue of the taxpayers' petition to challenge IRS notices of deficiency nor did the filing of that petition preclude the taxpayers from "enjoying the protections of [Code Sec.] 6103." The disclosures made in various tax liens were not necessary to official duties because the IRS had admitted that the underlying assessments were improper "long before the first disclosure to a third party was made." A previously prohibited collateral attack upon a levy or assessment did not exist because Code Sec. 6103(k)(6) did not authorize disclosures made after the government had admitted that the underlying assessment was in error. The IRS was found liable because it did not contest its own negligence; furthermore, the IRS was not able to raise a good faith defense because its error was allegedly caused by the computer system rather than someone's good faith misinterpretation of Code Sec. 6103 . Sanctions were not imposed under Fed. R. Civ. Proc. 11 because the government's actions were not frivolous. Furthermore, costs and attorney's fees were not awarded to the taxpayers because they would have the opportunity to prove damages (including costs and fees) at trial. BACK REFERENCES: 87FED ¶5209.75, 87FED ¶5785B.11 and 87FED ¶5786A.07
Montie S. Day, Jon R. Vaught, Day Law Corp., 80 Swan Way, Oakland, Calif. 94621, for plaintiffs. Joseph P. Russoniello, United States Attorney, Jay R. Weill, Assistant United States Attorney, San Francisco, Calif. 94102, for defendant.
MEMORANDUM AND ORDER
WEIGEL, Senior District Judge:
This is an action by taxpayers Paul and Gina Husby under 26 U.S.C. §7431 for unauthorized disclosure of tax return information by the Internal Revenue Service (IRS). Defendant United States moves for summary judgment, and plaintiffs file a cross motion for partial summary judgment on the issue of liability, as well as a motion for sanctions.
The material facts are not in dispute. The Internal Revenue Service admits error in its deficiency assessment against plaintiffs and in its subsequent collection activity, including levies on plaintiffs' assets. The sole question is whether plaintiffs are entitled to damages under the civil remedies provision of the Internal Revenue Code, 26 U.S.C. §7431 , providing that
If any officer or employee of the United States knowingly, or by reason of negligence, discloses any return or return information with respect to a taxpayer in violation of any provision of section 6103 , such taxpayer may bring a civil action for damages against the United States in a district court of the United States.
26 U.S.C.A. §7431(a)(1) (West Supp. 1987).
Section 6103 sets forth the general rule that returns and return information are confidential and that officers and employees of the United States shall not disclose such information "except as authorized by this title." 26 U.S.C.A. §6103(a) .
BACKGROUND
On March 11, 1986, the Commissioner of the Internal Revenue Service mailed plaintiffs a Notice of Deficiency for alleged income taxes due and owing for 1982. On June 9, 1986, plaintiffs filed a Petition with the United States Tax Court, seeking a redetermination of the deficiency. The IRS filed an answer on August 6, 1986.
On September 1, 1986, the IRS made an assessment against plaintiffs for the alleged deficiency, demanding payment of some forty-seven thousand dollars. Defendant admits that, under 26 U.S.C. §6213(a) , this assessment should not have been made, because plaintiffs had filed the said Petition with the Tax Court. On September 19, 1986, plaintiffs' counsel notified the IRS in writing that the assessment was illegal and cautioned that any liens or attempts to levy pursuant to the invalid assessment might constitute unauthorized disclosure in violation of 26 U.S.C. §6103 .
On October 6, 1986, the IRS acknowledged receipt of the September 19 letter, informing plaintiffs that their inquiry was being forwarded to another IRS office.
By notice dated November 10, 1986, the IRS made further demand for payment. On November 13, plaintiffs' counsel once again wrote to the IRS, warning of possible violations of §6213 and §6103 . Soon thereafter, plaintiffs' counsel received a telephone call from Ms. Debra K. Estrem, an attorney for the IRS, acknowledging the mistake by the IRS and assuring that no further collection activity would occur. Ms. Estrem also requested that plaintiffs' counsel inform her immediately if further bills were received.
In spite of all this, the IRS on December 15 again demanded payment in satisfaction of the alleged deficiency. On January 16, 1987, plaintiff Paul Husby and his counsel met with an appeals officer of the IRS--a Mr. Whitman--in connection with the Tax Court Petition. At that meeting, plaintiffs' counsel again stated plaintiffs' position that the assessment was illegal and that plaintiffs were willing to pursue judicial action to prevent disclosure of tax information to third parties.
On January 19, plaintiffs received yet another notice and demand for payment. Plaintiffs' counsel responded on February 4, 1987, with a letter to Mr. Whitman, again warning that seizing of plaintiffs' assets pursuant to the illegal assessment would trigger action by plaintiffs under 26 U.S.C. §7431 . Included with this letter was a copy of the January 19 demand letter.
Despite this series of exchanges between plaintiffs, their counsel, and the IRS, the IRS on March 23, 1987 served a notice of levy on the San Francisco Police Credit Union and collected funds of $3,789.53 held by plaintiffs. On April 3, 1987, another notice of levy was served, this time on L.F. Rothschild Unterberg Towbin, a stockbroker.
On April 7, plaintiffs obtained an order from this Court, enjoining defendant from
(A) Disclosing or presenting to third parties tax return information as described in Title 26 United States Code, Section 6103 , whether in the form of a lien, levy, or other demand, or information relating to any proposed income tax liability for the calendar year 1982;
(B) From liening, leving [sic], taking, receiving, seizing or otherwise appropriating or collecting assets of the plaintiffs for satisfaction of any income tax liability for the calendar year 1982;
During the hearing preceding issuance of the order, the IRS admitted that the original assessment and all collection activity pursuant to it were in error.
Soon after the issuance of the order, yet another notice of levy was served on L.F. Rothschild Unterberg Towbin. Also on April 13, the IRS filed a Notice of Federal Tax Lien Under Internal Revenue Law in the County of Marin.
On April 17, the IRS refunded to plaintiffs the $3,789.53 collected from the San Francisco Police Credit Union.
On April 23, the IRS served a release of levy on the Bank of America, Gina Husby's employer, and the San Diego Gas & Electric Company. Whether any levy had originally been served on these two companies is not clear. On April 30, the Marin County lien was released.
The government in its affidavits blames the IRS computer system for the problems.
The parties' cross motions for summary judgment raise three issues for this Court: (1) whether the information disclosed by the IRS was already a matter of public record and therefore not entitled to confidential treatment under §6103 ; (2) whether the disclosures were authorized under §6103(k)(6) ; and (3) whether the good faith exception of §7431(b) applies to relieve defendant of liability.
CONFIDENTIALITY OF THE DISCLOSED INFORMATION
