t c memo united_states tax_court don and margaret taylor petitioners v commissioner of internal revenue respondent docket no filed date noel bisges for petitioners douglas polsky for respondent memorandum findings_of_fact and opinion armen special_trial_judge this case was heard pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_182 unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable years in continued respondent determined deficiencies in petitioners' federal income taxes for the taxable years and in the amounts of dollar_figure and dollar_figure respectively as well as accuracy-related_penalties under sec_6662 in the amounts of dollar_figure and dollar_figure respectively after concessions by petitioners the only issue for decision is whether petitioners are entitled to capital_loss carryovers for the years in issue based on the sale of a residential property we hold that they are not findings_of_fact some of the facts have been stipulated and are so found petitioners resided in gravois mills missouri at the time that their petition was filed with the court petitioners are husband and wife prior to date petitioners resided and owned real_property in thousand palms california the thousand palms property the thousand palms property included a single-family home a work area a 20-foot by 40-foot garage used by petitioner mr taylor in his construction business and a mobile home these structures were located on a continued issue and all rule references are to the tax_court rules_of_practice and procedure petitioners have conceded the schedule c adjustments for the years in issue and the penalties under sec_6662 relating to these adjustments acre parcel of land for tax purposes petitioners treated percent of this property as used for business petitioners planned to move to missouri for semiretirement in this regard petitioners entered into a contract to purchase a campground in missouri the missouri property in date petitioners paid an dollar_figure earnest money deposit toward this contract petitioners intended to use a portion of the missouri property as a residence and to rent the other portions to supplement their retirement income thereafter in date petitioners listed the thousand palms property for sale at a listing price of dollar_figure given its uniqueness petitioners hoped that an individual in the construction business would be interested in their property sometime in date petitioners were contacted by a married couple mr and mrs norris the norrises the norrises proposed a transaction to exchange properties with petitioners the norrises owned a single-family home on a 1-acre lot in palm springs california the palm springs house the palm springs house was listed at dollar_figure and had been on the market for more than months even though palm springs and thousand palms are neighboring communities their residential real_estate markets are not similar palm springs homes are typically larger and much more expensive than the homes in thousand palms petitioners had not previously owned any property in palm springs petitioner mr taylor investigated the palm springs residential sales market to determine the value of the palm springs house subsequently petitioners and the norrises agreed that they would treat the exchange of the two properties as two separate sales with a reduced selling_price for each property of dollar_figure the california residential real_estate market declined sometime in the early 1990's it is not clear whether petitioners were aware of this decline at the time of this transaction petitioners closed the sale of their thousand palms property in date in consideration petitioners received cash in the amount of dollar_figure unsecured notes in the amount of dollar_figure mortgage relief in the amount of dollar_figure and a dollar_figure payment to petitioners' real_estate broker petitioners paid for their purchase of the palm springs house by obtaining a dollar_figure mortgage and using the funds obtained therefrom to pay off the norrises' existing mortgage petitioners did not pay out-of- pocket cash or incur any other debt to pay for this purchase petitioners satisfied the remaining dollar_figure due by transferring equity from the thousand palms property to the norrises within a few weeks after the sale exchange of the thousand palms property petitioners closed their purchase of the missouri property at a price of dollar_figure petitioners used the cash obtained from the thousand palms property sale exchange for the missouri property purchase upon obtaining the missouri property petitioners promptly moved to missouri at about the same time ie immediately after obtaining the palm springs house petitioners listed the house for sale with a real_estate agent the list price for the palm springs house was dollar_figure but the listing stated that as petitioners were absentee owners they would accept most offers in the interim petitioners did not offer the palm springs house for rent the palm springs house had never been lived in and renting it might have caused a reduction in the value of the house in the meanwhile petitioners incurred mortgage interest_expense on the palm springs house mortgage petitioners paid the mortgage interest_expense through an escrow account set up by petitioners at the time of their purchase petitioners established the escrow account for their convenience because they intended to sell the palm springs house immediately petitioner mr taylor was a real_estate agent however he used his real_estate agent's license in the contracting business and not in the sales business he was not the listing agent for the sale of the thousand palms property or subsequently for the palm springs house however petitioners had in the past purchased low cost residential properties in thousand palms rented the same and subsequently sold such properties at a profit and purchased raw land cleaned and leveled off the land and resold the land at a profit petitioners sold the palm springs house in date only months after purchasing it for dollar_figure petitioners claimed a capital_loss of dollar_figure with respect to this sale on their federal_income_tax return petitioners offset the gain on their sale of the thousand palms property and certain other gains against the capital_loss claimed from the sale of the palm springs house having offset these gains petitioners reported a short-term_capital_loss carryover on their return in the amount of dollar_figure petitioners then utilized portions of the loss carryover in the years in issue to offset certain capital_gains in those years respondent determined that petitioners did not incur a capital_loss on the sale of the palm springs house and therefore disallowed the carryover to the years in issue profit_motive opinion respondent's determination in the notice_of_deficiency essentially embodies the notion that the loss from the sale of a for reasons not discussed in the record respondent did not determine any deficiency for ie for the year of the alleged loss personal_residence is nondeductible a principle which is indisputable see sec_1_165-9 income_tax regs respondent contends that the sale exchange of the thousand palms property for the palm springs house and the immediate sale thereafter of the palm springs house was in essence a means to enable petitioners to complete the sale of their thousand palms property consequently respondent maintains that petitioners did not purchase the palm springs house with the requisite profit intent to claim a loss under sec_165 petitioners contend that they did not purchase the palm springs house as a personal_residence rather that they purchased it as an investment therefore they maintain that the loss on the sale of the palm springs house constitutes a loss incurred in a transaction entered into for profit under sec_165 and entitles them to a capital_loss_carryover for the years in issue we disagree with petitioners for the following reasons sec_165 provides that an individual is entitled to claim a loss incurred in a transaction entered into for profit even if the transaction is not connected with a trade_or_business sec_183 and the regulations promulgated thereunder provide guidance as to whether a transaction is entered into for profit the regulations set forth a nonexhaustive list of factors that may be considered in deciding whether a profit objective exists some of these factors include the manner in which the taxpayer carries on the activity the expertise of the taxpayer or the taxpayer's advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that the assets used in the activity may appreciate in value sec_1_183-2 income_tax regs no single factor nor even the existence of a majority of factors favoring or disfavoring the existence of a profit objective is controlling id rather the relevant facts and circumstances of the case are determinative 72_tc_411 affd without published opinion 647_f2d_170 9th cir furthermore the existence of the requisite profit objective is a question of fact that must be determined on the basis of the entire record 63_tc_375 in resolving this factual question greater weight is accorded to objective facts than a taxpayer's mere statement of intent 85_tc_557 72_tc_659 68_tc_696 see sec_1_183-2 income_tax regs to be entitled to a loss under sec_165 petitioners' primary motive for entering into the transaction must have been to make a profit 82_tc_1001 the term primary is defined as of first importance or principally see 383_us_569 fox v commissioner supra 81_tc_210 although profit need not be the sole motive if the taxpayer's intent to make a profit is merely incidental the taxpayer will not be entitled to the loss under sec_165 cotner v commissioner tcmemo_1996_428 consequently if the taxpayer's overriding purpose for purchasing the real_estate is personal the requisite profit_motive cannot be established see o'neill v commissioner tcmemo_1985_92 nicath realty co v commissioner tcmemo_1966_246 also if the taxpayer purchases property with the expectation of making a profit on the sale after it has served the personal purposes for which it was initially purchased then profit_motive is not the primary motive 34_tc_528 we now analyze whether petitioners possessed the requisite profit_motive to claim a loss under sec_165 we first consider the relevant factors outlined under sec_1_183-2 income_tax regs our first inquiry is whether petitioners purchased the palm springs house in a businesslike manner we find that petitioners' behavior in purchasing the palm springs house was not businesslike petitioners were not aware of the palm springs house until the same was brought to their attention by the norrises the norrises proposed that they would purchase petitioners' thousand palms property only if petitioners would purchase the palm springs house we are guided in this regard by o'neill v commissioner supra where in an analogous situation the property had been brought to the taxpayer's attention by her daughter there the taxpayer's daughter had been unable to obtain financing and requested that the taxpayer purchase the property for the daughter's rental use we held that the taxpayer had not purchased the residential_real_property in a businesslike manner and hence that the taxpayer did not possess the requisite profit_motive similarly we do not think that petitioners purchased the palm springs house