department of the treasury employer_identification_number contact person - id number contact telephone number uil internal_revenue_service p o box cincinnati oh number release date date date legend w dollars amount x dollars amount z dollars amount y range of numbers dear you asked for advance approval of your scholarship grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax you requested approval of your scholarship program to fund the education of certain qualifying students our determination we approved your procedures for awarding scholarships based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding scholarships meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable also awards made under these procedures are scholarship or fellowship grants and are not taxable to the recipients if they use them for qualified_tuition_and_related_expenses subject_to the limitations provided in code sec_117 description of your request your letter indicates you will operate a scholarship program the purpose of your program is to offer high school seniors not interested or able to attend a traditional college program the opportunity to secure an education and eventual employment in a trade you will publicize your program at local high schools and on your website you will have meetings with high school counselors and brochures will be available to be eligible students must be graduating high school seniors interested in beginning a career in a trade rather than in a traditional college environment and from a low-income letter catalog number 58263t household you define low-income as single earner family income less than w dollars and dual earner family income less than x dollars a year students must complete an application including an essay of intent stating their desired trade interest recommendations from teachers or other staff members and a statement of financial need financial need will be demonstrated through the sar page from the fafsa form the first two pages of the parents’ guardians’ tax_return or a financial statement you will award in the range of y scholarships annually this number will be determined by your board budget and number of qualified applicants individual scholarship amounts will not exceed z dollars the amount will be determined by research into the trade school programs and maximum tuition required to fulfill the course you will pay funds directly to the student’s school funds will then be applied to the enrolled students who are in good standing to maintain their scholarship students must attend all required classes uphold passing grades in all required courses a grade point average or pass and receive a certificate of completion students will be required to submit attendance records and end of semester grades you may contact or interview technical school staff as a mid-term check-in students will be provided with a warning should either their grades or attendance fall below requirements warnings will be provided in the form of a letter to the student and the school immediately following notification that grades or attendance have fallen below the requirement warnings will be escalated to a violation should a semester of grades or attendance be below the requirement if the student violates the requirements of the scholarship pro-rata funding of the remaining scholarship dollars will not be awarded to the student current selection committee members were selected based on their involvement with the community educational system and overall interest and awareness of the scholarship program an interview process to select a new member will be conducted should a member no longer desire to serve current committee members facilitate the process and new members will be determined by unanimous decision should there be no unanimous decision your acting director will provide the deciding vote you represent that you will complete the following arrange to receive and review grantee reports annually and upon completion of the purpose for which the grant was awarded investigate diversion of funds from their intended purposes take all reasonable and appropriate steps to recover the diverted funds ensure other grant funds held by a grantee are used for their intended purposes and withhold further payments to grantees until you obtain grantees’ assurances that future diversions will not occur and that grantees will take extraordinary precautions to prevent future diversion from occurring you represent that you will maintain the following all records relating to individual grants including information obtained to evaluate grantees identify whether a grantee letter catalog number 58263t is a disqualified_person establish the amount and purpose of each grant and establish that you undertook the supervision and investigation of grants described above basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is a scholarship or fellowship subject_to the provisions of code sec_117 the grant is to be used for study at an educational_organization described in code sec_170 e other conditions that apply to this determination e e e e e e this determination only covers the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as a precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes to your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot award grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary please keep a copy of this letter in your records letter catalog number 58263t if you have questions please contact the person listed at the top of this letter sincerely stephen a martin director exempt_organizations rulings and agreements letter catalog number 58263t


t c memo united_states tax_court epco inc and subsidiaries petitioner v commissioner of internal revenue respondent docket no filed date juan d keller paul p weil and philip b wright for petitioner james a kutten for respondent supplemental memorandum opinion goldberg special_trial_judge this matter is before the court on petitioner's motion for reconsideration under rule and motion to vacate decision under rule the motions relate to our memorandum findings of facts and opinion filed date t c memo and our decision entered on date the facts and holding of that opinion are incorporated herein by this reference brooks mcarthy mcarthy sought to develop a trailer park on land he owned to be called brookshire village mobile home park brookshire mcarthy utilized the resources of eugene fribis fribis an engineer consultant and owner of epco inc petitioner the common parent of an affiliated_group that includes house springs sewer co house springs and imperial utility corp imperial in particular fribis advised mcarthy regarding the sewer system brookshire would require mcarthy later opted for an underground sewage pipe extension to county club manor manor a sewage treatment facility operated by imperial this method required the construction of pipes and expansion of manor to handle the additional sewage the cost of this method totaled dollar_figure each mobile home was required to pay a dollar_figure contribution_in_aid_of_construction fee and a monthly service charge of dollar_figure for sewage treatment imperial contracted with mcarthy to build a sewer system for brookshire imperial agreed to build an underground wastewater collection pipe extending from manor to brookshire mcarthy agreed to pay imperial dollar_figure in tap-on fees contribution sec_1 unless otherwise indicated all section references are to the internal_revenue_code as amended all rule references are to the tax_court rules_of_practice and procedure the term tap-on fee is commonly used interchangeably with the term contribution_in_aid_of_construction in aid of construction and deposited this amount in an interest-bearing checking account in the names of mcarthy and imperial at lemay bank trust co the account bore mcarthy's social_security_number as the taxpayer_identification_number and interest earned on the account was paid to mcarthy funds could be withdrawn from the bank by checks signed by both fribis as president of imperial and mcarthy imperial contracted with mcclanahan contracting mcclanahan a partnership of which fribis was a partner to install the sewer main-line extension and expand manor the cost of extending the main-line from manor to brookshire was dollar_figure imperial paid approximately dollar_figure of this cost and the remainder consisted of the dollar_figure from the escrow account the expansion of manor cost dollar_figure the escrowed funds were credited toward the dollar_figure per pad contribution_in_aid_of_construction fee as such imperial did not charge mcarthy a fee to connect each mobile home to the sewer system from the escrow account dollar_figure was disbursed in and dollar_figure was disbursed in to subcontractors and contractors working on the construction of the sewer pipeline including price bros klueter bros mcclanahan and fred weber inc imperial now owns the sewer line extension on its federal_income_tax return petitioner included in gross_income the dollar_figure disbursed from the escrow and claimed depreciation in connection with those disbursements petitioner did not report the dollar_figure on its federal_income_tax return in her notice_of_deficiency respondent determined that the dollar_figure was includable in petitioner's income for as contributions in aid of construction under sec_118 at trial and in its briefs petitioner argued that the contribution by mcarthy escrowed funds is not a contribution_in_aid_of_construction within the meaning of sec_118 but a nontaxable contribution to the capital of imperial if the payment is a contribution_in_aid_of_construction including such amount in the income of a corporation would violate the sixteenth_amendment and in the alternative the fair_market_value of mcarthy's contribution should be based on the revenue generated by the sewer line rather than the cost of construction in epco inc subs v commissioner tcmemo_1995_249 we found that the funds disbursed from the escrow account were contributions in aid of construction of the sewer pipeline and therefore we held that the amounts disbursed are includable in petitioner's income id we further held based on the legislative_history of nonshareholder contributions that including in income contributions in aid of construction did not violate the sixteenth_amendment with respect to petitioner's alternative argument we stated finally we reject petitioner's alternative argument that the amount of income includable should be the value of the main-line extension computed using the discounted cash- flow method based upon projected revenue imperial received cash imperial did not receive an operating sewer system and therefore the projected income stream from the expansion of sewage capacity is irrelevant the fact that imperial used the cash to construct the main-line extension does not make the contribution equivalent to the asset constructed we note that petitioner's reliance on the staff of joint comm on taxation general explanation of the tax_reform_act_of_1986 j comm print relating to sec_118 is misplaced id in its motions to vacate and for reconsideration petitioner argues that the findings with respect to its alternative argument are factually incorrect in that petitioner did not