Defendant does not contest that the information disclosed was "return information" within the scope of §7431 . Instead defendant argues that plaintiffs' Tax Court Petition, which is a matter of public record, already disclosed the taxpayers' names, social security numbers, and the fact that plaintiffs owed the government back taxes. According to defendant, "all of the information which is the subject of this action was a matter of public record in the Tax Court," and therefore "such information no longer retains its confidential nature under Section 6103(a) . Defendant's Memorandum in Support of Motion for Summary Judgment at 13.
Defendant's contention is factually inaccurate. The Tax Court Petition does not disclose that plaintiffs owe the government back taxes. That is the very issue to be decided by the Tax Court. As plaintiffs point out, significant information disclosed by defendant was not contained in the Tax Court Petition. There was no public record of outstanding tax assessments against plaintiffs until defendant's disclosure. The existence of the liens and levies could not have been disclosed by plaintiffs in their Petition, since such liens and levies did not exist at the time of the filing. Defendant was the first to disclose this information.
This Court cannot agree with defendant that the filing of a Tax Court Petition containing only taxpayers' names and social security numbers changes all of taxpayers' return information from confidential to non-confidential, thereby extinguishing all expectations of privacy under §6103 . 1 If defendant's reading of §6103 were adopted, taxpayers could either challenge government notices of deficiency by filing Petitions with the United States Tax Court, or they could enjoy the protections of §6103 against unauthorized disclosure, but not both. Under defendant's theory, once the Petition is filed, all return information related to the dispute becomes fair game for IRS disclosure, §6103 notwithstanding. Congress could not have intended such an absurd result.
AUTHORIZATION UNDER §6103(K)(6)
Defendant argues that §6103(k)(6) authorizes the actions taken by the IRS. That subsection reads, in pertinent part:
An internal revenue officer or employee may, in connection with his official duties relating to any audit, collection activity, or civil or criminal tax investigation or any other offense under the internal revenue laws, disclose return information to the extent that such disclosure is necessary in obtaining information, which is not otherwise reasonably available, with respect to the correct determination of tax, liabilities for tax, or the amount to be collected or with respect to the enforcement of any other provision of this title.
The plain language of this subsection authorizes only disclosures which are necessary in obtaining information related to official duties. The disclosures at issue clearly were not necessary to official duties because the underlying assessment was improper.
Defendant asserts that once an assessment is made, whether proper or improper, §6103(k)(6) authorizes employees of the IRS to disclose as necessary. This argument was rejected by the Eighth Circuit in Rorex v. Traynor [85-2 USTC ¶9636 ], 771 F.2d 383 (8th Cir. 1985) (Disclosure pursuant to an unlawful levy violates §6103(a) and is not authorized under §6103(k)(6) ). The Court there reasoned that to ignore the legality of the underlying levy would allow IRS employees to "disclose information about any taxpayer simply by making the disclosure in the form of a notice of levy." Id. at 386.
Defendant argues that since taxpayers are barred by 26 U.S.C. §7426 from bringing actions for wrongful levies, they should not be allowed a collateral attack under §7431 : "If, as plaintiffs contend, wrongful disclosure damages actions can be brought by taxpayers under Section 7431 whenever a levy or lien is determined to be defective, a flood of previously prohibited litigation could result." Defendant's Memorandum at 11.
First of all, plaintiffs nowhere contend that wrongful disclosure actions should be permitted any time a levy or lien is determined to be defective. Moreover, this Court in holding that defendant's disclosures were not authorized under §6103(k)(6) because of the illegality of the underlying assessment will not cause a downpour of "previously prohibited litigation" which defendant fears. The case at hand presents no problem as to collateral attack of a levy or assessment. All parties agree that the assessment was error. Long before the first disclosure to a third party was made, defendant had already admitted that the original assessment should not have been made. Even after defendant admitted before this Court that the assessment and subsequent collection activity were improper, disclosure was made in the form of a tax lien. The provisions of §6301(k)(6) do not authorize disclosures made after the government admits that the underlying assessment was in error.
As the disclosures at issue violated §6103(a) , that requirement for bringing action under §7431 is satisfied. The other requirement is that the disclosure be made knowingly or negligently. Defendant does not contest negligence. Therefore, the Court finds Defendant United States liable under §7431(a)(1) as a matter of law.
GOOD FAITH DEFENSE UNDER §7431(B)
Subsection (b) of §7431 provides that
No liability shall arise under this section with respect to any disclosure which results from a good faith, but erroneous, interpretation of section 6103 .
Defendant contends that since the disclosures were the result of honest mistakes, the good faith defense should apply. However, §7431(b) does not create a general good faith defense; on its face it applies only to good faith misinterpretations of §6103 . Defendant fails to explain who, if anyone, made any such interpretation of that statute, or what the erroneous interpretation might have been.
Moreover, defendant's general position as illustrated in its memoranda and affidavits is that this unfortunate incident was really nobody's fault, that a computer is to blame. Likewise, it is clear from defendant's submissions that no one made any interpretation of §6103 . The IRS cannot collectively qualify as having made a good faith but erroneous interpretation of §6103 . Therefore, the good faith defense is not available.
PLAINTIFFS' MOTION FOR SANCTIONS
As defendant's motion was not frivolous under Fed.R.Civ.P. Rule 11, that cannot serve as a basis for granting plaintiff's motion for sanctions. As to plaintiffs' fees and costs in obtaining the Court order which defendant subsequently violated, the Court finds that sanctions at this time are not the appropriate vehicle for obtaining such relief. Plaintiffs will be allowed ample opportunity to prove damages, including costs and fees, at trial.
Accordingly,
IT IS HEREBY ORDERED that
(1) plaintiffs' motion for summary judgment as to defendant's liability is GRANTED;
(2) defendant's motion for summary judgment is DENIED; and
(3) plaintiffs' motion for sanctions is DENIED.
1 The Court finds persuasive the reasoning in Rodgers v. Hyatt that §6103 protection does not turn on the confidential or non-confidential status of the information disclosed, but on whether the disclosure was authorized under §6103 . Even if the information at issue had been previously disclosed in a court proceeding between taxpayers and the government, that should not remove the prohibition against government disclosure absent some express authorization.
In any event, because the information at issue in this case had not been previously disclosed, the Court need not reach the issue presented in Rodgers.

