James L. and Leta A. Thurman - Page 13

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          42 T.C. 308, 330-333 (1964).  However, there is no defense of               
          substantial compliance for failure to comply with the essential             
          requirements of the governing statute.  Prussner v. United                  
          States, 896 F.2d 218, 224 (7th Cir. 1990); see also Tipps v.                
          Commissioner, supra at 468; Penn-Dixie Steel Corp. v.                       
          Commissioner, 69 T.C. 837, 846 (1978); Rockwell Inn, Ltd. v.                
          Commissioner, T.C. Memo. 1993-158.  We have looked to the                   
          specific requirements of the election provision to determine                
          whether they relate to the substance or "essence" of the                    
          statutory and regulatory scheme.  Young v. Commissioner, 83 T.C.            
          831, 838 (1984), affd. 783 F.2d 1201 (5th Cir. 1986); Tipps v.              
          Commissioner, supra.  In ascertaining whether a particular                  
          provision of a regulation must be literally complied with, it is            
          necessary to examine its purpose, its relationship to other                 
          provisions, the terms of the underlying statute, and the                    
          consequences of failing to comply with the provision in question.           
          Young v. Commissioner, supra; Hewlett-Packard Co. v.                        
          Commissioner, supra at 748-749; Valdes v. Commissioner, 60 T.C.             
          910, 913 (1973).  In addition, the omission of the required                 
          material must not operate to respondent’s prejudice.  Tipps v.              
          Commissioner, supra; Taylor v. Commissioner, supra, at 1079-1080;           
          Rockwell Inn, Ltd. v. Commissioner, supra.                                  
               In the case at hand, respondent's determination that EMFI              
          elected to distribute earnings and profits is not based upon an             





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