receive cash but rather received a sewer line petitioner also argues that because its cost of the sewer line extension was greater than the amount of contributions by mcarthy it realized no income on the exchange we shall grant petitioner's motion for reconsideration and reexamine this argument petitioner argues that the funds from the escrow account were never paid to petitioner but instead were disbursed under the joint signatures of fribis as president of imperial and mcarthy petitioner states that the escrow agreement prevented it from receiving cash based on a reexamination of the record we agree that petitioner did not receive cash from the escrow account in the sense of a disbursement payable to petitioner however in light of the fact that the disbursements were only made under the signatures of fribis and mcarthy to pay entities to which imperial was contractually bound and the fact that imperial is now the owner of the pipeline we conclude that the reasoning in epco inc subs v commissioner supra is correct while petitioner may not have been given cash directly from the escrow account petitioner received the benefit of the funds disbursed in the same manner as if the funds had been deposited directly into its own account to argue otherwise would be an exercise in semantics and it is well established that the substance of the transaction rather than its form must govern the tax consequences 80_tc_491 citing 324_us_331 293_us_465 69_tc_905 affd 632_f2d_1171 5th cir petitioner contends that an escrow not under the control of the taxpayer is neither a vehicle for the realization of income nor the receipt of the escrow proceeds themselves in support thereof petitioner cites the following cases 651_f2d_1066 5th cir 627_f2d_1044 10th cir biggs v commissioner supra 385_f2d_238 5th cir garcia v commissioner supra 74_tc_555 74_tc_1134 fredericks v commissioner tcmemo_1994_27 649_fsupp_949 e d mo most of the cases cited by petitioner have a common thread namely a discussion of or reference to the doctrine_of constructive receipt the doctrine generally provides that a taxpayer realizes income without actual receipt if such income is available to the taxpayer and the availability thereof is not subject_to substantial limitations sec_1_451-2 income_tax regs the doctrine_of constructive receipt is not applicable in this case because the escrowed funds were in fact disbursed and as such provided a direct benefit to petitioner the remaining cases cited by petitioner involve the issue of exchanges under sec_1031 all of those cases are inapposite in addition petitioner argues that we erred when we stated that petitioner's reliance on the staff of joint comm on taxation general explanation of the tax_reform_act_of_1986 j comm print relating to sec_118 the general explanation is misplaced petitioner argues that because it received a sewer line not cash the portion of the general explanation concerning valuation is relevant to the determination of the fair_market_value of the sewer line and as a result to the determination of the amount of income petitioner must recognize the funds in the escrow account were earmarked as tap-on fees or contributions in aid of construction these funds went to those entities hired by petitioner to build a pipeline that petitioner now owns clearly petitioner received 385_f2d_238 5th cir 74_tc_1134 69_tc_905 affd 632_f2d_1171 5th cir from mcarthy not a sewer pipeline but rather the direct benefit of the cash disbursements thus as we stated in our opinion in epco inc subs v commissioner supra the general explanation is irrelevant to the facts in this case having reconsidered petitioner's alternative argument and addressed the merits thereof we deny petitioner's motion to vacate to reflect the foregoing an appropriate order will be issued one of the direct benefits received by petitioner as a result of mcarthy's contributions was that the funds went to pay contractors and subcontractors to whom petitioner was directly liable


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 ita b04 plr-153835-05 date date legend x ------------------------------------------------------- date ----------------- date ----------------------- date --------------------------- dear -------------- this letter is in response to a request filed on behalf of x regarding the late filing of a form_8716 election to have a tax_year other than a required tax_year x has requested an extension of time for making such an election under authority contained in sec_301_9100-3 of the procedure and administration regulations information submitted indicates that x a limited_liability corporation taxed as a partnership was organized on date x’s form_8716 was due on date but was not filed by that date however the information furnished indicates that the taxpayer intended to file form_8716 on a timely basis and engaged a qualified_tax professional in order to assure a proper filing due to an error or misunderstanding on the part of the tax professional the form_8716 was not timely filed the error was not due to any lack of due diligence or prompt action on the part of x sec_1_444-3t of the temporary income_tax regulations provides among other requirements that form_8716 must be filed by the earlier of i the 15th day of the fifth month following the month that includes the first day of the taxable_year for which the election will first be effective or ii the due_date without regard to extensions of the income_tax return resulting from the election under sec_444 of the internal_revenue_code sec_301_9100-1 sets forth rules respecting the granting of extensions of time for making certain elections under these rules the commissioner in his discretion may grant a reasonable extension of time to make a regulatory election under subtitle a plr-153835-05 provided the taxpayer acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government sec_301_9100-2 sets forth rules governing automatic extensions for regulatory elections including elections to use other than the required tax_year under sec_444 if the provisions of sec_301_9100-2 do not apply to the taxpayer’s situation as in the instant case the provisions of sec_301_9100-3 other extensions may apply sec_301_9100-3 sets forth standards that the commissioner will employ in determining whether to grant discretionary relief in situations that do not meet the requirements of sec_301_9100-2 the standards applied are whether the taxpayer acted reasonably and in good_faith in the matter and whether the granting of relief will prejudice the interests of the government generally a taxpayer will be deemed to have acted reasonably and in good_faith where the taxpayer reasonably relied on a qualified_tax professional and that professional failed to make or advise the taxpayer to make the election at issue the information submitted and representations furnished by x and its tax professional establish that x acted reasonably and in good_faith in respect of this matter furthermore we have determined that the granting of relief in this case will not prejudice the interests of the government within the intendment of sec_301_9100-3 accordingly the requirements of sec_301_9100-3 for the granting of relief have been satisfied x is hereby granted an extension of time to file form_8716 so as to effect a first taxable_year ending date within days of the date of this ruling x must file the required form_8716 together with a copy of this letter_ruling with the service_center where its federal_income_tax return is filed this ruling is also conditioned on x complying with sec_1_7519-1t which provides in relevant part that for each taxable_year that x has an election under sec_444 in effect x must i file a return as provided in sec_1_7519-2t and ii make any required_payment as provided in sec_1_7519-2t except for the specific ruling above which is restricted to the filing of form_8716 we express or imply no opinion concerning the federal_income_tax consequences of the facts of this case under any other provision of the code or regulations that may be applicable thereto this letter_ruling is based on facts and representations provided by x and its authorized representative and is limited to the matters specifically addressed no opinion is expressed as to the tax treatment of the transactions considered herein under the provisions of any other sections of the code or regulations which may be applicable thereto or the tax treatment of any conditions not specifically addressed herein plr-153835-05 because it could help resolve federal tax issues a copy of this letter should be maintained with x’s permanent records in accordance with the provisions of a power_of_attorney currently on file with this office a copy of this letter_ruling is being sent to x’s authorized representative this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent michael j montemurro branch chief office of associate chief_counsel income_tax accounting sincerely


department of the treasury internal_revenue_service washington d c tax exempt ang qovermmert entities division number release date date date legend foundatior dear uil dollar_figure ‘we have considered your ruling_request dated date facts foundation is a tax-exempt public charity described in sec_501 a and b a vi of the internal_revenue_code code its articlas of incorporation state its mission as organized for purposes that are exclusively religious charitable scientific literary and educational within the meaning of sec_501 its principal activities involve supporting youth in a particular sport especially for individuals who have historically been underserved or underrepresented in the sport the foundation targets the disabled minorities inner-city youth juniors and women ‘the foundation also maintains a scholarship program for college students who meet academic sport community service and financial need requirements and are studying sport management for the particular sport at issue in an accredited program at one of u s universities applicants are screened by a university scholarship committee and the most eligible_candidates are forwarded to the foundation scholarship selection committee three of five selection committee members are on the foundation beard the remaining two selection committee members are independent individuals generally experts in the field of education while family members of scholarship committee members are eligible for scholarships the related committee member must recuse him herself or withdraw the family member's application scholarship grants are paid directly to the recipient's university for qualified_tuition_and_related_expenses under sec_117 b _ the foundation creates and maintains records and case histories as required by revrul_56_304 c b foundation now plans to add three new scholarship programs to assist financially needy students to study sport management and to encourage diversity in the sport the first new eligible recipients will have completed one of scholarship program is for high school graduates admitted into an accredited sport management program for the particular sport at issue at one of u s universities this is a four-year renewable scholarship dependent upon maintaining academic sport internship community service and financial need requirements foundation’s youth