IRS has published 43 frivolous positions which can be treated by the IRS as tax fraud. Anyone who has taken these positions should immeditately call our office at 703 425-1400 and ask for "tax attorney help" especially if you have any unfiled tax returns.

Notice 2008-14 , I.R.B. 2008-4, January 14, 2008.

[ Code Secs. 6159, 6320, 6330, 6702, 7122 and 7811]


Procedure: Filing: Penalties, civil: Frivolous claims. --
The IRS has identified 43 frivolous positions that have been deemed frivolous by courts or have no basis for validity in existing law. These positions are frivolous for purposes of the Code Sec. 6702(a) penalty for filing frivolous tax returns and the Code Sec. 6702(b) penalty for filing specified frivolous submissions, such as requests for Collection Due Process (CDP) hearings, applications for installment agreements, offers in compromise, and taxpayer assistance orders. Included in the list are four new positions that relate to a misinterpretation of the Ninth Amendment regarding objections to military spending, erroneous claims that taxes are owed only by persons with a fiduciary relationship to the U.S. or IRS, a nonexistent "Mariner's Tax Deduction," or something similar, related to invalid deductions for meals and misuse or excessive use of the credit for fuels under Code Sec. 6421. Notice 2007-30, I.R.B. 2007-14, 883, is modified and superseded.





PURPOSE

Positions that are the same as or similar to the positions listed in this Notice are identified as frivolous for purposes of the penalty for a "frivolous tax return" under section 6702(a) of the Internal Revenue Code and the penalty for a "specified frivolous submission" under section 6702(b). Persons who file a purported return of tax, including an original or amended return, based on one or more of these positions are subject to a penalty of $5,000 if the purported return of tax does not contain information on which the substantial correctness of the self-assessed determination of tax may be judged or contains information that on its face indicates the self-assessed determination of tax is substantially incorrect. Likewise, persons who submit a "specified submission" (namely, a request for a collection due process hearing or an application for an installment agreement, offer-in-compromise, or taxpayer assistance order) based on one or more of the positions listed in this Notice are subject to a penalty of $5,000. The penalty may also be applied if the purported return or any portion of the specified submission is not based on a position set forth in this Notice, yet reflects a desire to delay or impede the administration of Federal tax laws for purposes of section 6702(a)(2)(B) or 6702(b)(2)(A)(ii).



BACKGROUND

Section 407 of Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, 120 Stat. 2922, 2960-62 (2006), amended section 6702 to increase the amount of the penalty for frivolous tax returns from $500 to $5,000 and to impose a penalty of $5,000 on any person who submits a "specified frivolous submission." A submission is a "specified frivolous submission" if it is a "specified submission" (defined in section 6702(b)(2)(B) as a request for a hearing under section 6320 or 6330 or an application under section 6159, 7122 or 7811) and any portion of the submission (i) is based on a position identified by the Secretary as frivolous or (ii) reflects a desire to delay or impede administration of the Federal tax laws. Section 6702 was further amended to add a new subsection (c) requiring the Secretary to prescribe, and periodically revise, a list of positions identified as frivolous. Notice 2007-30, 2007-14 I.R.B. 883, contained the prescribed list. This Notice revises the list to add more positions identified as frivolous. The positions that have been added are found in paragraphs 9(g), 11, 14 and 25.



