internal_revenue_service number release date index number 468a department of the treasury washington dc --------------------------------- ------------------------------------------------------------ -------------- --------------------------- -------------------------- --------------------------------------- person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi b06 - plr-149295-09 date date legend parent company a company b company c company d company e ----------------------------- ------------------------ -------------------------------------------------------- ------------------------ --------------------------------------------------- ------------------------ ------------------------------------- -------------------------------------------- --------------------------------------------------- taxpayer ------------------------------------------------------------ --------------------------------------- state a state b state c plant -------------- -------- -------------------- ------------------------------- plr-149295-09 location commission a commission b dollar_figurex ----------------------------------- ------------------------------------------- ----------------------------------------------------- --------------------- director --------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- dear -------------------- this letter responds to your request for letter_ruling dated date as modified by your letter dated date you requested that we rule on certain tax consequences under sec_468a of the internal_revenue_code of the transaction discussed below facts taxpayer has represented the following facts and information relating to the ruling_request parent a corporation organized in state a is the parent of an affiliated_group of subsidiary corporations taxpayer also organized in state a is wholly-owned by parent and is a member of the affiliated_group company a a corporation formed in state a is owned in part by parent and in part by a wholly-owned indirect subsidiary of parent company a is also a member of the affiliated_group company b a corporation organized under the laws of state c is wholly-owned by company a is also a member of the affiliated_group company b is the owner of plant plant is a nuclear power plant located at location company b is subject_to the jurisdiction of commission a with regard to the operation and maintenance of plant and to the jurisdiction of commission b with regard to the rates charged to wholesale customers for electricity produced by plant company b maintains a nuclear decommissioning trust that is composed of a both a fund that is qualified under sec_468a qdt and a fund that is not qualified under sec_468a nqdt with respect to plant parent will undertake the following transactions parent will cause those subsidiaries that own a portion of company a to convert to limited_liability companies plr-149295-09 llc these conversions will result in parent being the direct owner of all of the stock of company a company a will then convert under the laws of state a into an llc and will be disregarded for federal tax purposes company b will then be a wholly- owned direct subsidiary of parent parent will form company c under the laws of state b company c is an llc under the laws of state b and will elect to be treated as a corporation for federal tax purposes company b will merge into company c taxpayer represents that this will be a tax-free reorganization under sec_368 parent will form company d wholly- owned subsidiary of parent as an llc under the laws of state a and company d will elect to be disregarded for federal tax purposes parent will distribute its interest in company d to company c in a transaction that taxpayer represents will be a tax-free contribution of assets under sec_351 by operation of the laws of state b company c will contribute most of its assets including ownership of plant to company d taxpayer will form a new subsidiary company e under the laws of state c taxpayer will contribute approximately dollar_figurex to company e in exchange for all of the stock of company e taxpayer represents that this contribution will be a tax-free contribution of assets under sec_351 company d will merge into company e with company e surviving company e will tender to company c approximately dollar_figurex as consideration for the merger after these transactions company e will hold plant the associated decommissioning liability and the decommissioning trust consisting of both the qdt and the nqdt taxpayer has requested the following rulings requested ruling the qdt will not be disqualified by reason of the transfer of the qdt described above and will continue to be treated as satisfying the requirements of sec_468a and sec_1_468a-6t of the temporary income_tax regulations requested ruling the qdt will not recognize any gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the qdt described above requested ruling pursuant to sec_1_468a-6t c the basis of the qdt assets will be unchanged by the transfer of the qdt described above law and analysis sec_468a of the code provides that a taxpayer may elect to deduct payments made to a nuclear decommissioning reserve fund that meets the plr-149295-09 requirements of sec_468a ie a fund that is a qualified nuclear decommissioning fund sec_468a provides that any amount distributed from a qualified nuclear decommissioning fund during any taxable_year is includible in the taxable_income of the taxpayer for that year sec_468a provides that in addition to contributions to a qualified nuclear decommissioning fund that are deductible under sec_468a there is allowable as a deduction the amount of nuclear decommissioning costs with respect to which economic_performance occurs within the meaning of sec_461 during the taxable_year nuclear decommissioning costs are defined in sec_1_468a-1t b as all otherwise deductible expenses to be incurred in connection with the entombment decontamination dismantlement removal and disposal of the structures systems and components of a nuclear power