development programs prior to high school graduation and met a number of other objective criteria including minimum grade point average financial need documented community service and minimum verifiable spart playing ability and subsequent renewal of the scholarship for up to four years is determined by the foundation scholarship committee described above while family members of scholarship committee members are eligible for these scholarships the related committee member must recuse scholarship grants are paid directly to him herself or withdraw the family member's application the the recipient's university for qualified_tuition_and_related_expenses under sec_117 foundation will create and maintain records and case histories as required by revrul_56_304 1958_2_cb_306 initial selection for the award eligible students must have the second new scholarship program is a diversity scholarship program for women and ethnic minority students attending one of the nineteen u s universities that offer the sport management curriculum for the particular sport at issue the ethnic minority populations targeted for these scholarships include african-american hispanic-american native or alaskan american and asian or pacific island american completed at least two years of the sport management program and as with the existing scholarship program applicants are initially screened by a university scholarship committee and the most eligible_candidates are forwarded to the foundation scholarship selection committee applicants must meet additional criteria have at least a grade point average pass the sport playing ability test and have completed at least two intemships related to the sport management program for this sport while family members of scholarship committee members are eligible for these scholarships the related committee member must recuse him herself or withdraw the family member’s application scholarship grants are paid directly to the recipient's university for qualified_tuition_and_related_expenses under sec_117 the foundation will create and maintain records and case histories as required by revrul_56_304 1956_2_cb_306 the third scholarship program is open to contestants in a minority collegiate sport championship for the sport at issue contestants are individuals whether or not they are ethnic minorities attending historically black colleges and universities hispanic serving institutions and tribal colleges or ethnic minority students from other u s sport championship are eligible for this scholarship if they have at least a grade point average in college and have participated in community service while a college student information about this scholarship is distributed to all tournament participants selection of scholarship recipients is made by the foundation scholarship committee are paid directly to the recipient's university for qualified_tuition_and_related_expenses under sec_117 scholarships the related committee member must recuse him herself or withdraw the family member's application required by revrul_56_304 1956_2_cb_308 while family members of scholarship committee members are eligible for these the foundation will create and maintain records and case histories as colleges or universities participants in the scholarship grants requested ruling the continued operation by the foundation of the existing sport management scholarship program and the adoption and implementation of the three proposed additional scholarship programs described above will not adversely affect the foundation’s status as a tax-exempt charity described in sec_170 1a vi c and a of the internal_revenue_code_of_1986 as amended because these scholarship programs are or will be when implemented charitable activities described in sec_501 and are consistent with the foundation’s tax-exempt purposes law sec_501 and c provide for exemption from federal inoome tax for -- corporations and any community chest fund or foundation organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes or to foster national or intemational amateur sports competition but only if no part of its activities involve the provision of athletic_facilities or equipment or for the prevention of crueity to children or animals no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation except as otherwise provided in subsection h and which does not participate in or intervene in including the publishing or distributing of statements any political campaign on behalf of or in opposition to any candidate for public_office sec_1 c -1 a of the regulations states that ijn order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization faits to meet either the organizational_test or the operational_test it is not exempt d testing for public safety e literary f sec_1 c -1 of the regulations provides that exempt purposes are a religious b charitable c scientific educational or g prevention of cruelty to children or animals sec_1 c -1 li of the regulations states that ‘ ajn organization is not organized or operated exclusively for one or more of the purposes specified in subdivision of this subparagraph unless it serves a public rather than a private interest thus to meet the requirement of this subdivision it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization of persons controlled directly or indirectly by such private interests sec_1 c -1 d 4i of the regulations provides that s ince each of the purposes specified in subdivision of this subparagraph is an exempt_purpose in itself an organization may be exempt if it is organized and operated exclusively for any one or more of such purposes in fact an organization is organized and operated exclusively for an exempt_purpose or hf purposes exemption will be granted fo such an organization regardless of the purpose or purposes specified in its application_for exemption for example if an organization claims exemption on the ground that it is educational exemption will net be denied if in fact itis ‘charitable’ sec_1_501_c_2_-1 of the regulations defines the term charitable stating that it ‘is used in sec_501 c in its generally accepted legal sense and is therefore not to be construed as limited by the separate enumeration in sec_501 of other tax-exempt purposes which may fall within the broad outlines of ‘charity’ as developed by judicial decisions such term includes relief of the poor and distressed or of the underprivileged advancement of religion advancement of education or science erection or maintenance of public buildings monuments or works lessening of the burdens of government and promotion of social welfare by organizations designed to accomplish any of the above purposes or i to lessen neighborhood tensions ii to eliminate prejudice and discrimination iii ta defend human and civil rights secured_by law of iv to combat community deterioration and juvenile delinquency emphasis added revrul_56_304 1956_2_cb_306 provides that organizations privately established and funded as charitable foundations which are organized and actively operated to carry on one or more of the purposes specified in sec_501 of the internal_revenue_code of and which otherwise meet the requirements for exemption from federal_income_tax are not to individuals provided such distributions are pracluded from making distributions of their funds made on a true charitable basis in furtherance of the purposes for which they are organized however organizations of this character which make such distributions should maintain adequate_records and case histories to show the name and address of each recipient of aid the amount distributed to each the pumpose for which the aid was given the manner in which the recipient was selected and the relationship if any between the recipient and members officers or trustees of the organization a grantor or substantial_contributor to the organization or a member_of_the_family of either and a corporation controlled by a grantor or substantial_contributor in order that any of all distributions made to individuals can be substantiated upon request by the internal_revenue_service in revrul_66_103 1966_1_cb_134 a nonprofit organization providing awards and grants including scholarships and fellowship grants to needy individuals to enable them to continue their work in the creative arts as wall as to continue their education and studies with no menetary benefit to the donor organization is entitled to exemption fram federal_income_tax under sec_501 of the intemal revenue code of thus scholarships based on need are deemed to be charitable in revrul_69_267 1960_1_cb_151 the service ruled that a nonprofit organization that awards scholarships to individuals on the basis of scholastic ability rather than financial need qualifies for exemption from federal_income_tax under sec_501 c of the internal_revenue_code of the organization was formed and is operated to award scholarships to students for educational studies in institutions of higher leaning the recipients are selected from a broad class of applicants on the basis of scholastic standing only the organization is supported by grants and contributions the revenue_ruling held that sec_501 c of the code provides for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable purposes sec_1 c -1 a of the income_tax regulations provides that the term ‘charitable’ is used in sec_501 in its generally accepted legal sense therefore it includes advancement of education and the organization qualified for exemption analysis foundation maintains a need and merit-based scholarship pragram far college juniors and seniors pursuing a sport management curriculum for the sport at issue at one of nineteen u s colleges and universities under code sec_501 and sec_1 -1 of the regulations foundation’s scholarship program is charitable in nature as it both advances education and assists those in financial need the foundation’s three new scholarship programs two of which target individuals based on both financial need and ability and one of which targets mainly minorities and women based on scholastic and sport ability are scholarships that are charitable based on financial need and or scholastic ability as described in revrul_66_103 1966_1_cb_134 and revrul_69_257 1969_1_cb_151 all of the scholarship programs benefit a charitable_class that is large and indefinite so the scholarships are not targeted to pre-selected individuals scholarship criteria are objective and members of the foundation selection committee must recuse themselves from considering family members for a foundation scholarship the foundation complies with the recordkeeping requirements of revrul_56_304 1956_2_cb_306 in making grants to individuals conclusion ‘the continued operation by the foundation of the existing sport management scholarship program and the adoption and implementation of the three proposed additional scholarship programs as described will not adversely affect the foundation’s status as a tax-exempt charity described in saction sec_170 sec_501 and sec_809 of the internal_revenue_code of as amended these scholarship programs are or will be when implemented charitable activities described in sec_501 and are consistent with the foundation’s tax-exempt purposes this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you shauld follow the instructions in notice this ruling is directed only to the organization that requested it provides that it may not be used or cited by others as precedent this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolved questions concerning your federal_income_tax status this ruling shoutd be kept in your permanent records sec_6110 of the code 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 in accordance with the power_of_attorney currently on file with the intemal revenue service we are sending a copy of this letter to your authorized representative sincerely ronald j shoemaker manager exempt_organizations technical group enclosure notice