DISCUSSION

Frivolous Positions. Positions that are the same as or similar to the following are frivolous.
(1) Compliance with the internal revenue laws is voluntary or optional and not required by law, including arguments that:

a. Filing a Federal tax or information return or paying tax is purely voluntary under the law, or similar arguments described as frivolous in Rev. Rul. 2007-20, 2007-14 I.R.B. 863.

b. Nothing in the Internal Revenue Code imposes a requirement to file a return or pay tax, or that a person is not required to file a tax return or pay a tax unless the Internal Revenue Service responds to the person's questions, correspondence, or a request to identify a provision in the Code requiring the filing of a return or the payment of tax.

c. There is no legal requirement to file a Federal income tax return because the instructions to Forms 1040, 1040A, or 1040EZ or the Treasury regulations associated with the filing of the forms do not display an OMB control number as required by the Paperwork Reduction Act of 1980, 44 U.S.C. §3501 et seq., or similar arguments described as frivolous in Rev. Rul. 2006-21, 2006-1 C.B. 745.

d. Because filing a tax return is not required by law, the Service must prepare a return for a taxpayer who does not file one in order to assess and collect tax.

e. A taxpayer has an option under the law to file a document or set of documents in lieu of a return or elect to file a tax return reporting zero taxable income and zero tax liability even if the taxpayer received taxable income during the taxable period for which the return is filed, or similar arguments described as frivolous in Rev. Rul. 2004-34, 2004-1. C.B. 619.

f. An employer is not legally obligated to withhold income or employment taxes on employees' wages.

g. Only persons who have contracted with the government by applying for a governmental privilege or benefit, such as holding a Social Security number, are subject to tax, and those who have contracted with the government may choose to revoke the contract at will.

h. A taxpayer may lawfully decline to pay taxes if the taxpayer disagrees with the government's use of tax revenues, or similar arguments described as frivolous in Rev. Rul. 2005-20, 2005-1 C.B. 821.

i. An administrative summons issued by the Service is per se invalid and compliance with a summons is not legally required.

(2) The Internal Revenue Code is not law (or "positive law") or its provisions are ineffective or inoperative, including the sections imposing an income tax or requiring the filing of tax returns, because the provisions have not been implemented by regulations even though the provisions in question either (a) do not expressly require the Secretary to issue implementing regulations to become effective or (b) expressly require implementing regulations which have been issued.

(3) A taxpayer's income is excluded from taxation when the taxpayer rejects or renounces United States citizenship because the taxpayer is a citizen exclusively of a State (sometimes characterized as a "natural-born citizen" of a "sovereign state"), that is claimed to be a separate country or otherwise not subject to the laws of the United States. This position includes the argument that the United States does not include all or a part of the physical territory of the 50 States and instead consists of only places such as the District of Columbia, Commonwealths and Territories ( e.g., Puerto Rico), and Federal enclaves ( e.g., Native American reservations and military installations), or similar arguments described as frivolous in Rev. Rul. 2004-28, 2004-1 C.B. 624, or Rev. Rul. 2007-22, 2007-14 I.R.B. 866.

(4) Wages, tips, and other compensation received for the performance of personal services are not taxable income or are offset by an equivalent deduction for the personal services rendered, including an argument that a taxpayer has a "claim of right" to exclude the cost or value of the taxpayer's labor from income or that taxpayers have a basis in their labor equal to the fair market value of the wages they receive, or similar arguments described as frivolous in Rev. Rul. 2004-29, 2004-1 C.B. 627, or Rev. Rul. 2007-19, 2007-14 I.R.B. 843.

(5) United States citizens and residents are not subject to tax on their wages or other income derived from sources within the United States, as only foreign-based income or income received by nonresident aliens and foreign corporations from sources within the United States is taxable, and similar arguments described as frivolous in Rev. Rul. 2004-30, 2004-1 C.B. 622.

(6) A taxpayer has been untaxed, detaxed, or removed or redeemed from the Federal tax system though the taxpayer remains a United States citizen or resident, or similar arguments described as frivolous in Rev. Rul. 2004-31, 2004-1 C.B. 617.

(7) Only certain types of taxpayers are subject to income and employment taxes, such as employees of the Federal government, corporations, nonresident aliens, or residents of the District of Columbia or the Federal territories, or similar arguments described as frivolous in Rev. Rul. 2006-18, 2006-1 C.B. 743.

(8) Only certain types of income are taxable, for example, income that results from the sale of alcohol, tobacco, or firearms or from transactions or activities that take place in interstate commerce.

(9) Federal income taxes are unconstitutional or a taxpayer has a constitutional right not to comply with the Federal tax laws for one of the following reasons:

a. The First Amendment permits a taxpayer to refuse to pay taxes based on religious or moral beliefs.

b. A taxpayer may withhold payment of taxes or the filing of a tax return until the Service or other government entity responds to a First Amendment petition for redress of grievances.

c. Mandatory compliance with, or enforcement of, the tax laws invades a taxpayer's right to privacy under the Fourth Amendment.

d. The requirement to file a tax return is an unreasonable search and seizure contrary to the Fourth Amendment.

e. Income taxation, tax withholding, or the assessment or collection of tax is a "taking" of property without due process of law or just compensation in violation of the Fifth Amendment.

f. The Fifth Amendment privilege against self-incrimination grants taxpayers the right not to file returns or the right to withhold all financial information from the Service.

g. The Ninth Amendment exempts those with religious or other objections to military spending from paying taxes to the extent the taxes will be used for military spending.

h. Mandatory or compelled compliance with the internal revenue laws is a form of involuntary servitude prohibited by the Thirteenth Amendment.

i. Individuals may not be taxed unless they are "citizens" within the meaning of the Fourteenth Amendment.

j. The Sixteenth Amendment was not ratified, has no effect, contradicts the Constitution as originally ratified, lacks an enabling clause, or does not authorize a non-apportioned, direct income tax.

k. Taxation of income attributed to a trust, which is a form of contract, violates the constitutional prohibition against impairment of contracts.

l. Similar constitutional arguments described as frivolous in Rev. Rul. 2005-19, 2005-1 C.B. 819.

(10) A taxpayer is not a "person" within the meaning of section 7701(a)(14) or other provisions of the Internal Revenue Code, or similar arguments described as frivolous in Rev. Rul. 2007-22, 2007-14 I.R.B. 866.