in a businesslike manner we next find that the time and effort petitioners spent in carrying on the activity is not indicative of a profit_motive petitioners point out that they took the time to investigate the value of the palm springs house by looking at comparables however any prudent purchaser of residential property would investigate the value of comparable_property accordingly such action in and of itself is not indicative of a profit_motive petitioners have not indicated that they spent any other time or effort to ensure the profitability of their alleged investment in fact petitioners immediately listed the palm springs house for resale and moved to missouri for semiretirement once in missouri there is no indication that petitioners engaged in any activity designed to enhance the profitability of their alleged investment regarding the rental business of residential property we have previously held that generally residential property is not purchased for investment purposes where the property is located in a distant city if there are additional costs involved in its management o'neill v commissioner supra we think that given the circumstances the same principle applies here we find that the amount of time petitioners spent on the purchase and resale of the palm springs house indicates that petitioners did not possess the requisite profit_motive as to petitioners' expertise we find that although petitioner mr taylor was a real_estate agent he did not use his expertise in this endeavor first petitioner mr taylor used his real_estate agent's license in the contracting business and not in the sales business next any familiarity that petitioner mr taylor may have had with the residential real_estate market was limited to low-price housing and raw land in the thousand palms locality the palm springs residential real_estate market was different from the thousand palms residential real_estate market furthermore petitioner mr taylor was not the listing agent on the sale of the palm springs house rather petitioners moved to missouri immediately after the purchase of the house and listed their house with another real_estate agent thus even if petitioner mr taylor possessed any expertise in the residential real_estate activities he did not utilize the same in the resale of the palm springs house we also believe that petitioners did not obtain the palm springs house with the expectation that it might appreciate in value petitioners contend that they expected to make a quick profit from the sale of the palm springs house petitioners purchased the palm springs house at a reduced price of dollar_figure after the house had been on the market for months this price was dollar_figure less than the price at which it was listed petitioners maintain that they were not aware of any decline in the real_estate market at the time of their purchase of the palm springs house yet they were not alarmed that the norrises had been unable to sell the house during the 4-month listing period or that they were willing to accept such a reduced price petitioners claim that they hoped to make a quick dollar_figure i e a percent profit we think that petitioners could not realistically have had such expectations there is no reason to surmise that petitioners were unaware of the costs sometimes exceeding percent of the sales_price associated with the sale of real_estate through a third-party real_estate agent in addition petitioners surely realized that they would incur mortgage interest_expense prior to the resale of the palm springs house any possible profit would have been eroded if not eliminated by such expense under these circumstances we find that petitioners did not obtain the palm springs house with the expectation that they could benefit from a possible appreciation in its value our examination of the relevant profit_motive factors delineated under sec_1_183-2 income_tax regs leads us to conclude that although petitioners hoped for some profit they did not have the requisite profit_motive to claim a loss under sec_165 rather we agree with respondent that petitioners' primary motive in purchasing the palm springs house was to get one step closer to moving to missouri we are persuaded by respondent's argument that petitioners were eager to move to missouri for semiretirement that they anticipated some difficulty in selling the thousand palms property and that the sale exchange with the norrises for a single-family home enabled them to move to missouri and be left with the less onerous task of selling a single-family home in a more populated area and obtain the additional cash required for their purchase of the missouri property many factors support respondent's theory the thousand palms property was a highly specialized property the property included a single-family home a construction work area and a mobile home petitioners realized that only a limited group of individuals would be interested in such a property as previously noted it was the norrises who contacted petitioners the norrises were willing to purchase the thousand palms property if petitioners would purchase their home ie the palm springs house as a new single-family house the palm spring house was probably easier to sell furthermore the sale exchange transaction was designed in such a manner to provide petitioners with the additional cash required to purchase the missouri property in fact petitioners used the cash thus obtained to close their purchase of the missouri property also petitioners immediately listed the palm springs house for resale in order to complete the transaction and their move to missouri thus we view petitioners' sale exchange of one property for another and the immediate resale of the latter as primarily motivated by personal reasons hence despite the fact that petitioners did not purchase the palm springs house for use as their personal_residence we think that petitioners' motive was more personal in nature see o'neill v commissioner tcmemo_1985_92 nicath realty co inc v commissioner tcmemo_1966_246 here although we find that the desire to make a profit was not completely lacking it was only incidental in nature cotner v commissioner tcmemo_1996_428 petitioners cannot avoid the effect of the statute and the regulations disallowing petitioners to claim a loss relating to the sale of a residence by dividing the transaction into a series of transactions under these circumstances we shall consider the transaction as a whole and shall not allow petitioners to claim a loss under sec_165 cf 242_f2d_825 4th cir quinn v commissioner tcmemo_1983_ butrick v commissioner tcmemo_1972_59 consequently we hold that petitioners' primary motive in purchasing the palm springs house was not profit and that petitioners are therefore not entitled to capital_loss carryovers for the years in issue to reflect our disposition of the disputed issue as well as petitioners' concessions decision will be entered for respondent


t c summary opinion united_states tax_court kathleen lewis russell petitioner v commissioner of internal revenue respondent docket no 17028-09s filed date kathleen lewis russell pro_se kristin m timmons for respondent armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any unless otherwise indicated all subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure other court and this opinion shall not be treated as precedent for any other case respondent determined a deficiency in petitioner’s federal_income_tax of dollar_figure the issues for decision are whether petitioner is entitled to dependency_exemption deductions for her granddaughter and great-granddaughter we hold that she is whether petitioner is entitled to the earned_income_credit for her granddaughter and great-granddaughter we hold that she is whether petitioner is entitled to the additional_child_tax_credit for her great-granddaughter we hold that she is whether petitioner is entitled to head_of_household filing_status we hold that she is background some of the facts have been stipulated and they are so found we incorporate by reference the parties’ stipulation of facts and accompanying exhibits petitioner resided in the state of minnesota when the petition was filed in early petitioner moved from minnesota to fresno california to be closer to her granddaughter charell petitioner rented a home in fresno the fresno home and charell moved in with her during petitioner was employed by kings canyon national park kings canyon in the sierra nevada mountains in california approximately a 1-hour-and 15-minute drive from the fresno home petitioner paid rent to her employer through a payroll deduction for_the_use_of onsite lodging in which she stayed during inclement weather when the mountain roads were impassable in order to facilitate the receipt of mail when stranded in the mountains petitioner established a post office box in kings canyon the p o box petitioner used the p o box as her primary mailing address and had all of the mail from the fresno home forwarded to it petitioner explained that she had the mail forwarded so that during the winter months she would continue to receive her bills as well as her netflix and blockbuster subscriptions when stranded in the mountains in charell attained the age of years and also gave birth to a daughter d d petitioner’s great-granddaughter following the birth of d d charell stayed with her uncle petitioner’s son at his home in fresno for approximately days on the occasions when petitioner was stuck in the petitioner worked at grant grove which according to http maps yahoo com is approximately miles from the fresno home the court refers to minor children by their initials see rule a mountains charell and d d would sometimes stay at charell’s uncle’s home during charell earned a de_minimis amount of income from three employers for each of the jobs charell listed a different home address none of which was the address of the fresno home charell used these alternate addresses to ensure receipt of her paychecks because all of the mail from the fresno home was forwarded to the p o box during charell’s working hours her uncle or his wife would watch d d on her federal_income_tax return petitioner claimed two dependency_exemption deductions for charell and d d the earned_income_credit in respect of charell and d d the additional_child_tax_credit in respect of d d and head_of_household filing_status in a notice_of_deficiency respondent denied the dependency_exemption deductions the earned_income_credit and the additional_child_tax_credit and changed petitioner’s filing_status to single a dependency_exemption deductions discussion4 in general a taxpayer may claim a dependency_exemption deduction for each individual who is a dependent as defined in we decide this case without regard to the burden_of_proof sec_152 of the taxpayer for the taxable_year sec_151 c as relevant herein sec_152 defines a dependent to include a qualifying_child a qualifying_child must inter alia share the same principal_place_of_abode as the taxpayer for more than one-half of the year in issue sec_152 petitioner claims that she is entitled to dependency_exemption deductions for her granddaughter and great- granddaughter because they lived with her in the fresno home respondent contends that petitioner and her granddaughter and great-granddaughter did not share the same principal_place_of_abode for more