internal_revenue_service department of the treasury number release date index number 468a 468a washington dc person to contact telephone number refer reply to cc psi plr-106366-00 date date re request for a revised schedule of ruling amounts taxpayer plant location commission a commission b commission c cooperative a cooperative b cooperative c director fund dear this letter responds to the request of taxpayer dated date for a revised schedule of ruling amounts in accordance with sec_1_468a-3 of the income_tax regulations taxpayer was previously granted a revised schedule of ruling amounts on date information for the schedule of ruling amounts was submitted on behalf of the taxpayer pursuant to sec_1_468a-3 taxpayer represents the facts and information relating to its request for a revised schedule of ruling amounts as follows taxpayer is under the audit jurisdiction of the director taxpayer has a direct ownership_interest of percent as a tenant-in-common with other electric utility companies in plant which is situated at location plant’s operating license expires in plr-106366-00 taxpayer is subject_to the jurisdiction of commission a which covers percent of the taxpayer’s total electric sales commission b which covers percent and commission c which covers percent for a total of percent these percentages may vary slightly from year to year the estimated base cost for decommissioning the plant is based on an independent study and is premised on the prompt removal and dismantlement method taxpayer intends to transfer its ownership interests in plant and fund as part of a corporate_reorganization the reorganization is in compliance with state law and is expected to take place in therefore taxpayer has requested that the revised schedule of ruling amounts extend through commission c in docket no effective approved rates that taxpayer negotiated with cooperative a and cooperative b commission c authorized nuclear decommissioning costs to be included in the taxpayer’s cost of service for ratemaking purposes for the plant in the amount of allocated to cooperative a and allocated to cooperative b and estimated an after-tax rate of return on assets of percent commission c also determined the total estimated cost of decommissioning to be this base cost escalated using an estimated inflation rate of percent results in an estimated future decommissioning cost of the tax and investment changes made to sec_468a of the internal_revenue_code by section of the energy policy act of were not taken into consideration when estimating these costs commission c in docket no effective approved rates that taxpayer negotiated with cooperative c commission c authorized nuclear decommissioning costs to be included in the taxpayer’s cost of service for ratemaking purposes for the plant in the amount of and estimated an after-tax rate of return on assets of percent commission c also determined the total estimated cost of decommissioning to be this base cost escalated using an estimated inflation rate of percent results in an estimated future decommissioning cost of the tax and investment changes made to sec_468a of the internal_revenue_code by section of the energy policy act of were not taken into consideration when estimating these costs amounts for commission a and commission b are not specifically reviewed herein there are no proceedings pending before either commission a commission b or commission c that may result in an increase or decrease in the amount of decommissioning costs for the plant to be included in taxpayer’s cost of service for ratemaking purposes plr-106366-00 the funding_period for the plant extends from and the level_funding limitation period for the plant extends from the estimated period for which the fund will be in effect is for the amounts related to cooperative a and cooperative b and for the amount related to cooperative c the estimated_useful_life of the plant is thus the taxpayer has calculated its qualifying percentage to be percent for the amounts related to cooperative a and cooperative b and percent for the amount related to cooperative c sec_468a of the internal_revenue_code provides that a taxpayer may elect to deduct the amount of payments made to a qualified nuclear decommissioning fund however sec_468a limits the amount_paid into the fund for any taxable_year to the lesser_of the amount of nuclear decommissioning costs allocable to the fund that is included in the taxpayer’s cost of service for ratemaking purposes for the taxable_year or the ruling_amount applicable to that year sec_468a of the code provides that no deduction shall be allowed for any payment to the nuclear decommissioning fund unless the taxpayer requests and receives from the secretary a schedule of ruling amounts the ruling_amount for any taxable_year is defined under sec_468a as the amount which the secretary determines to be necessary to fund that portion of nuclear decommissioning costs which bears the same ratio to the nuclear power plant as the period for which the fund is in effect bears to the estimated_useful_life of the plant this term is further defined to include the amount necessary to prevent excessive funding of nuclear decommissioning costs or funding of these costs at a rate more rapid than level_funding taking into account such discount rates as the secretary deems appropriate sec_468a of the code provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of the taxable_year if the payment is made on account of the taxable_year within 2½ months after the close of the taxable_year sec_1_468a-1 of the regulations provides that an eligible_taxpayer may elect to deduct nuclear decommissioning costs under sec_468a of the code an eligible_taxpayer as defined under sec_1_468a-1 is a taxpayer that has a qualifying interest in a nuclear power plant as defined under sec_1_468a-1 a qualifying interest is among other things a direct ownership_interest including an interest held as a tenant in common or joint tenant sec_1_468a-2 of the regulations provides that the maximum amount of cash payments made or deemed made to a nuclear decommissioning fund during any taxable_year shall not exceed the lesser_of i the cost of service amount applicable to the nuclear decommissioning fund for such taxable_year or ii the ruling_amount applicable to the nuclear decommissioning fund for such taxable_year plr-106366-00 sec_1_468a-3 of the regulations provides that in general a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that over the taxable years remaining in the funding_period as of the date the schedule first applies will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding_period equal to and in no event more than the amount of decommissioning costs allocable to the fund sec_1_468a-3 of the regulations provides that each schedule of ruling amounts shall be based on the reasonable assumptions and determinations used by the applicable public_utility commission s in establishing or approving the amount of decommissioning costs to be included in the cost of service for ratemaking purposes taking into account amounts that are otherwise required to be included in the taxpayer’s income under sec_88 of the code and the regulations thereunder each schedule of ruling amounts shall be based on the public_utility commission’s reasonable assumptions concerning i the after-tax rate of return to be earned by the amounts collected for decommissioning ii the total estimated cost of decommissioning the nuclear power plant and iii the frequency of contributions to the nuclear decommissioning fund for a taxable_year sec_1_468a-3 of the regulations requires the internal_revenue_service to provide a schedule of ruling amounts that is identical to the schedule proposed by the taxpayer but no such schedule shall be provided by the service unless the taxpayer’s proposed schedule is consistent with the principles and provisions of this section sec_1_468a-3 of the regulations provides that the ruling_amount specified in a schedule of ruling amounts for any taxable_year in the level_funding limitation period shall not be less than the ruling_amount specified in such schedule for any earlier taxable_year under sec_1_468a-3 the level_funding limitation period begins on the first day of the first taxable_year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day of the taxable_year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes sec_1_468a-3 of the regulations provides that the funding_period for a nuclear decommissioning fund is the period that begins on the first day of the first taxable_year for which a deductible payment is made or deemed to be made to such nuclear decommissioning fund and ends the later of i the last day of the taxable_year that includes the estimated date on which decommissioning costs of the nuclear power plant to which the nuclear decommissioning fund relates will no longer be included in the taxpayer’s cost of service for ratemaking purposes or ii the last day of the taxable_year that includes the estimated date on which the nuclear power plant to which the nuclear decommissioning fund relates will no longer be included in the taxpayer’s rate base for ratemaking purposes plr-106366-00 sec_1_468a-3 of the regulations provides that the amount of decommissioning costs allocable to a nuclear decommissioning fund is the taxpayer’s share of the total estimated cost of decommissioning the nuclear power plant multiplied by the qualifying percentage sec_1_468a-3 of the regulations provides that in general the total estimated cost of decommissioning a nuclear power plant is the reasonably estimated cost of decommissioning used by the applicable public_utility commission in establishing or approving the amount of these costs to be included in cost of service for ratemaking purposes sec_1_468a-3 of the regulations provides that a taxpayer’s share of the total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning the plant multiplied by the taxpayer’s qualifying interest in the plant sec_1_468a-3 of the regulations provides that the qualifying percentage for any nuclear decommissioning fund is equal to the fraction the numerator of which is the number of taxable years in the estimated period for which the nuclear decommissioning fund is to be in effect and the denominator of which is the number of taxable years in the estimated_useful_life of the applicable nuclear power plant sec_1_468a-3 of the regulations provides that the estimated period for which a nuclear decommissioning fund is to be in effect begins on the later of the first day of the first taxable_year for which a deductible payment is made to the nuclear decommissioning