(11) Only fiduciaries are taxpayers, or only persons with a fiduciary relationship to the United States are obligated to pay taxes, and the United States or the Service must prove the fiduciary status or relationship.

(12) Federal Reserve Notes are not taxable income when paid to a taxpayer because they are not gold or silver and may not be redeemed for gold or silver.

(13) In a transaction using gold and silver coins, the value of the coins is excluded from income or the amount realized in the transaction is the face value of the coins and not their fair market value for purposes of determining taxable income.

(14) A taxpayer who is employed on board a ship that provides meals at no cost to the taxpayer as part of the employment may claim a so-called "Mariner's Tax Deduction" (or the like) allowing the taxpayer to deduct from gross income the cost of the meals as an employee business expense.

(15) A taxpayer may purport to operate a home-based business as a basis to deduct as business expenses the taxpayer's personal expenses or the costs of maintaining the taxpayer's household when the maintenance items or amounts as reported do not correspond to a bona fide home business, such as when they are grossly excessive in relation to the conceivable costs for some portion of the home being used exclusively and regularly as a business, or similar arguments described as frivolous by Rev. Rul. 2004-32, 2004-1 C.B. 621.

(16) A "reparations" tax credit exists, including arguments that African-American taxpayers may claim a tax credit on their Federal income tax returns as reparations for slavery or other historical mistreatment, that Native Americans are entitled to an analogous credit (or are exempt from Federal income tax on the basis of a treaty), or similar arguments described as frivolous in Rev. Rul. 2004-33, 2004-1 C.B. 628, or Rev. Rul. 2006-20, 2006-1 C.B. 746.

(17) A Native American or other taxpayer who is not an employer engaged in a trade or business may nevertheless claim (for example, in an amount exceeding all reported income) the Indian Employment Credit under section 45A, which explicitly requires, among other criteria, that the taxpayer be an employer engaged in a trade or business to claim the credit.

(18) A taxpayer's wages are excluded from Social Security taxes if the taxpayer waives the right to receive Social Security benefits, or a taxpayer is entitled to a refund of, or may claim a charitable-contribution deduction for, the Social Security taxes that the taxpayer has paid, or similar arguments described as frivolous in Rev. Rul. 2005-17, 2005-1 C.B. 823.

(19) Taxpayers may reduce or eliminate their Federal tax liability by altering a tax return, including striking out the penalty-of-perjury declaration, or attaching documents to the return, such as a disclaimer of liability, or similar arguments described as frivolous in Rev. Rul. 2005-18, 2005-1 C.B. 817.

(20) A taxpayer is not obligated to pay income tax because the government has created an entity separate and distinct from the taxpayer --a "straw man" --that is distinguishable from the taxpayer by some variation of the taxpayer's name, and any tax obligations are exclusively those of the "straw man," or similar arguments described as frivolous in Rev. Rul. 2005-21, 2005-1 C.B. 822.

(21) Inserting the phrase "nunc pro tunc" on a return or other document filed with or submitted to the Service has a legal effect, such as reducing a taxpayer's tax liability, or similar arguments described as frivolous in Rev. Rul. 2006-17, 2006-1 C.B. 748.

(22) A taxpayer may avoid tax on income by attributing the income to a trust, including the argument that a taxpayer can put all of the taxpayer's assets into a trust to avoid income tax while still retaining substantial powers of ownership and control over those assets or that a taxpayer may claim an expense deduction for the income attributed to a trust, or similar arguments described as frivolous in Rev. Rul. 2006-19, 2006-1 C.B. 749.

(23) A taxpayer may lawfully avoid income tax by sending income offshore, including depositing income into a foreign bank account.

(24) A taxpayer can claim the section 44 Disabled Access Credit to reduce tax or generate a refund, for example, by purportedly having purchased equipment or services for an inflated price (which may or may not have been actually paid), even though it is apparent that the taxpayer did not operate a small business that purchased the equipment or services to comply with the requirements of the Americans with Disabilities Act.

(25) A taxpayer may claim the section 6421 fuels tax credit, which is limited to gasoline used in an off-highway business use, even though the taxpayer did not purchase and use gasoline during the taxable period for which the credit is claimed for an off-highway business use. Also, if the taxpayer claims an amount of credit that is so disproportionately excessive to any (including zero) business income reported on the taxpayer's income tax return as to be patently unallowable ( e.g., a credit that is 150 percent of business income reported on Form 1040) or facially reflects an impossible quantity of gasoline given the business use, if any, as reported by the taxpayer.

(26) A taxpayer is allowed to buy or sell the right to claim a child as a qualifying child for purposes of the Earned Income Tax Credit.

(27) An IRS Form 23C, Assessment Certificate - Summary Record of Assessment, is an invalid record of assessment for purposes of section 6203 and Treas. Reg. §301.6203-1, the Form 23C must be personally signed by the Secretary of the Treasury for an assessment to be valid, the Service must provide a copy of the Form 23C to a taxpayer if requested before taking collection action, or similar arguments described as frivolous in Rev. Rul. 2007-21, 2007-14 I.R.B. 865.

(28) A tax assessment is invalid because the assessment was made from a section 6020(b) substitute for return, which is not a valid return.

(29) A statutory notice of deficiency is invalid because the taxpayer to whom the notice was sent did not file an income tax return reporting the deficiency or because the statutory notice of deficiency was unsigned or not signed by the Secretary of the Treasury or by someone with delegated authority.

(30) A Notice of Federal Tax Lien is invalid because it is not signed by a particular official (such as by the Secretary of the Treasury), or because it was filed by someone without delegated authority.