than one-half of the year in issue we find that petitioner and her granddaughter and great- granddaughter did share the same principal_place_of_abode for more than one-half of the year in issue see sec_152 petitioner was not stranded in the mountains so much so that the fresno home failed to be petitioner’s home likewise charell and d d did not spend so much time with the uncle such that the fresno home failed to be charell’s and d d ’s home therefore petitioner’s granddaughter and great-granddaughter are qualifying children under sec_152 accordingly we hold that petitioner is entitled to dependency_exemption deductions for her granddaughter and great- granddaughter for no other requirement is at issue in the instant case b earned_income_tax_credit sec_32 permits an eligible_individual an earned_income_credit eic against that individual’s tax_liability as pertinent here the term eligible_individual is defined to mean any individual who has a qualifying_child for the taxable_year sec_32 the amount of the credit is determined according to percentages that vary depending on whether the taxpayer has one qualifying_child or two or more qualifying children sec_32 the percentages increase if a taxpayer has two qualifying children as opposed to one id thus if petitioner has two qualifying children the eic is dollar_figure with one qualifying_child the eic is dollar_figure see revproc_2006_53 sec_3 2006_2_cb_996 to be eligible to claim an eic with respect to a qualifying_child a taxpayer must establish inter alia that the child had the same principal_place_of_abode as the taxpayer for more than one-half of the taxable_year sec_32 sec_152 an eligible_individual also includes an individual who does not have a qualifying_child see sec_32 however an eic is available to such an individual only if his or her adjusted_gross_income is less than dollar_figure see revproc_2006_53 sec_3 2006_2_cb_996 because petitioner’s adjusted_gross_income exceeded that amount in petitioner is not entitled to an eic for that year without a qualifying_child see supra note we previously concluded that petitioner and her granddaughter and great-granddaughter shared the same principal_place_of_abode for more than one-half of the year in issue therefore petitioner is entitled to the eic she claimed on her federal_income_tax return c child_tax_credit and additional_child_tax_credit sec_24 allows taxpayers a credit against tax imposed for each qualifying_child the term qualifying_child is defined by sec_24 to mean a qualifying_child of the taxpayer as defined in sec_152 who has not attained the age of sec_24 provides that a portion of the credit may be refundable which portion is commonly referred to as the additional_child_tax_credit petitioner claimed the additional_child_tax_credit on her federal_income_tax return for d d we have previously concluded that d d is a qualifying_child as defined in sec_152 accordingly we hold that petitioner is entitled to the additional_child_tax_credit for d d as claimed on the return d head_of_household filing_status as relevant herein sec_2 provides that a taxpayer qualifies as head_of_household if she maintains as her home a household that constitutes the principal_place_of_abode of a qualifying_child for more than one-half of the taxable_year we have previously held that petitioner is entitled to dependency_exemption deductions for her granddaughter and great- granddaughter for because each is a qualifying_child accordingly petitioner qualifies for head_of_household filing_status for conclusion we have considered all of the arguments made by respondent and to the extent that we have not specifically addressed those arguments we conclude that they are without merit to reflect the foregoing decision will be entered for petitioner


whistleblower 16158-14w petitioner v commissioner of internal revenue respondent docket no 16158-14w filed date w provided information to the internal_revenue_service irs regarding t ’s alleged failure to withhold and pay over taxes for through w supplemented the submission to add years through the irs expanded an ongoing examination for through to address the withholding issue that w raised but that examination did not result in collected_proceeds the irs did not conduct an exam- ination relating to the withholding issue for subsequent years t updated its recordkeeping system after w alleges that improvements to t ’s recordkeeping resulted in collected pro- ceeds and that the secretary must pay an award held because there were no collected_proceeds for through w is not entitled to an award for those years held fur- ther there was no administrative or judicial action with respect to years after because the irs took no action with respect to those years held further the commissioner is not required to monitor a taxpayer’s voluntary change in reporting for years for which there was no action whistleblower 16158-14w v commissioner sealed for petitioner sealed for respondent opinion buch judge the whistleblower timely petitioned upon receiving a determination_letter from the internal_revenue_service irs whistleblower office whistleblower office denying an award on date the commissioner filed a motion for summary_judgment arguing that he is entitled to judgment as a matter of law because the information pro- vided by the whistleblower did not lead to the collection of any proceeds and therefore the whistleblower is not entitled to an award the whistleblower filed a response primarily arguing that there is a genuine dispute of material fact because the whistleblower contends the information pro- vided caused the taxpayer to change its reporting for years after the commissioner’s examination and further arguing that the change in reporting led the commissioner to collect additional taxes that should be considered collected pro- ceeds under sec_7623 we held a hearing on the motion and we ordered briefs after reviewing the parties’ arguments we will grant the commissioner’s motion because accepting the whistleblower’s factual allegations as true any revenue from the taxpayer’s subsequent change in reporting does not meet the definition of collected_proceeds for the years that were the subject of the action by the commissioner background in late date the whistleblower filed a form_211 application_for award for original information with the commissioner on the form_211 the whistleblower claimed to have information on a corporation taxpayer that had failed to withhold taxes for and on pay- ments of interest and dividends that it had made to foreign persons the whistleblower stated on the form_211 that the whistleblower knew the information because the whistle- blower was an employee of the taxpayer unless otherwise indicated all section references are to the internal_revenue_code in effect at all relevant times and all rule references are to the tax_court rules_of_practice and procedure united_states tax_court reports the whistleblower office reviewed the information pro- vided on the form_211 and provided the information to other business divisions within the irs including the criminal_investigation_division and the large business and inter- national division lb_i upon receiving this information lb_i expanded an ongoing audit that was unrelated to the whistleblower’s allegations at the end of the audit lb_i issued a no_change_letter to the taxpayer informing it that the audit did not result in any adjustments subsequently the lb_i auditor and the whistleblower office filled out and signed a form confidential evaluation report on claim for award the explanation attached to the form stated that the whistleblower was correct that the taxpayer had made errors but the cause of the errors was an honest mistake made while updating its reporting systems the explanation went on to say that i t appears the taxpayer has been convinced by its close call to become fully compliant with its withholding_tax responsibilities and further examination is not warranted the whistleblower supplemented the whistleblower’s submissions between and relating to years after however the commissioner did not examine any addi- tional years on the basis of the whistleblower’s submissions on date the whistleblower office sent a letter to the whistleblower notifying the whistleblower that the whistleblower was not entitled to an award because the information provided did not result in the collection of any proceeds the commissioner filed a motion for summary_judgment he argues that there were no collected_proceeds for to nor any_action for the later years and therefore he is entitled to summary_judgment discussion the purpose of summary_judgment is to avoid unnecessary and expensive trials fla peach corp v commissioner 90_tc_678 however summary_judgment is not a substitute for trial and it should not be invoked in pro- ceedings where the parties disagree as to material facts 61_tc_861 summary_judgment may be granted if the pleadings answers to inter- whistleblower 16158-14w v commissioner rogatories depositions admissions and any other acceptable materials together with the affidavits or declarations if any show that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law rule b the party moving for summary_judgment bears the burden of demonstrating that a genuine dispute does not exist as to any material fact and that he is entitled to judgment as a matter of law 98_tc_518 aff ’d 17_f3d_965 7th cir because the moving party bears this burden any factual inferences will be treated in a manner that is most favorable to the non- moving party 85_tc_812 while the burden falls on the moving party the non- moving party may not rest upon the mere allegations or denials of such party’s pleading but such party’s response must set forth specific facts showing that there is a genuine dispute for trial rule d there are no material facts in dispute in this case and a decision may be rendered as a matter of law the dispute centers around whether the amount of collected_proceeds as provided in sec_7623 can include amounts collected for years after examination years because of a taxpayer’s change in reporting therefore summary_judgment is appropriate i sec_7623 requires both an action and collected pro- ceeds before sec_7623 authorized the secretary to pay such sums as he deems necessary for- detecting under- payments of tax and detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same congress amended the statute by the tax relief and health care act of pub_l_no div a sec_406 sec_120 stat pincite- under the amendment what had been sec_7623 became sec_7623 and congress added new sub- sections id sec_7623 provides if the secretary proceeds with any administrative or judicial action described in subsection a based on information brought to the sec- retary’s attention by an individual such individual shall subject_to paragraph receive as an award at least percent but not more than percent of the collected_proceeds including penalties interest addi- united_states tax_court reports tions to tax and additional_amounts resulting from the action including any related actions or from any settlement in response to such action we have described sec_7623 as straightforward and written in expansive terms whistleblower 21276-13w v commissioner 147_tc_121 the parties dispute whether the whistleblower is entitled to an award the commissioner argues that the whistle- blower is