fund or deemed made or the first day of the taxable_year that includes the date that the nuclear power plant begins commercial operations as determined by the applicable public_utility commission at the time the plant was first included in the taxpayer’s rate base and ends on the last day of the taxable_year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes according to sec_1_468a-3 the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes is determined under the ratemaking assumptions used by the applicable public_utility commission in establishing or approving rates during the first ratemaking proceeding in which the nuclear power plant was included in the taxpayer’s rate base sec_1_468a-3 of the regulations provides that the estimated_useful_life of a nuclear power plant begins on the first day of the taxable_year that includes the date that the plant begins commercial operations as determined by the applicable public_utility commission at the time the plant was first included in the taxpayer’s rate base and ends on the last day of the taxable_year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for plr-106366-00 ratemaking purposes according to sec_1_468a-3 the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes is determined under the ratemaking assumptions used by the applicable public_utility commission in establishing or approving rates during the first ratemaking proceeding in which the nuclear power plant was included in the taxpayer’s rate base sec_1_468a-3 of the regulations provides that if two or more public_utility commissions establish or approve rates for electric energy generated by a single nuclear power plant then the schedule of ruling amounts shall be separately determined pursuant to the rules of sec_1_468a-3 through e for each public_utility commission that has determined the amount of decommissioning costs to be included in the cost of service for ratemaking purposes for this plant under sec_1_468a-3 this separate determination shall be based on the reasonable assumptions and determinations used by the relevant public_utility commission and shall take into account only that portion of the total estimated cost of decommissioning that is properly allocable to the ratepayer whose rates are established or approved by the public_utility commission according to sec_1_468a-3 the ruling amounts for any taxable_year is the sum of the ruling amounts for such taxable_year determined under the separate schedules of ruling amounts sec_1_468a-3 of the regulations provides that the internal_revenue_service shall not provide a taxpayer with a schedule of ruling amounts for any nuclear decommissioning fund unless the public_utility commission that establishes or approves the rates for electric energy generated by the plant to which the nuclear decommissioning fund relates has determined the amount of decommissioning costs to be included in the taxpayer’s cost of service for ratemaking purposes and has disclosed the after-tax rate of return and any other assumptions and determinations used in establishing or approving the amount sec_1_468a-3 of the regulations enumerates the information required to be contained in a request for a schedule of ruling amounts filed by a taxpayer in order to receive a ruling_amount for any taxable_year sec_1_468a-3 of the regulations provides that a taxpayer is required to request a revised schedule of ruling amounts for a nuclear decommissioning fund if a any public_utility commission that establishes or approves rates for the furnishing or sale of electric energy generated by a nuclear power plant to which the nuclear decommissioning fund relates increases the proposed period over which decommissioning costs of the nuclear power plant will be included in cost of service for ratemaking purposes adjusts the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes or reduces the amount of decommissioning costs to be included in cost of service for any taxable_year and b the taxpayer’s most recent request for a schedule of ruling plr-106366-00 amounts did not provide notice to the service of such action by the public_utility commission sec_1_468a-3 of the regulations provides that any taxpayer that has previously obtained a schedule of ruling amounts can request a revised schedule of ruling amounts such a request must be made in accordance with the rules of sec_1_468a-3 the internal_revenue_service shall not provide a revised schedule of ruling amounts applicable to a taxable_year in response to a request for a schedule of ruling amounts that is filed after the deemed payment deadline date for such taxable_year sections a and c of the energy act eliminated for taxable years beginning after date the investment restrictions contained in sec_468a of the code sections b and c of the energy act revised sec_468a by lowering the tax_rate applicable to a nuclear decommissioning fund for taxable years beginning after date we have examined the representations and information submitted by the taxpayer in relation to the requirements set forth in the sec_468a of the code and the regulations thereunder based solely on these representations of the facts we reach the following conclusions taxpayer has a qualifying interest in the plant and is therefore an eligible_taxpayer under sec_1_468a-1 of the regulations commissions a b and c have determined the amount of decommissioning costs to be included in the taxpayer’s cost of service for ratemaking purposes as required by sec_1_468a-3 of the regulations taxpayer as owner of the plant has calculated its share of the total decommissioning costs under sec_1_468a-3 of the regulations taxpayer has determined that pursuant to sec_1_468a-3 of the regulations the qualifying percentage is percent for the amounts related to cooperative a and cooperative b and percent for the amount related to cooperative c taxpayer has proposed a schedule of ruling amounts which meets the requirements of sec_1_468a-3 and of the regulations the annual payments specified in the proposed schedule of ruling amounts are based on the reasonable assumptions and determinations used by commissions a b and c and will result in a projected fund balance at the end of the funding_period equal to or less than the amount of decommissioning costs allocable to the fund plr-106366-00 the maximum amount of cash payments made or deemed made to the fund during any taxable_year is restricted to the lesser amount of the decommissioning costs applicable to the fund or the ruling_amount applicable to the fund as set forth under sec_1_468a-2 of the regulations taxpayer subject_to the jurisdiction of three public_utility commissions for ratemaking purposes has calculated its share of the total decommissioning costs allocable to commissions a b and c as required by sec_1_468a-3 of the regulations based on the above determinations we conclude that the taxpayer’s proposed schedule of ruling amounts satisfies the requirements of sec_468a of the code approved schedule of ruling amounts taxable years commissions a b and c year comm a1 comm b1 comm c total approval of the schedule of ruling amounts is contingent on there being no change in the facts and circumstances known or assumed at the time this ruling is issued if any of the events described in sec_1_468a-3 of the regulations occur in future years the taxpayer must request a review and revision of the schedule of ruling amounts generally the taxpayer is required to file such a request on or before the deemed payment deadline date for the first taxable_year in which the rates reflecting such action became effective when no such event occurs the taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline of the tenth taxable_year following the close of the tax_year in which the most recent schedule of ruling amounts was received amounts for commissions a and b are not specifically reviewed herein and are merely reprinted to arrive at the amount for the total annual ruling_amount for purposes of the review and revision under sec_1_468a-3 of the regulations the date of the schedule of ruling amounts approved by the service on date governs the review period for the commission a and commission b ruling amounts plr-106366-00 the approved schedule of ruling amounts is relevant only to those payments made to the fund payments allocable to any funds other than the fund cannot qualify for purposes of the deduction under the provisions of sec_468a of the code as stated above payments made to the fund can qualify only to the extent that they do not exceed the lesser_of the decommissioning costs applicable to the fund or the ruling amounts applicable to the fund in the taxable_year this letter_ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that this ruling may not be used or cited as precedent pursuant to sec_1_468a-7 of the regulations a copy of this letter must be attached with the required election statement to the taxpayer’s federal_income_tax return for each taxable_year in which the taxpayer claims a deduction for payments made to the fund in accordance with the power_of_attorney a copy of this letter_ruling is being sent to your authorized representative a copy of this letter_ruling also is being sent to the director sincerely yours peter c friedman assistant to the branch chief branch office of the associate chief_counsel passthroughs and special industries


trust a b internal_revenue_service number release date index number ------------------------------------------ --------------------------------------------------------- ------------------------------------------ ----------------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-146979-05 date date ---------------------------------------------------------------------------------------------------- ------------------------ ---------------------------------------------------------------------------------------------------- -------------------------- ---------------------------------------------------------------------------------------------------- -------------------------- ------------------------------------------------------- ------------------ ------------------------- ---------------------- --------------- --- --- --- charity ---------------------------------------------------- court d1 d2 d3 d4 a b c d dear -------------- correspondence submitted on behalf of trust by its authorized representatives requesting rulings under sec_664 sec_507 sec_1001 and sec_4941 of the internal_revenue_code grantors created trust a charitable_remainder_unitrust crut on d1 and are entitled to receive payment of the unitrust_amount under the trust instrument the trust instrument provides that the trustee will pay to the recipients in equal shares during their lifetimes a untitrust amount equal to the lesser_of a the trust income for the taxable_year as defined in sec_643 and the regulations thereunder or b a percent of the net the information submitted states that a and b a married couple collectively this responds to a letter dated date and subsequent plr-146979-05 fair_market_value of the assets of the trust valued as of the first day of each taxable_year of the trust the valuation_date the payment of the unitrust_amount shall also include any amount of trust income for the year that is in excess of the amount