(31) The form or content of a Notice of Federal Tax Lien is controlled by or subject to a state or local law, and a Notice of Federal Tax Lien that does not comply in form or content with a state or local law is invalid.

(32) A collection due process notice under section 6320 or 6330 is invalid if it is not signed by the Secretary of the Treasury or other particular official, or if no certificate of assessment is attached.

(33) Verification under section 6330 that the requirements of any applicable law or administrative procedure have been met may only be based on one or more particular forms or documents (which must be in a certain format), such as a summary record of assessment, or that the particular forms or documents or the ones on which verification was actually determined must be provided to a taxpayer at a collection due process hearing.

(34) A Notice and Demand is invalid because it was not signed, was not on the correct form ( e.g., a Form 17), or was not accompanied by a certificate of assessment when mailed.

(35) The United States Tax Court is an illegitimate court or does not, for any purported constitutional or other reason, have the authority to hear and decide matters within its jurisdiction.

(36) Federal courts may not enforce the internal revenue laws because their jurisdiction is limited to admiralty or maritime cases or issues.

(37) Revenue Officers are not authorized to issue levies or Notices of Federal Tax Lien or to seize property in satisfaction of unpaid taxes.

(38) A Service employee lacks the authority to carry out the employee's duties because the employee does not possess a certain type of identification or credential, for example, a pocket commission or a badge, or it is not in the correct form or on the right medium.

(39) A person may represent a taxpayer before the Service or in court proceedings even if the person does not have a power of attorney from the taxpayer, has not been enrolled to practice before the Service, or has not been admitted to practice before the court.

(40) A civil action to collect unpaid taxes or penalties must be personally authorized by the Secretary of the Treasury and the Attorney General.

(41) A taxpayer's income is not taxable if the taxpayer assigns or attributes the income to a religious organization (a "corporation sole" or ministerial trust) claimed to be tax-exempt under section 501(c)(3), or similar arguments described as frivolous in Rev. Rul. 2004-27, 2004-1 C.B. 625.

(42) The Service is not an agency of the United States government but rather a private-sector corporation or an agency of a State or Territory without authority to administer the internal revenue laws.

(43) Any position described as frivolous in any revenue ruling or other published guidance in existence when the return adopting the position is filed with or the specified submission adopting the position is submitted to the Service.

Returns or submissions that contain positions not listed above, which on their face have no basis for validity in existing law, or which have been deemed frivolous in a published opinion of the United States Tax Court or other court of competent jurisdiction, may be determined to reflect a desire to delay or impede the administration of Federal tax laws and thereby subject to the $5,000 penalty.

The list of frivolous positions above will be periodically revised as required by section 6702(c).



EFFECTIVE DATE

This Notice is effective for submissions made and issues raised after Jan. 14, 2008. For submissions made and issues raised between March 16, 2007, and Jan. 14, 2008, Notice 2007-30 applies.



EFFECT ON OTHER DOCUMENTS

Notice 2007-30 is modified and superseded.



DRAFTING INFORMATION

The principal author of this notice is the Office of the Associate Chief Counsel (Procedure and Administration). For further information regarding this notice, contact the Office of the Associate Chief Counsel (Procedure and Administration), Branch 2, at (202) 622-4940 (not a toll-free call).

Joint Committee on Taxation List of Expiring Federal Tax Provisions 2007 --2020

January 14, 2008

110th Congress


LIST OF EXPIRING FEDERAL TAX PROVISIONS 2007-2020


Prepared by the Staff of the JOINT COMMITTEE ON TAXATION

January 11, 2008

JCX-1-08




CONTENTS


INTRODUCTION


I. FEDERAL TAX PROVISIONS EXPIRING 2007-2020




A. Provisions that Expired in 2007



B. Provisions Expiring in 2008



C. Provisions Expiring in 2009



D. Provisions Expiring in 2010



E. Provisions Expiring in 2011



F. Provisions Expiring in 2012



G. Provisions Expiring in 2013



H. Provisions Expiring in 2014



I. Provisions Expiring in 2015



J. Provisions Expiring in 2020



II. TEMPORARY DISASTER RELIEF FEDERAL TAX PROVISIONS EXPIRING 2007-2010




A. Temporary Disaster Relief Federal Tax Provisions that Expired in 2007



B. Temporary Disaster Relief Federal Tax Provisions Expiring in 2008



C. Temporary Disaster Relief Federal Tax Provisions Expiring in 2009



D. Temporary Disaster Relief Federal Tax Provisions Expiring in 2010





INTRODUCTION


This document,1 prepared by the staff of the Joint Committee on Taxation, provides a listing of tax provisions (other than those providing time-limited transition relief after the repeal of an underlying rule) that are currently scheduled to expire in 2007-2020 (with references to the applicable section of the Internal Revenue Code of 1986 or other applicable law). Expiring Federal tax provisions providing temporary disaster relief are separately listed in Part II of the document.

For purposes of compiling this list, the staff of the Joint Committee on Taxation considers a provision to be expiring if, at some statutorily specified date in the future, the provision expires completely or reverts to the law in effect before the present-law version of the provision. Certain provisions terminate on dates that refer to a taxpayer's taxable year and not a calendar year. For these provisions, the expiration dates listed in this document apply with respect to calendar year taxpayers. The expiration dates of such provisions may differ, however, with respect to fiscal year taxpayers or taxpayers with short taxable years.