not because there was no action taken for years after the whistleblower argues that the commissioner collected_proceeds because the taxpayer began proper reporting and withholding for the years after the examina- tion years which can be attributed back to the years for which there was an action ii the secretary must take an administrative or judicial action an award under sec_7623 is predicated in part on the secretary’s proceeding with any administrative or judicial action described in subsection a in this case there is no dispute that the commissioner took an administrative action with respect to the taxpayer’s through years the commissioner expanded an ongoing examination to include the withholding_tax issue this is clearly a civil_proceeding by the commissioner that may result in collected_proceeds but the commissioner took no administrative or judicial action with respect to years after the years for which the whistleblower seeks an award the whistleblower office explained in the form after completing the through examination that any further examination is not warranted the mere fact that the taxpayer filed an original return is not a civil_proceeding by the commissioner thus there is no administrative or judicial action from which an award can be paid but this is not the end of our inquiry the parties dispute whether amounts collected for the years after the examina- tion years can be taken into account when determining col- lected proceeds for the actions taken with respect to through the commissioner states that amounts col- lected for years after the examination years are not collected_proceeds because the commissioner has not taken an action whistleblower 16158-14w v commissioner the whistleblower argues that the amounts collected for through are collected_proceeds and should relate back to the examination for the through years thus we need to decide whether there were any collected_proceeds for the years after the examination years that should have been taken into account for an award for the actions that occurred for the tax years through iii the award must be based on collected_proceeds sec_7623 provides that a whistleblower will receive as an award at least percent but not more than percent of the collected_proceeds including penalties interest additions to tax and additional_amounts there- fore an award is predicated on the collection of proceeds collected_proceeds is not defined in the statute in whistle- blower 21276-13w v commissioner t c pincite we relied on the canons of statutory construction to define col- lected proceeds we defined it as all proceeds collected by the government from the taxpayer id pincite we explained that collected_proceeds is an expansive and general term a sweeping term id pincite and not limited to amounts assessed and collected under title_26 id pincite a collected_proceeds do not include amounts collected for years after examination years because of a change in reporting the parties dispute whether collected_proceeds include amounts collected for the years after examination years because of a taxpayer’s voluntarily changing its reporting the whistleblower observes that the whistleblower provided information to the commissioner which led to an expansion of an examination to include information reporting the whistleblower further argues that this expansion caused the taxpayer to change its reporting and begin properly reporting and withholding after a decade of improper reporting thus under the position taken by the whistleblower any initial action requires the commissioner to track changes in a tax- payer’s reporting on that issue because any change in reporting may result in collected_proceeds the commissioner argues that collected_proceeds do not include additional_amounts collected as a result of the taxpayer’s voluntary compliance united_states tax_court reports the whistleblower argues that the commissioner should not limit collected_proceeds to the year of the action and looks to final regulations which the parties agree do not apply in this case for support the whistleblower argues that sec_301_7623-4 proced admin regs date demonstrates that collected_proceeds include addi- tional amounts collected after an examination because of a change in reporting but that regulation does not define col- lected proceeds that regulation relates to the factors to be taken into account when determining the award percentage the regulation provides b factors used to determine award percentage - positive fac- tors -the application of the following non-exclusive factors may support increasing an award percentage under paragraphs c or of this section- viii the information provided had an impact on the behavior of the taxpayer for example by causing the taxpayer to promptly correct a pre- viously-reported improper position in contrast sec_301_7623-2 proced admin regs date defines collected_proceeds that regulation provides that collected_proceeds include t ax penalties interest additions to tax and additional_amounts col- lected because of the information provided amounts collected prior to receipt of the information if the information provided results in the denial of a claim_for_refund that otherwise would have been paid and a reduction of an overpayment credit balance used to satisfy a tax_liability incurred because of the information provided that regulation also includes a provision allowing for moni- toring post-determination proceeds see id subpara ii specifically that regulation provides if based on all information known with respect to the taxpayer’s account as of the date of the computation described in paragraph d i of this section there is a possibility that the irs may collect additional pro- ceeds then the whistleblower office will continue to monitor the case if the whistleblower office identifies additional collected_proceeds then the irs will compute and pay accordingly the preamble to the final_regulation explained this rule in detail in part the department of the treasury treasury wrote these final regulations provide that the whistle- whistleblower 16158-14w v commissioner blower office will monitor the relevant taxpayer account or accounts until the irs receives collected_proceeds as a result of a reduction in the tax attribute or the taxpayer’s ability to apply the tax attribute expires unused t d 2014_36_irb_486 in other words the irs will look to a tax attribute that has been adjusted for a year that was the sub- ject of the action and if there is an effect for other years the irs will consider the ongoing effect of that tax attribute in determining the amount of collected_proceeds treasury even cautioned the adoption of a monitoring approach in the final regulations however is only intended to explicitly enable the irs to make an additional award payment when a tax attribute produces collected_proceeds after an award has been determined as described in the preceding para- graphs in other words monitoring does not alter the general_rule that no award will be paid until there has been a final_determination of tax as defined in the final regulations id the whistleblower misses this important distinction the final regulations allow the irs to monitor a taxpayer’s reporting of tax_attributes that arise for the years that were the subject of the examination see sec_301_7623-2 proced admin regs see also t d i r b pincite on the basis of the tax effect of those attributes the irs may adjust an award upward or downward see t d i r b pincite one example is the reduction of a net_operating_loss nol carryforward because of the whistleblower’s information the whistleblower may receive a percentage of the collected_proceeds resulting from the por- tion of the nol deduction that is disallowed for the carryforward years see id similarly if the whistleblower’s information led to the disallowance of an expense deduction for a piece of equipment that should have been capitalized and depreciated the future allowance of depreciation deduc- tions could reduce the amount of collected_proceeds that might have otherwise arisen from the mere disallowance of the expense deduction standing alone see id neither of these examples adapted from the preamble to the final regulations id suggests that the irs would mon- itor for a change in reporting both address situations in which adjustments to tax_attributes made in the year of the action have direct carryover consequences for other years united_states tax_court reports collected_proceeds do not include self-reported amounts collected when a taxpayer changes its reporting for years that are not part of the action the commissioner argues and we agree that because of the significant costs and heavy administrative burden collected_proceeds cannot include amounts collected for years after examination years on account of a taxpayer’s changing its reporting petitioner takes the definition of collected_proceeds as all proceeds collected by the government from the taxpayer whistle- blower 21276-13w v commissioner t c pincite to an irrational extreme to argue that self-assessed amounts col- lected for future years are proceeds collected by the govern- ment indeed many if not all of the commissioner’s examinations will have some influence on a taxpayer’s reporting however any determination of an award based on additional_amounts collected for years following examination years would be based on speculation the whistleblower argues that the determination of amounts collected for years after examination years on account of a change in reporting is not too speculative in this case the whistleblower contends that the commissioner would be able to determine with reasonable certainty that the to examination had caused the taxpayer to change its reporting after the examination by simply com- paring the taxpayer’s history of noncompliance with the period when the taxpayer came into compliance the whistle- blower asks us to define collected_proceeds to include amounts collected after examination years if they are reasonably determinable the commissioner counters that any attempt to determine the amount of the award would require another action eg an examination by the commis- sioner and the court cannot require the commissioner to take an action we agree with the commissioner and as we congress did not authorize the have previously held court to proceed with an the secretary to direct the whistleblower’s argument incorporates the statement from the pre- amble to the final regulations which explains that collected_proceeds do not include amounts collected for subsequent years because the irs would have no way to determine with any reasonable certainty what the tax- payer’s reporting position would have been if not for the underlying action and whether the taxpayer’s compliance was a direct result of the under- lying action t d 2014_36_irb_486 whistleblower 16158-14w v commissioner administrative or judicial action 136_tc_597 see also 139_tc_299 aff ’d 550_fedappx_10 d c cir b the whistleblower’s additional arguments are uncon- vincing the whistleblower advances various other arguments that are all tied together using the common change in behavior thread amounts paid through voluntary compliance for subse- quent years are not additional_amounts term additional_amounts as used the whistleblower argues that a genuine dispute of mate- rial fact remains as to whether amounts