required under b above to the extent that the aggregate of the amounts paid in prior years was less than the aggregate of the amounts computed at a percent of the net fair_market_value of the trust assets the payments will be made until the death of the survivor of the grantors upon the death of the survivor grantor the trustee shall distribute all of the principal and income of trust other than any amount due either of grantors or their respective estates as provided to charity a public charity the trustee proposes to terminate trust early and to distribute all trust property to grantors and charity by obtaining an order from court contingent on the issuance of a favorable private_letter_ruling from the service under the proposed termination plan it is represented that grantors will assign their interests in trust to charity in exchange for grantors’ assignment of their interests in trust the trustee will make a one-time lump sum distribution equal to the present_value of their right to receive unitrust or income payments for life any assets distributed in-kind will be distributed on a pro-rata basis among grantors and charity a’s normal life expectancy a‘s personal physician submitted a statement confirming that there was no indication that a’s life expectancy was less than would otherwise be expected for a person a’s age b’s date of birth is d2 and b is aware of no physical condition that would decrease b’s normal life expectancy b‘s personal physician submitted a statement confirming that there was no indication that b’s life expectancy was less than would otherwise be expected for a person b’s age ruling a’s date of birth is d2 and a is aware of no physical condition that would decrease sec_664 defines a crut for the purposes of sec_664 as a_trust a from which a fixed percentage which is not less than percent nor more than percent of the net fair_market_value of its assets valued annually is to be paid not less often than annually to one or more persons at least one of which is not an organization described in sec_170 and in the case of individuals only to an individual who is living at the time of the creation of the trust for a term of years not in excess of years or for the life or lives of such individual or individuals b from which no amount other than the payments described in sec_664 and other than qualified gratuitous transfers described in sec_664 may be paid to or for the life or lives of such individual or individuals c following the termination of the payments described in sec_664 the remainder_interest in the trust is to be transferred to or for_the_use_of an organization described in sec_170 or is to be retained by the trust for such a use or to the extent the remainder_interest is in qualified_employer_securities as defined in sec_664 provides that notwithstanding the provisions of sec_664 based solely on the facts and representations submitted we conclude that the plr-146979-05 sec_664 all or part of such securities are to be transferred to an employee_stock_ownership_plan as defined in sec_4975 in a gratuitous transfer as defined by sec_664 and d with respect to each contribution of property to the trust the value determined under sec_7520 of such remainder_interest in such property is at least percent of the net fair_market_value of such property as of the date such property is contributed to the trust and b the trust instrument of a crut may provide that the trustee shall pay the income_beneficiary for any year a the amount of the trust income if such amount is less than the amount required to be distributed under sec_664 and b any amount of the trust income which is in excess of the amount required to distributed under sec_664 to the extent that by reason of sec_664 the aggregate of the amounts paid in prior years was less than the aggregate of such required amounts early termination of trust pursuant to court order will not cause trust to be disqualified as a crut under sec_664 this ruling is conditioned on grantors and trust treating the early termination as described in ruling sec_2 through below ruling sec_2 case of a_trust the creator of the trust above from income_tax self-dealing between a disqualified_person and a private_foundation exchange or leasing of property between a private_foundation and a disqualified_person or transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation sec_507 imposes a tax on a private_foundation under certain circumstances sec_4941 imposes an excise_tax on disqualified persons for each act of sec_4941 defines self-dealing as including any direct or indirect sale or sec_664 generally exempts cruts as defined in sec_664 and sec_507 defines the term substantial_contributor to include in the sec_4946 provides that for purposes of subchapter_a of chapter of subtitle d of title_26 the term disqualified_person includes with respect to a private_foundation a person who is a substantial_contributor to the foundation or a foundation_manager within the meaning of sec_4946 sec_4946 provides that for purposes of subchapter_a of chapter of subtitle sec_4947 provides in pertinent part that in the case of a_trust which is not sec_4946 provides that for purposes of sec_4946 the term substantial plr-146979-05 contributor means a person who is described in sec_507 d of title_26 the term foundation_manager means with respect to any private_foundation an officer director or trustee of a foundation or an individual having powers or responsibilities similar to those of officers directors or trustees of the foundation and with respect to any act or failure to act the employees of the foundation having authority or responsibility with respect to such act or failure to act exempt from tax under sec_501 not all of the unexpired interests of which are devoted to charitable purposes and which has amounts in trust for which a charitable deduction was allowed sec_507 and sec_4941 apply as if such trust were a private_foundation sec_4947 provides that sec_4947 shall not apply with respect to any amounts payable under the terms of such trust to non-charitable income beneficiaries provides in essence that payments of income by a crut to its individual income beneficiaries do not result in any_tax on self-dealing under sec_4947 sec_7520 annuity life_estate or remainder factor may not be used to value a restricted beneficial_interest however a special factor may be used to value a restricted beneficial_interest in some circumstances sec_1_7520-3 provides that the standard factor for an ordinary remainder_interest represents the present worth of the right to receive dollar_figure at the end of a defined period sec_1_7520-3 provides that the standard factor for an ordinary life_estate interest represents the right to receive the use of dollar_figure for a defined period sec_53_4947-1 of the foundation and similar excise_taxes regulations sec_1_7520-3 of the income_tax regulations provides that the standard trust is a split-interest trust described in sec_4947 by being described in sec_4947 trust is subject_to the provisions of sec_507 and sec_4941 and certain other provisions as if it were a private_foundation grantors are disqualified persons with respect to the trust within the meaning of sec_4946 because they are the creators of the trust sec_507 defines the term substantial_contributor to include the creator of the trust however the grantors are not disqualified persons with respect to charity a public charity because sec_4941 applies to certain transactions between private_foundations and disqualified persons by early termination trust will distribute lump sums to grantors and charity equal to the actuarial value of their interests in trust taking into account the net-income plr-146979-05 provisions of trust and the distributions are also treated as a constructive_sale or exchange between grantors and charity generally payments to grantors from trust would constitute self-dealing one reasonable method to calculate the actuarial value of the income and the appropriate calculation of the actuarial value of the income_interest of trust however because the distribution to grantors equals the actuarial value of the income_interest taking into account the net-income provisions of the trust the exception to self- dealing provided by sec_53_4947-1 applies and the distribution will not be an act of self-dealing furthermore because charity is a public charity sec_4941does not apply to the transaction between grantors and charity taking into account the net-income provisions of trust requires the use of a reasonable method for the calculation which does not inappropriately inflate grantors’ interest to the detriment of the charitable remainderman remainder interests is the following the computation of the remainder_interest is found using a special factor as indicated in sec_1_7520-3 the special remainder factor is found by using the methodology stated in sec_1_664-4 for computing the factor for a remainder_interest in a unitrust with the following modification where sec_1_664-4 provides an assumption that the trust’s stated payout percentage is to be paid out each year instead the assumed payout shall be that of a fixed percentage which is equal to the lesser_of the trust’s stated payout percentage or the sec_7520 rate for the month of termination the special factor for the non-charitable payout interest i sec_1 minus the special remainder factor based on this methodology the calculation of grantors’ income_interest in trust may be demonstrated as follows the sec_7520 rate for d4 is b percent assuming the termination occurred in d4 the lesser_of this rate and trust’s stated payout percentage is b percent the assumed grantors’ ages as of the nearest birthdays are c and d based on table 90cm interest at b percent an unadjusted payout rate of b percent and quarterly payments made at the end of each quarter the present_value of the remainder_interest in a unitrust which falls in at the death of the last of two persons aged c and d is dollar_figure427 for each dollar_figure of the trust estate the present_value of the payout interest in the same unitrust until such death is dollar_figure minus dollar_figure427 or dollar_figure573 for each dollar_figure of the trust estate would during the full term of the trust under the above-described methodology for valuing their interest in a crut with a net_income make-up feature further state law allows for early termination under the facts presented pursuant to the court order in addition grantors’ personal physician has conducted a physical examination on each of them and has stated under penalties of perjury that the examination reveals no in this case the income beneficiaries are not expected to receive more than they plr-146979-05 medical_condition expected to result in a shorter-than-average longevity under sec_1 and grantors have each signed a similar statement furthermore because the effect of the transaction is to vest the income_interest accordingly we hold as follows neither the distribution to grantors of the and remainder_interest in the remainder beneficiary charity the trust no longer will be a split-interest trust under sec_4947 and sec_507 will not apply unitrust termination amount the final distribution of trust assets to charity grantors’ consent to trust