I. FEDERAL TAX PROVISIONS2 EXPIRING 2007-2020





A. Provisions that Expired in 2007





___________________________________________________________________________________
Provision (Code section) Expiration Date

___________________________________________________________________________________



1. Credit for certain nonbusiness energy property (sec. 12/31/07
25C(g))




2. Personal tax credits allowed against regular tax and 12/31/07
alternative minimum tax ("AMT") (sec. 26(a)(2))3




3. Election to include combat pay as earned income for 12/31/07
purposes of earned income credit (sec.
32(c)(2)(B)(vi))




4. Tax credit for research and experimentation expenses 12/31/07
(sec. 41(h)(1)(B))




5. Indian employment tax credit (sec. 45A(f)) 12/31/07




6. Credit for certain expenditures for maintaining 12/31/07
railroad tracks (sec. 45G(f))




7. Date by which certain biomass or synthetic fuels 12/31/07
produced at certain qualified facilities must be sold
to be eligible for the credit for producing fuel from
a nonconventional source (sec. 45K(f)(1)(B))




8. Credit for energy efficient appliance (sec. 45M(b)) 12/31/07




9. Increased AMT exemption amount (sec. 55(d)(1)) 12/31/07




10.Deduction for certain expenses of elementary and 12/31/07
secondary school teachers (sec. 62(a)(2)(D))




11.Penalty-free withdrawals from retirement plans for 12/31/07
individuals called to active duty (sec. 72(t)(2)(G))




12.Use of qualified mortgage bonds to finance residences 12/31/07
for veterans without regard to first-time homebuyer
requirement (sec. 143(d)(2)(D))




13.Deduction of State and local general sales taxes (sec. 12/31/07
164(b)(5))




14.15-year straight-line cost recovery for qualified 12/31/07
leasehold improvements and qualified restaurant
improvements (sec. 168(e)(3)(E)(iv) and (v))




15.Seven-year recovery period for motorsports 12/31/07
entertainment complexes (sec. 168(i)(15)(D))




16.Accelerated depreciation for business property on an 12/31/07
Indian reservation (sec. 168(j)(8))




17.Encouragement of contributions of capital gain real 12/31/07
property made for conservation purposes (secs.
170(b)(1)(E) and 170(b)(2)(B))




18.Enhanced charitable deduction for contributions of 12/31/07
food inventory (sec. 170(e)(3)(C))




19.Enhanced charitable deduction for contributions of 12/31/07
book inventories to public schools (sec. 170(e)(3)(D))




20.Enhanced deduction for corporate contributions of 12/31/07
computer equipment for educational purposes (sec.
170(e)(6)(G))




21.Expensing of "brownfields" environmental remediation 12/31/07
costs (sec. 198(h))




22.Deduction allowable with respect to income 12/31/07
attributable to domestic production activities in
Puerto Rico (sec. 199(d)(7))




23.Archer medical savings accounts ("MSAs") (sec. 12/31/07
220(i)(2) and (3)(B))




24.Above-the-line deduction for qualified tuition and 12/31/07
related expenses (sec. 222(e))




25.Tax-free distributions from individual retirement 12/31/07
plans for charitable purposes (sec. 408(d)(8))




26.Special rule for sales or dispositions to implement 12/31/07
FERC or State electric restructuring policy (sec.
451(i)(3))




27.Modification of tax treatment of certain payments to 12/31/07
controlling exempt organizations (sec.
512(b)(13)(E)(iv))




28.Suspension of 100 percent-of-net-income on percentage 12/31/07
depletion for oil and gas from marginal wells (sec.
613A(c)(6)(H))




29.Treatment of certain dividends and assets of regulated 12/31/07
investment companies (secs. 871(k)(1)(C) and (2)(C),
881(e)(1)(A) and 2), 897(h)(4)(A)(ii), and 2105(d))




30.Basis adjustment to stock of S corporations making 12/31/07
charitable contributions of property (sec. 1367(a))




31.Qualified zone academy bonds . allocations of bond 12/31/07
authority (sec. 1397E(e)(1))




32.Tax incentives for investment in the District of
Columbia:

a. Designation of D.C. enterprise zone, employment tax 12/31/07
credit, and additional expensing (sec. 1400(f)(1))




b. Tax-exempt D.C. empowerment zone bonds (sec. 12/31/07
1400A(b))




c. Acquisition date for eligibility for zero-percent 12/31/07
capital gains rate for investment in D.C. for gains
through 12/31/12 (secs. 1400B(b)(2), (b)(3)(A),
(b)(4)(A)(i), (b)(4)(B)(i)(I), (e)(2), and (g)(2))




d. Tax credit for first-time D.C. homebuyers (sec. 12/31/07
1400C(i))




33.Definition of gross estate for regulated investment 12/31/07
company stock owned by a non resident not a citizen of
the United States (sec. 2105(d))




34.Disclosure of tax information to facilitate combined 12/31/07
employment tax reporting (sec. 6103(d)(5)(B))




35.Disclosure of return information to inform officials 12/31/07
of terrorist activities (sec. 6103(i)(3)(C)(iv))




36.Disclosure upon request of information relating to 12/31/07
terrorist activities (sec. 6103(i)(7)(E))




37.Disclosure of return information to carry out income 12/31/07
contingent repayment of student loans (sec.
6103(1)(13)(D))




38.Authority for undercover operations (sec. 7608(c)(6)) 12/31/07




39.Temporary increase in limit on cover over of rum 12/31/07
excise tax revenues (from $10.50 to $13.25 per proof
gallon) to Puerto Rico and the Virgin Islands (sec.
7652(f))




40.Tax on failure to comply with mental health parity 12/31/07
requirements applicable to group health plans (sec.
9812(f))4




41.American Samoa economic development credit (sec. 119 12/31/07
of Pub. L. No. 109-432)




3 The Economic Growth and Tax Relief Reconciliation Act of 2001 (Pub. L. No.
107-16, June 7, 2001) ("EGTRRA") made this provision permanent with respect to the
child tax credit and the adoption credit. The provisions of EGTRRA generally
sunset after 2010; see Part I.F., below. The allowance of the saver's credit
against regular tax and minimum tax is permanent.