paid for subsequent years are additional_amounts as used in sec_7623 and includable in collected_proceeds in whistleblower 13w v commissioner 146_tc_84 we held that the in sec_7623 the threshold requirements for a whistleblower award has a technical meaning we explained that addi- tional amounts when used in a series that includes the words tax and either additions to tax or additions to the tax means civil penalties set forth in chapter subchapter_a of the internal_revenue_code id pincite accordingly additional_amounts as used in sec_7623 has a technical meaning and the whistleblower has not set forth any specific facts to show that the taxpayer paid additional_amounts for later years voluntary compliance for subsequent years is not a related action the whistleblower also argues that the whistleblower is entitled to an award because the subsequent years were a related action and the commissioner collected additional taxes because of the taxpayer’s change in reporting the whistleblower relies on the internal_revenue_manual irm pt date for support the irm states that g enerally a related action is i any_action involving the taxpayer from the original action and that is based on either directly or indirectly the same information on which the original action is based id pt the whistle- united_states tax_court reports blower summarizes the commissioner’s position in the irm as same fact pattern but different years and argues that the taxpayer continued to make the same errors for at least some of its subsequent years before changing its reporting the whistleblower seeks to use the concept of a related action to merge the years with respect to which the commis- sioner took an action with the subsequent years we have explained that any related action is also a broad and sweeping term whistleblower 21276-13w v commis- sioner t c pincite however the whistleblower overlooks that a related action requires the secretary to take a subse- quent action specifically the irm refers to any_action involving the taxpayer from the original action irm pt the commissioner clearly contemplated that there be two actions an original action and a subsequent action and as explained above the commissioner did not take an action for the later years the commissioner did not conduct a civil or criminal proceeding that may result in collected_proceeds and there is no suggestion of any judicial action although the commissioner took an action with respect to the taxpayer’s to years he did not take a subsequent action there simply is no subsequent action the whistleblower offered no evidence of an implied settlement finally the whistleblower argues that a genuine issue of material fact remains regarding whether the commissioner collected_proceeds pursuant to an implied settlement the whistleblower’s position is that the commissioner’s auditor’s statement in the explanation attached to the form that i t appears the taxpayer has been convinced by its close call to become fully compliant with its withholding_tax responsibilities and further examination is not war- ranted implies an underlying agreement that the commis- sioner will not conduct an examination for subsequent years so long as the taxpayer changes its reporting sec_7623 allows for whistleblower awards resulting from any settlement in response to such action the term settlement is not defined in the internal_revenue_code however because a settlement is a contract we look to contract law principles to determine whether a settlement has been reached dorchester indus inc v commissioner whistleblower 16158-14w v commissioner 108_tc_320 aff ’d 208_f3d_205 3d cir a prerequisite to the formation of a contract is an objective manifestation of mutual assent to its essential terms and generally mutual assent requires an offer and an accept- ance id and a settlement agreement may be reached even in the absence of a writing lamborn v commissioner tcmemo_1994_515 tax ct memo lexis at the whistleblower has not set forth any specific facts showing that the taxpayer and the commissioner entered into a settlement agreement or had any intention to enter into such an agreement there is nothing more than the whistleblower’s speculation that the statement in the expla- nation attached to the form is something more than the auditor’s opinion this alone does not rise to the level of mutual assent mere speculative suggestions and conclusory assertions do not give rise to sufficient facts to deny a motion for summary_judgment daniels v commissioner tcmemo_1994_591 tax ct memo lexis at see also rule d 119_tc_157 accordingly we conclude that the whistleblower has not offered any facts to indicate that a settlement existed further even if a settlement had existed in keeping with our previous discussion a change in reporting does not give rise to collected_proceeds iv conclusion the whistleblower has not provided any evidence of a gen- uine dispute as to any material fact the whistleblower’s argument that the taxpayer’s change in reporting could result in collected_proceeds is not supported by the statute accordingly we will grant the commissioner’s motion for summary_judgment to reflect the foregoing an appropriate order and decision will be entered f


internal_revenue_service number release date index number ---------------------- ------------------------ -------------- ------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------------- --------------------------------------------------- telephone number -------------------- refer reply to cc tege eoeg eo1 plr-134282-16 date date legend foundation ---------------------- company trust business ------------------------------------------- --------------------------------------------- ----------------------------------------- dear ------------- this letter responds to foundation’s date request for a ruling that a proposed business holding will not constitute an excess business holding under sec_4943 of the internal_revenue_code code facts according to the information provided by foundation foundation is a foreign organization recognized as exempt from federal_income_tax under sec_501 and as a private_foundation foundation has received substantially_all of its support other than gross_investment_income from sources outside the united_states consistent with the investment goals of its endowment foundation proposes to make an investment in company a foreign organization that expects to be treated as a corporation for u s federal_income_tax purposes company is not a disqualified_person with respect to foundation company will indirectly hold more than ---- percent and as much as percent of the voting_stock in a foreign_business_entity business which expects to be treated as a corporation for u s federal_income_tax purposes sec_4943 of the internal_revenue_code_of_1986 as amended to which all subsequent section references are made unless otherwise stated plr-134282-16 foundation represents that business is a business_enterprise under sec_4943 and sec_53_4943-10 company and intermediate holding_companies or partnerships through which company holds its interest in business are each expected to derive ---- percent or more of their gross_income from passive sources including dividends and capital_gains from business foundation represents that each of company and such intermediate holding_companies or partnerships is expected not to be a business_enterprise within the meaning of sec_53_4943-10 foundation will not hold any shares in business directly nor does it directly own any of the shares of any other entity owned or controlled by company no disqualified persons with respect to foundation have ever held any stock in company or any entity in which company holds an interest nor will any disqualified_person with respect to foundation hold directly or indirectly any stock in business as part of foundation’s ongoing effort to ensure that its investments comply with the excess_business_holdings rules foundation seeks to ensure that it holds actually or constructively within the meaning of sec_53_4943-8 no more than percent of the voting_stock of business foundation will not hold directly or indirectly any stock in business other than through company because its interest in business is held indirectly through an interest in company foundation seeks to ensure that it holds no more than percent of the voting_stock of company company has three classes of shares one class of non-voting ordinary shares non- voting shares and two classes a and b of voting fixed coupon preferred shares voting shares the holders of class a voting shares have the right to elect up to ---- ------a directors or ---- of company’s directors and remove those directors at any time while foundation as the holder of all class b voting shares has the right to elect up to ------b director or ---- of company’s directors and to remove that director at any time directors serve indefinite terms until they resign or are removed by the pertinent holders of voting shares if a director vacancy arises and the pertinent holders of voting shares do not appoint a replacement director the remaining directors may appoint a replacement director who may be removed only by the pertinent holders of voting shares the remaining ----percent of the voting shares of company all of class a are held by trust a foreign non-profit grant-making trust trust is unrelated to and is not a disqualified_person with respect to foundation trust has not applied for a determination_letter from the irs trust was formed and funded in --------by an individual who is unrelated to and not a disqualified_person with respect to foundation foundation is not a beneficiary of trust and no trustee of either foundation or trust is a trustee of the other the terms of company’s articles of organization entitle trust to elect and remove ----percent of company’s directors including ----percent of the initial directors the articles provide that decisions of company directors are made by a plr-134282-16 majority and that a director appointed by foundation and a director appointed by trust is needed for a quorum for a director’s meeting at the present time all of the directors of company are also employees of foundation though ---- of these directors could be removed at any time by vote of trust there is not and has never been any restriction requiring director candidates to be foundation employees there are no separate shareholders’ agreements or voting agreements relating to the voting of company stock though trust and foundation do discuss the management of company and its investments in their capacity as shareholders holders of voting shares of company are entitled to a fixed amount of cash per share per year company must pay the accrued dividend on the voting shares before it can pay any amount to foundation as the holder of the non-voting shares and company’s directors otherwise have full discretion regarding whether or not to pay any such amount to foundation as the holder of the non-voting shares upon liquidation of company the voting shares are entitled to a liquidation preference equal to the sum of any unpaid accrued dividend and a nominal amount equal to the original capital invested per voting share after which the nonvoting shares are entitled to the remaining proceeds of liquidation foundation holds a call option over the voting shares held by trust that permits