termination nor charity’s consent to trust termination constitute acts of direct or indirect self-dealing under sec_4941 and sec_4947 we further hold that the court- approved termination of trust and related lump-sum_distribution to grantors of the unitrust termination amount and final distribution of remaining trust assets to charity will not constitute a taxable_termination under sec_507 and sec_4947 sec_1001 provides that the gain from the sale_or_other_disposition of ruling property is the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in such section for determining loss over the amount_realized under sec_1001 the amount_realized from the sale_or_other_disposition of property is the sum of any money received plus the fair_market_value of the property other than money received sec_1001 however provides that in determining gain_or_loss from the sale or disposition of a term_interest_in_property that portion of the adjusted_basis of the interest which is determined pursuant to sec_1015 to the extent that the adjusted_basis is a portion of the entire adjusted_basis of the property shall be disregarded under sec_1001 a term_interest_in_property includes an income_interest in a_trust sec_1001 does not apply to a sale_or_other_disposition that is a part of a transaction in which the entire_interest in property is transferred to any person or persons see sec_1001 and sec_1_1001-1 sec_1222 provides that the term long-term_capital_gain means gain from the sale_or_exchange of a capital_asset held for more than one year sec_1221 defines the term capital_asset as property held by the taxpayer with certain listed exceptions not applicable here sec_1223 provides that in determining the period for which a taxpayer has held property however acquired there shall be included the period for which the property was held by any other person if the property has the same basis in the taxpayer's hands as it would have in the hands of that other person plr-146979-05 revrul_72_243 1972_1_cb_233 provides that the proceeds received by the life_tenant of a_trust in consideration for the transfer of the life tenant's entire_interest in the trust to the holder of the remainder_interest are treated as an amount_realized from the sale_or_exchange of a capital_asset under sec_1222 the right to income_for_life from a_trust estate is a right in the estate itself see 157_f2d_235 2d cir cert_denied 330_us_826 in the present case although the proposed transaction takes the form of a distribution of the present values of the respective interests of grantors and charity in substance it is a sale of grantors’ interest to charity the remainder_interest holder the amount received by grantors as a result of the termination of trust is an amount_realized from the sale_or_exchange of a capital_asset revrul_72_243 if as represented by grantors grantors’ basis in the unitrust income_interest is a portion of the entire basis of the property as determined under sec_1015 grantors’ adjusted_basis in their interest is disregarded under sec_1001 because the disposition is not part of a transaction in which the entire_interest in trust is transferred to a third party consequently if grantors’ adjusted_basis is disregarded under sec_1001 the entire amount_realized by grantors as a result of the early termination of trust will be gain to grantors moreover because grantors’ holding_period in the life interest exceeds one year under sec_1222 the gain recognized by grantors as a result of the early termination of trust will be long-term_capital_gain except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the code specifically no opinion is expressed as to whether trust otherwise qualifies as a charitable_remainder_unitrust under sec_664 this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file copies of this letter are being sent to plr-146979-05 trust’s authorized representatives sincerely j thomas hines chief branch enclosures copy of this letter copy for sec_6110 purposes office of the associate chief_counsel passthroughs special industries


t c memo united_states tax_court thomas j woody petitioner v commissioner of internal revenue respondent docket no filed date p alleges that during tax_year he had a real_estate investment and rental business p deducted expenses associated with this activity as business_expenses under sec_162 r disallowed the business_expense deductions on the basis of this disallowance r determined a deficiency in p’s federal_income_tax for p petitioned this court for redetermination of that deficiency held p was not actively engaged in a real_estate investment and rental business when he incurred and paid the expenses he deducted as schedule c business_expenses in therefore the costs p deducted are pre-operational start-up_expenditures and may not be deducted as business_expenses under sec_162 bruce e gardner for petitioner scott l little for respondent memorandum findings_of_fact and opinion gustafson judge this case is before the court on petitioner thomas j woody’s petition for redetermination of his federal_income_tax deficiency for which the internal_revenue_service irs determined to be dollar_figure the issue for decision is whether mr woody is entitled under section to deductions claimed on his schedule c profit or loss from business as a threshold matter we must decide whether mr woody was actively engaged in the trade_or_business of real_estate investment and rental at the time he incurred and paid the expenses that he reported as business_expenses we find that he was not findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts filed date and the attached exhibits are incorporated herein by this reference at the time mr woody filed his petition he resided in washington d c on or about date mr woody started investigating the real_estate market so he could acquire real 1unless otherwise indicated all citations to sections refer to the internal_revenue_code_of_1986 u s c as amended and all citations to rules refer to the tax_court rules_of_practice and procedure estate for investment or rental throughout mr woody looked at many properties he was interested in buying for this real_estate investment and rental business he made multiple offers to purchase properties but was out-bid on most of his offers in date mr woody entered into a contract to purchase a property on bradley avenue in camden new jersey however after a home inspection revealed many defects in the property mr woody canceled the contract because the seller was not willing to make the needed repairs mr woody did not purchase any investment or rental property until he purchased the property on randolph street in camden new jersey on date ie the next to last day of the year at issue at that time there was no tenant in the property and he did not secure a tenant until sometime after furthermore there is nothing in the record to indicate that mr woody held the property out for rent in throughout mr woody performed many other tasks in conjunction with his alleged business he created a name for his endeavor--value property investments--and began marketing his services via business cards flyers and word of mouth in date mr woody completed a business outline with buying remodeling and renting property being the stated purpose of value property investments on date mr woody paid dollar_figure to the wealth intelligence academy for certain training classes which he subsequently attended to acquire real_estate investment skills after mr woody took the wealth intelligence academy courses his business plan shifted from merely buying remodeling and renting to also include what mr woody referred to as flipping or wholesaling however he never consummated this type of transaction during in date mr woody applied and was approved for a loan from the u s small_business administration and he obtained an employer_identification_number from the irs in date mr woody obtained a credit card in the name of thomas j woody value property invest and opened a checking account in the name of mr thomas j woody d b a value property investments despite all of the foregoing activity mr woody did not purchase any investment_property until date and he did not buy or sell any other_property rent out any property or hold any property out for rent nor did he engage in flipping or wholesaling during tax_year for tax_year mr woody filed a form_1040 u s individual_income_tax_return with an attached schedule c on that schedule c mr woody reported no gross_receipts or sales but reported total expenses of dollar_figure which consisted of wholesaling or flipping is entering into a contract for the purchase of a property and then before the sale goes to closing assigning to a third-party buyer in return for a fee the right to buy the property car and truck expenses supplies meals and entertainment workshops and training computer and software misc dollar_figure big_number big_number respondent now concedes that mr woody incurred and paid all of the expenses set forth in his schedule c as listed above and the parties stipulate that they were incurred and paid before date however upon examination of mr woody’s tax_return the irs disallowed mr woody’s schedule c expenses on the grounds that he had failed to substantiate his expenses or to prove that they were ordinary and necessary to his business in the statutory_notice_of_deficiency issued to mr woody on date the irs determined an income_tax deficiency of dollar_figure mr woody timely petitioned the tax_court on date for a redetermination of that deficiency in response to mr woody’s petition respondent answered 3for most of these listed expenses the record shows expressly that they were incurred before date and there is no indication that any of them was incurred after that date for the relevance of that date see infra note at trial mr woody presented additional evidence to establish that he paid an additional dollar_figure in expenses that should have been included on his schedule c three of those additional expenditures a loan application fee of dollar_figure an advertising expense of dollar_figure and settlement charges of dollar_figure totaling dollar_figure were incurred after date however the dollar_figure in settlement charges incurred with respect to the purchase of the randolph street property is a capital_expenditure which is non- deductible in see sec_263 sec_1_263_a_-2 income_tax regs respondent determined that petitioner was not engaged in the active_conduct of a real_estate investment business as alleged further alleges in any event that petitioner has not substantiated the amount of payment of or the specifics of any such expenses therefore respondent’s justification of his disallowance of mr woody’s expenses was in fact two-fold lack of substantiation of the expenses and the determination that mr woody was not actively engaged in a trade_or_business as required by sec_162 a trial in this case was held on date in washington d c i the parties’ contentions opinion mr woody does not dispute that his initial investigation of properties and the failed bids thereon and his research into the real_estate investment and rental business from february to date occurred before the commencement of his business however mr woody contends that he commenced his real_estate investment and