4 Corresponding provisions are contained in section 712(f) of ERISA and section
2705(f) of the Public Health Service Act. These provisions also expire on December
31, 2007.







B. Provisions Expiring in 2008





___________________________________________________________________________________
Provision (Code section) Expiration Date

___________________________________________________________________________________



1. Airport and Airway Trust Fund excise taxes:




a. All but 4.3 cents per gallon of taxes on 2/29/08
noncommercial aviation kerosene and noncommercial
aviation gasoline (sec. 4081(d)(2)(B))5




b. Domestic and international air passenger ticket 2/29/08
taxes (sec. 4261(j)(1)(A)(ii))




c. Air cargo tax (sec. 4271(d)(1)(A)(ii)) 2/29/08




2. Reporting on certain acquisitions of interest in 8/17/08
insurance contracts in which certain exempt
organizations hold an interest (sec. 6050V)




3. Disclosure of tax return information for 9/30/08
administration of certain veterans programs (sec.
6103(l)(7)(D)(viii))




4. Credit for residential energy efficient property (sec. 12/31/08
25D(g))




5. Incentives for biodiesel and renewable diesel:




a. Income tax credits for biodiesel fuel, biodiesel 12/31/08
used to produce a qualified mixture, and small
agri-biodiesel producers (sec. 40A(g))




b. Income tax credits for renewable diesel fuel and 12/31/08
renewable diesel used to produce a qualified
mixture (sec. 40A(g))




c. Excise tax credits and outlay payments for 12/31/08
biodiesel fuel mixtures (secs. 6426(c)(6) and
6427(e)(5)(B))




d. Excise tax credits and outlay payments for 12/31/08
renewable diesel fuel mixtures (secs. 6426(c)(6)
and 6427(e)(5)(B))




6. Placed-in-service date for facilities eligible to 12/31/086
claim electricity production credit (sec. 45(d))




7. New markets tax credit (sec. 45D(f)(1)) 12/31/08




8. Credit for construction of new energy efficient homes 12/31/08
(sec. 45L(g))




9. Mine rescue team training credit (sec. 45N) 12/31/08




10.Increased credit for business solar energy property 12/31/08
(sec. 48(a)(2)(A)(i)(II))




11.Credit for hybrid solar lighting systems (sec. 12/31/08
48(a)(3)(A)(ii))




12.Credit for business installation of qualified fuel 12/31/08
cells and stationary microturbine power plants (sec.
48(c)(1)(E) and (c)(2)(E))




13.Issuance of clean renewable energy bonds (sec. 54(m)) 12/31/08




14.Five-year NOL carryback for certain electric utility 12/31/08
companies (sec. 172(b)(1)(I))




15.Energy efficient commercial buildings deduction (sec. 12/31/08
179D(h))




16.Election to expense advanced mine safety equipment 12/31/08
(sec. 179E)




17.Special expensing rules for certain film and 12/31/08
television productions (sec. 181(f))




18.Exceptions under subpart F for active financing income 12/31/08
(secs. 953(e)(10) and 954(h)(9))




19.Look-through treatment of payments between related 12/31/08
controlled foreign corporations under the foreign
personal holding company rules (sec. 954(c)(6))




20.FUTA surtax of 0.2 percent (sec. 3301(1)) 12/31/08




21.Special rate for qualified methanol or ethanol fuel 12/31/08
from coal (sec. 4041(b)(2)(D))




5 The 4.3-cents-per-gallon rate is permanent.




6 The placed-in-service date expired December 31, 2005, in the case of a qualified
facility using solar energy.







C. Provisions Expiring in 2009





___________________________________________________________________________________
Provision (Code section) Expiration Date

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1. Qualified green buildings and sustainable design 9/30/09
project bonds (sec. 142(l)(8))




2. Incentives for alternative fuel and alternative fuel
mixtures (excluding liquefied hydrogen):7




a. Excise tax credits and outlay payments for 9/30/09
alternative fuel (secs. 6426(d)(4) and
6427(e)(5)(C))




b. Excise tax credits and outlay payments for 9/30/09
alternative fuel mixtures (secs. 6426(e)(3) and
6427(e)(5)(C))




3. Alternative motor vehicle credit for qualified hybrid 12/31/09
motor vehicles other than passenger automobiles and
light trucks (sec. 30B(j)(3))




4. Alternative fuel vehicle refueling property 12/31/09
(non-hydrogen refueling property) (sec. 30C(g)(2))8




5. Credit for small refiners for production of diesel 12/31/09
fuel in compliance with EPA sulfur regulations for
small refiners (sec. 45H(c)(4))




6. Placed-in-service date for eligibility for tax credit 12/31/09
for the production of coke or coke gas (sec.
45K(g)(1))




7. Discharge of indebtedness on principal residence 12/31/09
excluded from gross income of individuals (sec.
108(a)(1)(E))




8. Increase in expensing (sec. 179(b)(1) and (2), (c)(2), 12/31/09
and (d)(1)(A)(ii))




9. Expensing of capital costs incurred by small refiners 12/31/09
for production of diesel fuel in compliance with EPA
sulfur regulations for small refiners (sec. 179B(a))




10.Allowance of additional IRA contributions in certain 12/31/09
bankruptcy cases (sec. 219(b)(5)(C))




11.Exclusion of gain or loss on sale or exchange of 12/31/09
certain brownfield sites from unrelated business
taxable income (sec. 512(b)(19)(K))