foundation to purchase the voting_stock of company at fair_market_value upon ------ months' notice the call option has not been exercised trust is not required to make capital contributions to company foundation has a capital commitment to company a portion of which has been drawn down to date in connection with company’s prior portfolio investments neither foundation nor any disqualified_person with respect to foundation has any power_of_appointment over any interest in business exercisable in favor of foundation or a disqualified_person ruling requested foundation requests a ruling that for purposes of sec_4943 it will own directly or indirectly no more than percent of the voting_stock of business and that it therefore will not have excess_business_holdings under sec_4943 solely as a result of making and holding an investment in business in the manner described above law sec_4943 imposes a tax on the excess_business_holdings of a private_foundation in a business_enterprise during any taxable_year which ends during the taxable_period plr-134282-16 sec_4943 generally defines excess_business_holdings with respect to the holdings of any private_foundation in any business_enterprise as the amount of stock or other interest in the enterprise which the foundation would have to dispose_of to a person other than a disqualified_person in order for the remaining holdings of the foundation in such enterprise to be permitted holdings sec_4943 generally defines the permitted holdings of a private_foundation in an incorporated business_enterprise as percent of the voting_stock reduced by the percentage of the voting_stock owned by all disqualified persons in any case in which all disqualified persons together do not own more than percent of the voting_stock of an incorporated business_enterprise nonvoting_stock held by the private_foundation shall also be treated as permitted holdings sec_4943 generally provides that in computing the holdings of a private_foundation or a disqualified_person with respect thereto in any business_enterprise any stock or other interest owned directly or indirectly by or for a corporation partnership estate_or_trust shall be considered as being owned proportionately by or for its shareholders partners or beneficiaries sec_4943 provides that the term business_enterprise does not include a trade_or_business at least percent of the gross_income of which is derived from passive sources it also provides that for this purpose gross_income from passive sources includes certain items that are excluded from unrelated_business_income among those items are dividends and capital_gains that are excluded from unrelated_business_income by sec_512 and see also sec_53 c and sec_4948 provides in part that chapter of the code other than sec_4948 shall not apply to any foreign organization which has received substantially_all of its support other than gross_investment_income from sources outside the united_states however such a foreign organization’s exemption from taxation under sec_501 may be revoked under sec_4948 if that organization engages in a prohibited_transaction sec_4948 provides that the term prohibited_transaction includes any act or failure to act other than with respect to sec_4942 which would subject a foreign organization described in sec_4948 to liability for a penalty under sec_6684 if such foreign organization were a domestic organization sec_6684 imposes a penalty if a person becomes liable for tax under chapter by reason of any act or failure to act which is not due to reasonable_cause and either such person has theretofore been liable for tax under such chapter or such act or failure to act is both willful and flagrant plr-134282-16 sec_53_4943-3 provides that the percentage of voting_stock held by any person in a corporation is normally determined by reference to the power of stock to vote for the election of directors with treasury_stock and stock which is authorized but unissued being disregarded thus for example if a private_foundation holds percent of the shares of one class of stock in a corporation which class is entitled to elect three directors and such foundation holds no stock in the other class of stock which is entitled to elect five directors such foundation shall be treated as holding percent of the voting_stock because the class of stock it holds ha sec_37 percent of such voting power by reason of being able to elect three of the eight directors and the foundation holds one-fifth of the shares of such class percent of percent is percent the fact that extraordinary corporate action eg charter or by-law amendments by a corporation may require the favorable vote of more than a majority of the directors or of the outstanding voting_stock of such corporation shall not alter the determination of voting power of stock in such corporation in accordance with the two preceding sentences sec_53_4943-3 generally provides that in addition to permitted holdings in voting_stock the permitted holdings of a private_foundation in an incorporated business_enterprise also include any share of nonvoting_stock in the business_enterprise so long as the private_foundation together with its disqualified persons hold no more than percent of the business enterprise’s voting_stock for this purpose all equity interests which do not have voting power attributable to them are classified as nonvoting_stock also under sec_53_4943-3 evidences of indebtedness including convertible indebtedness and warrants and other options or rights to acquire stock shall not be considered equity interests sec_53_4943-8 provides that any interest in a business_enterprise over which a foundation or a disqualified_person has a power_of_appointment exercisable in favor of the foundation or a disqualified_person shall be considered owned by the foundation or disqualified_person holding such power_of_appointment sec_53_4943-8 provides generally that if an interest in a business_enterprise owned by a corporation is constructively owned by a shareholder each shareholder's proportion of ownership is generally computed on the basis of the voting_stock each shareholder has in the corporation sec_53_4943-8 provides that if a private_foundation its disqualified persons or both own directly or constructively nonvoting_stock of a parent_corporation the holdings of which are treated as constructively owned by its shareholders by reason of sec_4943 and sec_53_4943-8 such nonvoting_stock shall be treated as nonvoting_stock of any corporation in which the parent_corporation holds an interest for purposes of the limitation on the holding of nonvoting_stock under sec_4943 and sec_53_4943-3 plr-134282-16 sec_53_4943-10 provides that for purposes of sec_4943 the term business_enterprise does not include a trade_or_business at least percent of the gross_income of which is derived from passive sources except that if in the taxable_year in question less than percent of the income of a trade_or_business is from passive sources the foundation may in applying this percent test substitute for the passive source gross_income in such taxable_year the average gross_income from passive sources for the taxable years immediately preceding the taxable_year in question or for such shorter period as the entity has been in existence thus stock in a passive holding_company is not to be considered a holding in a business_enterprise even if the company is controlled by the foundation instead the foundation is treated as owning its proportionate share of any interests in a business_enterprise held by such company under sec_4943 analysis although foundation as a foreign private_foundation described in sec_4948 is not subject_to tax under sec_4943 foundation must comply with the requirements of sec_4943 so as to avoid engaging in a prohibited_transaction under sec_4948 under sec_4943 the pertinent interests in defining the permitted holdings of a private_foundation in a corporation are the voting_stock and are generally limited to of the voting_stock given that company and any other intermediate holding_company or partnership through which foundation holds an indirect interest in business represents that it will receive at least -----percent of its gross_income from passive sources as dividends and capital_gains company and each other intermediate_entity is not a business_enterprise under sec_4943 instead foundation is treated under sec_4943 as owning its proportionate share of any interests in any business_enterprise including business that is owned by company or other intermediate passive holding_company see also sec_53_4943-8 and sec_53_4943-10 under sec_53_4943-8 foundation’s constructive_ownership of business is computed on the basis of the voting_stock foundation has in company under sec_53_4943-3 the voting shares in company are the voting_stock because the percentage of voting_stock held by any person in a corporation is normally determined by reference to the power of stock to vote for the election of directors as is the case with the voting shares moreover under sec_53_4943-3 foundation’s option to purchase trust’s voting_stock in company is not considered an equity_interest accordingly foundation owns percent of the voting_stock of company and thus constructively owns percent of the interest of company in business in addition under sec_53_4943-8 even though foundation owns nonvoting_stock of company such nonvoting_stock is treated as nonvoting_stock of any corporation including business in which company holds an interest thus plr-134282-16 foundation’s nonvoting_stock of company does not result in foundation’s constructive_ownership of additional voting_stock of business furthermore as described above no disqualified_person of foundation holds any interest in company or business and foundation holds no interest in business other than through its interest in company under these circumstances foundation will not be treated as owning more than percent of the voting_stock of company and therefore will not be treated as owning more than percent of the voting_stock of business even if company owns of the interests in business ruling based solely on the facts and representations submitted by foundation we rule that for purposes of sec_4943 foundation will own directly or indirectly no more than percent of the voting_stock of business and that foundation therefore will not have excess_business_holdings under sec_4943 solely as a result of making and holding an investment in business in the manner described above the rulings contained in this letter are based upon information and representations submitted by or on behalf of foundation and accompanied by a penalty of perjury statement executed by an appropriate party as specified in revproc_2017_1 2017_1_irb_1 b this office has not verified any of the material submitted in support of the request_for_ruling and such material is subject_to verification on examination the associate office will revoke or modify a letter_ruling and apply the revocation retroactively if there has been a misstatement or omission of controlling facts the facts at the time of the transaction are materially different from the controlling facts on which the ruling is based or the transaction involves a continuing action or series of actions and the controlling facts change during the course of the transaction see revproc_2017_1 sec_11 no ruling is granted as to whether foundation qualifies as an organization described in sec_501 or sec_509 except as expressly provided above no opinion is expressed or implied concerning the federal_income_tax consequences of any aspects of any transaction or item_of_income described in this letter_ruling this letter is directed only to foundation sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to each of foundation’s authorized representatives plr-134282-16 if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely amy f giuliano senior technician reviewer exempt_organizations branch tax exempt government entities cc