rental business on date when he entered into a contract of sale on the bradley avenue property in camden new jersey ie the contract he ultimately canceled as a 4mr woody also makes much of the fact that since the contractual rights in relation to the existing tenant at the bradley avenue property would belong to him in the event that he acquired the property that implies he offered that property for rent however because mr woody never acquired the property we cannot find that he ever had any legal ability to offer that continued result mr woody maintains that all the expenses associated with his business that were incurred after date should be deductible as business_expenses under sec_162 respondent asserts that mr woody was not actively engaged in the real_estate investment and rental business at any time during because mr woody did not become actively_engaged_in_business ie by buying selling renting or offering to rent property until he held the randolph street property out for rent some time after as a result since all of the schedule c expenses were incurred and paid before date ie before the acquisition of any potential rental property respondent contends that none of mr woody’s schedule c expenses are deductible under sec_162 ii burden_of_proof at trial and on brief mr woody argued that the burden_of_proof on the question whether he was actively engaged in a trade_or_business when he incurred the expenses has shifted to respondent because respondent raised that issue as a new_matter continued property for rent in any event such activity is not sufficient to rise to the level of carrying_on_a_trade_or_business see 83_tc_103 looking for or securing a tenant before the taxpayer actually owns the property and could actually rent the property was not sufficient to indicate the start of a business revd on other grounds 794_f2d_1157 6th cir overruled on other grounds 93_tc_684 affd in part and remanded in part per order 10th cir date in his answer see rule a the irs’s notice_of_deficiency stated that mr woody did not establish that the expense was ordinary and necessary to your business mr woody contends that this language did not raise the issue of whether he was engaged in the business however in this case the allocation of the burden_of_proof does not affect the outcome because the facts found here are essentially undisputed and the parties disagree only on how to characterize them e xcept for extraordinary burdens eg in fraud cases the burden_of_proof is merely a ‘tie-breaker’ and is irrelevant unless the evidence is in equipoise steiner v commissioner tcmemo_1995_122 69_tcm_2176 t c m ria par big_number on the basis of the stipulated facts and the evidence presented at trial we do not find the evidence with respect to whether mr woody was actively_engaged_in_business to be in equipoise as a result the question of who bears the burden_of_proof is one we need not reach 5a new_theory that is presented to sustain a deficiency is treated as a new_matter when it increases the amount of the original deficiency or requires the presentation of different evidence 112_tc_183 and cases cited thereat a new_theory which merely clarifies or develops the original determination is not a new_matter in respect of which the commissioner bears the burden_of_proof id iii business_expense deductions sec_162 generally allows a deduction for all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business such expenses must be directly connected with or pertain to the taxpayer’s trade_or_business that is functioning as a business at the time the expenses were incurred 93_tc_684 affd in part and remanded in part per order 10th cir date glotov v commissioner tcmemo_2007_147 sec_1_162-1 income_tax regs c f_r whether an expenditure satisfies the requirements of sec_162 is a question of fact 320_us_467 and whether a taxpayer’s activities constitute the carrying on of a trade_or_business requires an examination of the facts and circumstances of each case 480_us_23 312_us_212 o'donnell v commissi62_tc_781 affd without published opinion 519_f2d_1406 7th cir however a taxpayer is not carrying_on_a_trade_or_business under sec_162 until the business is functioning as a going concern and performing the activities for which it was organized glotov v commissioner supra until that time expenses related to that activity are not ordinary and necessary expenses currently deductible under sec_162 nor are they deductible under sec_212 but rather are start-up or pre-opening_expenses hardy v commissioner supra pincite- start-up_expenditures --ie expenses_incurred before the day on which the active trade_or_business begins sec_195 emphasis added --may be deducted only over time under sec_195 while all of mr woody’s expenditures at issue have been substantiated the question for decision before the court is whether they qualify as sec_162 business_expenses it is respondent’s position that even though mr woody incurred these expenses they are at best start-up_expenditures as opposed to sec_162 business_expenses in determining whether these 6where expenses are incurred in the same taxable_year in which a business begins to function but before the day on which it begins to function the disallowance of the deduction of such an expense under sec_162 arguably constitutes an exception to the generality that our tax system is annualized nonetheless the deductibility of an expense under section 162--or its relegation to treatment under section 195--does depend on the date on which the expense was incurred in relation to the date on which the business began operating and the expense is not deductible under sec_162 unless the business was functioning on the day the expense was incurred 7in his post-trial briefs mr woody acknowledges that he would be precluded from the special treatment afforded under sec_195 because he failed to make the requisite election required by sec_195 even without such an election a taxpayer might be entitled to sec_195 amortization of expenses that were incurred after date see sec_1_195-1t b d temporary income_tax regs fed reg date but only dollar_figure of the expenses at issue here was incurred after that date see supra note and mr woody has made no claim for sec_195 treatment so we do not here make any determination as to sec_195 treatment expenses are in fact sec_162 business_expenses the threshold question is when mr woody completed his start-up phase and became actively engaged in his business whether a taxpayer is engaged in a trade_or_business is determined using a facts_and_circumstances_test under which courts have focused on the following three factors that indicate the existence of a trade_or_business whether the taxpayer undertook the activity intending to earn a profit whether the taxpayer is regularly and actively involved in the activity and whether the taxpayer’s activity has actually commenced see mcmanus v commissioner tcmemo_1987_457 affd without published opinion 865_f2d_255 4th cir on the basis of mr woody’s testimony we may assume that he undertook this activity to make a profit and that he regularly and actively engaged in it however it is the third factor--whether mr woody’s business had actually commenced--that is determinative here 8mr woody cites 78_tc_642 affd without published opinion 702_f2d_1205 d c cir for the proposition that because mr woody engaged in his activity for profit he must have been actively_engaged_in_business mr woody’s reliance on dreicer is misplaced dreicer deals exclusively with determining whether a taxpayer is engaged in an activity for profit however whether a taxpayer is engaged in an activity for profit is not the decisive factor in determining whether he is actively engaged in a trade_or_business rather it is just one of the three factors that needs to be satisfied see mcmanus v commissioner tcmemo_1987_457 affd without published opinion 865_f2d_255 4th cir in mr woody’s business outline dated date he indicated that he was starting value property investments for the purpose of buying remodeling and renting property therefore until mr woody began to buy remodel or rent--ie to perform the activities for which value property investments was organized--he was not carrying_on_a_trade_or_business as contemplated by sec_162 we find that mr woody’s activities did not rise to the level of a trade_or_business until at the earliest the time he purchased the randolph street property on december of the year in suit more likely mr woody’s activities did not rise to the level of a trade_or_business until he held the randolph street property out for rent sometime after the close of the year in suit see 114_tc_333 holding that the mere purchase of property did not constitute an active trade_or_business since the property was not rented or held out for rent until a subsequent year nonetheless in order to resolve the matter before us we do not need to decide whether mr woody’s business started at the time he purchased the randolph street property or at the time he held it out for rent because in any event the expenses in question here all occurred before the purchase date ie before date if the earliest possible date mr woody was actively carrying_on_a_trade_or_business was date then any expenses_incurred in that year but incurred before the day on which the active trade_or_business began sec_195 iii --ie all the expenses_incurred from january through date--would be by definition start-up expenses whose deductibility and possible amortization is expressly dealt with by sec_195 since all the expenses at issue here were incurred between january and date they would not be deductible for under sec_162 because their timing makes them subject_to the provisions of sec_195 and sec_195 start-up_expenditures are not deductible under sec_162 see 93_tc_684 mr woody’s largest expenditure in 2004--dollar_figure for workshops and training--was an educational expense incurred to prepare for a new career ie real_estate investor and renter rather than to maintain or improve skills in an ongoing business 9if mr woody argued for sec_195 treatment for the dollar_figure portion of his expenses that was incurred after october then it might be necessary to resolve the precise date on which he commenced his business ie date versus a later date in however as stated supra note mr woody has made no claim for sec_195 treatment 10the settlement expenses associated with the purchase of the randolph street property were incurred on date however as stated supra note the settlement charges are not deductible business_expenses but rather are capital expenditures see sec_1_263_a_-2 income_tax regs or career it was therefore not deductible under sec_162 see sec_1_162-5 income_tax regs conclusion although we found mr woody’s testimony to be credible it established that he was not actively carrying_on_a_trade_or_business at the time that the expenses at issue were incurred mr woody’s activities in were at most start-up activities because he had not yet commenced the activities for which value property investments was organized ie buying selling renting or offering to rent property or even flipping or wholesaling accordingly we hold that the irs’s disallowance of mr woody’s schedule c deductions was proper to reflect the foregoing decision will be entered under rule