internal_revenue_service number release date index number ------------------ ---------- --------------------------------- ---------------------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ---------------- telephone number -------------------- refer reply to cc corp b05 plr-137873-13 date date legend distributing controlled relatedco1 relatedco2 trust state a state b business a shareholder a shareholder b -------------------------------- ---------------------------------------- --------------------- --------------------- ----------------------------------------------- ------------------------- -------------------------------------- ---------------------------------------------------- -------------------------------------- ---------------------------------------------------------- ---------------------- ------------------- ------------ ----------------------------------------------------------------------------- ----------------------------------- ------------------ ------------------ plr-137873-13 operational employees year contributed assets asset a a b c d dear ------------- -------------------------------------------- ------ ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- --------------------------------- ----------------------------------------------------------------------------- ------------------------------------------------------------ -------------------------- -------------------------- -------------------------- -------------------------- this letter responds to your date request for rulings regarding certain federal_income_tax consequences of certain proposed transactions the information provided in that request and in later correspondence is summarized below the rulings in this letter are based upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process in particular this office has not reviewed any information pertaining to and has made no determination regarding whether the distribution defined below i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the distribution of the earnings_and_profits of any distributing_corporation or any controlled_corporation or both see sec_355 of the internal_revenue_code and sec_1_355-2 and iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock or distributing interests defined below representing a 50-percent_or_greater_interest in any distributing_corporation or any controlled_corporation see sec_355 and sec_1_355-7 plr-137873-13 facts distributing is an unincorporated state a organization that is treated as an s_corporation for u s federal_income_tax purposes distributing is a cash_method taxpayer that employs a calendar_year shareholder a and shareholder b both of whom are u s residents for u s federal_income_tax purposes each directly own a of the equity ownership interests of distributing the distributing interests the remaining b of the distributing interests are held by the trust the beneficial_ownership of which is held equally by shareholder a and shareholder b additionally shareholder a together with trusts for the benefit of shareholder a’s spouse and descendants owns relatedco1 and shareholder b owns relatedco2 each a state a corporation engaged in the same line_of_business as distributing distributing and relatedco1 have each been engaged in business a since year a date more than five years prior to the commencement of the proposed transaction defined below distributing does not currently have any employees on its payroll rather shareholder a manages distributing and the operational employees who are formally employed by relatedco1 and perform distributing’s operational activities since distributing’s formation distributing and relatedco1 have had an unwritten employee-sharing arrangement in place the employment arrangement under which the operational employees perform operational activities and some management services for both distributing and relatedco1 relatedco1 compensates the operational employees for all of their work and provides them with benefits and distributing reimburses relatedco1 for a portion of the operational employees’ compensation and benefits specifically distributing periodically makes payments to relatedco1 for c of relatedco1’s costs for the operational employees’ salaries benefits workers’ compensation insurance health insurance and other employment- related expenses the c is intended to approximate the portion of the operational employees’ work hours spent working on behalf of distributing when performing services on behalf of distributing the operational employees hold themselves out to third parties as employees of distributing the financial information submitted by distributing indicates that business a has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years shareholder a and shareholder b propose to separate their interests in distributing through the proposed transaction in order to avoid further disharmony in the management and operations of business a and to avoid litigation plr-137873-13 proposed transaction for what have been represented to be valid business purposes the following transaction the proposed transaction has been proposed i distributing will form controlled as a state b corporation controlled will adopt the cash_method and the calendar_year ii in exchange for the issuance of all of controlled’s stock distributing will transfer to controlled the contributed assets a portion of its business a assets as well as the financial accounts and the liabilities associated with these business_assets the contribution iii the trust will distribute one-half of its distributing interests to shareholder a and the other one-half of its distributing interests to shareholder b the trust distribution iv distributing will distribute all of the outstanding controlled stock to shareholder b in exchange for all of shareholder b’s distributing interests the distribution v after the distribution controlled will elect pursuant to sec_1362 to be an s_corporation within the meaning of sec_1361 effective as of the date of formation after the distribution relatedco1 might transfer its d interest in asset a to controlled in exchange for one or more operating_assets of controlled in a transaction intended to qualify for non-recognition treatment under sec_1031 the asset exchange representations a any indebtedness owed by controlled to distributing after the distribution will not constitute stock_or_securities b the fair_market_value of the controlled stock and other consideration if any to be received by shareholder b will be approximately equal to the fair_market_value of the distributing interests surrendered by shareholder b in the exchange c no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing d the years of financial information submitted on behalf of distributing is representative of its present business operation and with regard to such plr-137873-13 business there have been no substantial operational changes since the date of the last financial statements submitted e following the proposed transaction distributing and controlled will each continue independently and with its separate employees or with operational employees of relatedco or relatedco respectively the active_conduct of its share of all of the integrated activities of business a conducted by distributing prior to consummation of the proposed transaction f the distribution is carried out for the following corporate business purposes to avoid further disharmony in the management and operations of business a and to avoid litigation the distribution is motivated in whole or substantial part by one or more of these corporate business purposes g the distribution is not used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both h the total adjusted_basis and the fair_market_value of the assets transferred to controlled in the contribution will each equal or exceed the sum of i the total liabilities assumed within the meaning of sec_357 by controlled and ii the liabilities to which the contributed assets are subject these liabilities were incurred in the ordinary course of business and are associated with the assets being transferred i the aggregate fair_market_value of the assets transferred to controlled in the contribution will equal or exceed the aggregate adjusted_basis of these assets j distributing neither accumulated its receivables nor made extraordinary payment of its payables in anticipation of the proposed transaction k no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution l no two parties to the proposed transaction are investment companies as defined in sec_368 and iv m immediately after the distribution neither distributing nor controlled will be a disqualified_investment_corporation within the meaning of sec_355 n distributing controlled and the shareholders of distributing will each pay their separate expenses if any incurred in connection with the proposed transaction o payments made in connection with all continuing transactions if any between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm's length plr-137873-13 p for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold distributing interests possessing percent or more of the total combined voting power of distributing interests entitled to vote or percent or more of the total value of distributing interests that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution q for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution or ii attributable to distributions on distributing interests that were acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution r distributing did not acquire business a or control of any entity conducting business a during the five-year period ending on the date of the distribution in a transaction in which gain_or_loss was recognized in whole or in part within the meaning of sec_1_355-3 s the distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock or distributing interests representing a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation t no investment_credit determined under sec_46 has been or will be claimed with respect to any of the contributed assets u no party to the contribution or distribution is under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 v the basis of each shareholder in the distributing interest received in the trust distribution will be determined with reference to the trust’s adjusted_basis before the trust distribution under sec_643 no election under sec_643 to recognize gain_or_loss will be made plr-137873-13 w the asset exchange is intended to qualify as a sec_1031 exchange for which no gain_or_loss will be recognized ruling sec_1 the contribution followed by the distribution will qualify as a reorganization within the meaning of sec_368 distributing and controlled will each be a_party_to_a_reorganization within the meaning of sec_368 no gain_or_loss will be recognized by distributing on its transfer of the contributed assets to controlled in exchange for the assumption_of_liabilities and the issuance of controlled’s stock in the contribution sec_357 and sec_361 no gain_or_loss will be recognized by controlled on its receipt of the contributed assets from distributing in exchange for its assumption_of_liabilities and the issuance of its stock in the contribution sec_1032 controlled’s basis in each asset received in the contribution will be the same as the basis of such asset in the hands of distributing immediately before the contribution sec_362 controlled’s holding_period in each asset received in the contribution will include the period during which distributing held such asset sec_1223 no gain_or_loss will be recognized by distributing on the distribution of the controlled stock to shareholder b in the distribution sec_361 no gain_or_loss will be recognized by and no amount will be included in the income of shareholder b upon the receipt of controlled stock in exchange for the distributing interests in the distribution sec_355 the basis of the controlled stock received by shareholder b in the distribution will equal the basis of the distributing interests exchanged therefor sec_358 sec_1_358-2 the holding_period in the controlled stock received by shareholder b in the distribution will include the holding_period of the distributing interests surrendered in exchange therefor provided that such distributing interests are held as a capital_asset on the date of the distribution sec_1223 earnings_and_profits of distributing if any will be allocated between distributing and controlled in accordance with sec_312 and sec_1_312-10 plr-137873-13 distributing’s accumulated_adjustments_account will be allocated between distributing and controlled in a manner similar to the manner in which the earnings_and_profits of distributing will be allocated under sec_312 see sec_1_312-10 and sec_1_1368-2 provided that the distribution is undertaken immediately after the contribution distributing's momentary ownership of the stock of controlled as part of the reorganization under sec_368 will not cause controlled to have an ineligible shareholder for any portion of its first taxable_year under sec_1361 and will not in itself render controlled ineligible to elect to be an s_corporation for its first taxable_year caveats no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings in particular we neither express nor imply any opinion regarding i whether the distribution satisfies the business_purpose requirement of sec_1_355-2 ii whether the distribution is being used principally as a device for the distribution of the earnings_and_profits of distributing controlled or both see sec_355 and sec_1_355-2 iii whether the distribution is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock or distributing interests representing a percent or greater interest in distributing or controlled see sec_355 and sec_1_355-7 iv the u s federal_income_tax treatment of the trust and the trust distribution v the validity of any s_corporation_election or the continuing eligibility for s_corporation status of either distributing or controlled and vi the u s federal_income_tax treatment of the asset exchange plr-137873-13 procedural statements this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely _maury passman___________ maury passman acting chief branch office of associate chief_counsel corporate


internal_revenue_service department of the treasury index numbers number release date washington dc person to contact telephone number refer reply to cc dom corp 3-plr-117657-99 date date distributing controlled state x jurisdiction y z a b c d e business a this letter replies to a request for rulings dated date on the federal_income_tax consequences of a proposed transaction concerning sec_355 of the internal_revenue_code we received additional information in letters dated date january january and date the information submitted for consideration is summarized below distributing is a state x company with voting and non-voting stock outstanding the stock is held by members_of_a_family a b c d and e distributing conducts business a on the accrual_method of accounting and uses a fiscal tax_year plr-117657-99 we have received financial information indicating that distributing’s business a had gross_receipts and operating_expenses representative of the active_conduct_of_a_trade_or_business for each of the past five years the taxpayer wishes to separate its business a activities into two corporations because b disagrees with the other shareholders on how business a should be conducted b believes that some portion of business a should be conducted in jurisdiction y while the other shareholders wish to continue to conduct business a solely in state x this disagreement is having an adverse effect on the day-to-day operations of distributing in order to eliminate the problems generated by this situation the following transaction has been proposed i ii iii distributing will organize controlled as a state x accrual basis corporation with only voting_stock outstanding distributing will transfer real_property a loan receivable and cash the controlled assets to controlled in exchange for all of the controlled stock distributing will distribute all of the controlled stock to b in exchange for all of his distributing stock controlled will exchange state x real_property for real_property located in jurisdiction y the taxpayer has made the following representations in connection with the proposed transaction a b c d the fair_market_value of the controlled stock and other consideration to be received by b approximately equals the fair_market_value of the distributing stock surrendered by b in the exchange no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of the corporation the five years of financial information submitted on behalf of distributing is representative of the corporation's present operations and there have been no substantial operational changes since the date of the last financial statements submitted following the transaction distributing and controlled will each continue independently and with its own separate employees the active_conduct of its share of all of the integrated activities of business a plr-117657-99 e f g h i j k l m n o the distribution of stock of controlled is being carried out for the following corporate business_purpose avoiding significant existing disagreements and conflicts among the shareholders of distributing concerning management style and business objectives the distribution of the stock of controlled is motivated in whole or substantial part by this corporate business_purpose there is no plan or intention by the shareholders of distributing to sell exchange transfer by gift or otherwise dispose_of any of their stock in either distributing or controlled subsequent to the proposed transaction there is no plan or intention by either distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the transaction there is no plan or intention to liquidate distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation subsequent to the transaction except in the ordinary course of business or pursuant to the exchange described in paragraph iii above there are no liabilities to be assumed in the transaction and there are no liabilities to which the transferred assets are subject no investment_tax_credit has been claimed or will be claimed on the property to be transferred to controlled no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution of controlled stock payments made in connection with all continuing transactions if any between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s-length no two parties to the transaction are investment companies as defined in sec_368 and iv distributing is not an s_corporation within the meaning of sec_1361 and there is no plan or intention by distributing or controlled to make an s_corporation_election pursuant to sec_1362 the distribution is not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the combined voting power plr-117657-99 of all classes of stock of either distributing or controlled or stock possessing percent or more of the total value of all classes of stock of either distributing or controlled p the state x real_property to be exchanged see paragraph iii above will be disposed of within z days of the distribution controlled will continue to conduct business a until it disposes of the real_property business a will be fully operational in jurisdiction y within z days of the date controlled disposes of the state x real_property based solely on the information submitted and the representations set forth above we hold as follows the transfer by distributing to controlled of the controlled assets solely in exchange for all of the stock of controlled as described above followed by the distribution of all of the controlled stock to b in exchange for all of his distributing stock will be a reorganization within the meaning of sec_368 distributing and controlled will each be a_party_to_a_reorganization within the meaning of sec_368 distributing will recognize no gain_or_loss upon the transfer of assets to controlled in exchange for controlled stock as described above sec_361 controlled will recognize no gain_or_loss on the receipt of controlled assets in exchange for controlled stock sec_1032 the basis of each asset received by controlled will be the same as the basis of that asset in the hands of distributing immediately prior to the transaction sec_362 the holding_period of the controlled assets will include the period during which these assets were held by distributing sec_1223 b will not recognize gain_or_loss and no amount will be included in the income of b upon the receipt of the controlled stock in exchange for all of his distributing stock as described above sec_355 distributing will recognize no gain_or_loss upon the distribution of all of its controlled stock sec_361 b ’s basis in his controlled stock will equal the aggregate basis of his distributing stock surrendered in the exchange sec_358 plr-117657-99 the holding_period of the controlled stock received by b will include the holding_period of the distributing stock surrendered in the exchange provided that the distributing stock is held as a capital_asset on the date of the exchange sec_1223 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made under sec_1_312-10 of the income_tax regulations no opinion was requested and no opinion is expressed about the exchange of real_property described in paragraph iii above specifically we express no opinion whether the non-recognition provisions of sec_1031 apply to paragraph iii additionally we express no opinion about the tax treatment of the proposed transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings this ruling letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent each affected taxpayer must attach a copy of this letter to the taxpayer's federal_income_tax return for the tax_year in which the transaction covered by this ruling letter is consummated we have sent a copy of this letter to the taxpayer pursuant to the power_of_attorney on file in this office sincerely yours assistant chief_counsel corporate by ken cohen senior technician reviewer branch