plant that has permanently ceased the production of electric energy this term includes all otherwise deductible expenses to be incurred in connection with the preparation for decommissioning such as engineering and other planning expenses and all otherwise deductible expenses such term does not include otherwise deductible expenses to be incurred in connection with the disposal of spent nuclear fuel under the nuclear waste policy act of public law an expense is considered otherwise deductible for purposes of sec_1_468a-1t b if it would be deductible under chapter of the code without regard to sec_280b sec_468a provides that for purposes of sec_4951 a qualified nuclear decommissioning fund is treated as a_trust described in sec_501 sec_1_468a-1t b provides that a qualified nuclear decommissioning fund is a fund that satisfies the requirements of sec_1_468a-5t sec_1_468a-5t a sets out the qualification requirements for nuclear decommissioning funds it provides in part that a qualified nuclear decommissioning fund must be established and maintained pursuant to an arrangement that qualifies as a_trust under state law sec_1_468a-5t a iii provides that an electing taxpayer can establish and maintain only one qualified nuclear decommissioning fund for each nuclear power plant sec_1_468a-6t provides rules applicable to the transfer of an interest in a nuclear power plant and transfer of the qualified nuclear decommissioning fund where certain requirements are met for purposes of sec_1_468a-6t a nuclear power plant includes a plant that previously qualified as a nuclear power plant and that has permanently ceased to produce electricity plr-149295-09 sec_1_468a-6t b provides that sec_1_468a-6t applies if-- immediately before the disposition the transferor maintained a qualified nuclear decommissioning fund with respect to the interest disposed of and immediately after the disposition-- i the transferee maintains a qualified nuclear decommissioning fund with respect to the interest acquired ii the interest acquired is a qualifying interest of the transferee in the nuclear power plant in connection with the disposition either- i the transferee acquires part or all of the transferor’s qualifying interest in the plant and a proportionate amount of the assets of the transferor’s fund is transferred to a fund of the transferee or ii the transferee acquires the transferor’s entire qualifying interest in the plant and the transferor’s entire fund is transferred to the transferee and the transferee continues to satisfy the requirements of sec_1_468a-5t a iii which permits an electing taxpayer to maintain only one qualified nuclear decommissioning fund for each plant sec_1_468a-6t c provides that a disposition that satisfies the requirements of sec_1_468a-6t b will have the following tax consequences at the time it occurs neither the transferor nor the transferor’s qualified nuclear decommissioning fund will recognize gain_or_loss or otherwise take any income into account by reason of the transfer of a proportionate amount of the assets of the transferor’s qualified nuclear decommissioning fund to the transferee’s qualified nuclear decommissioning fund or by reason of the transfer of the transferor’s entire qualified nuclear decommissioning fund to the transferee for purposes of the regulations under sec_468a this transfer or the transfer of the transferor’s qualified nuclear decommissioning fund will not be considered a distribution of assets by the transferor’s qualified nuclear decommissioning fund neither the transferee nor the transferee’s qualified nuclear decommissioning fund will recognize gain_or_loss or otherwise take any income into account by reason of plr-149295-09 the transfer of a proportionate amount of the assets of the transferor’s qualified nuclear decommissioning fund to the transferee’s qualified nuclear decommissioning fund or by reason of the transfer of the transferor’s entire qualified nuclear decommissioning fund to the transferee for purposes of the regulations under sec_468a this transfer or the transfer of the transferor’s qualified nuclear decommissioning fund will not constitute a payment or a contribution of assets by the transferee to its qualified nuclear decommissioning fund transfers of assets of a qualified nuclear decommissioning fund to which this section applies do not affect basis thus the transferee’s qualified nuclear decommissioning fund will have a basis in the assets received from the transferor’s qualified nuclear decommissioning fund that is the same as the basis of those assets in the transferor’s qualified nuclear decommissioning fund immediately before the distribution under sec_1_468a-6t f the service may treat any disposition of an interest in a nuclear power plant as satisfying the requirements of the regulations if the service determines that such treatment is necessary or appropriate to carry out the purposes of sec_468a conclusions based on the information submitted by taxpayer we reach the following conclusions ruling the qdt will not be disqualified by reason of the transfer of the qdt described above and will continue to be treated as satisfying the requirements of sec_468a and sec_1_468a-6t ruling pursuant to 468a-6t c the qdt will not recognize any gain_or_loss or otherwise take any income_or_deduction into account by reason of the transfer of the qdt described above ruling pursuant to sec_1_468a-6t c the basis of the qdt assets will be unchanged by the transfer of the qdt described above while it owns a qualified_interest in plant company e is eligible to maintain the qualified nuclear decommissioning fund except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above in particular we express no opinion on the tax results of any of the mergers or contributions described above under any section of the code other than sec_468a plr-149295-09 this letter_ruling is directed only to the taxpayer that requested it sec_6110 provides that this ruling may not be used or cited as precedent in accordance with the power_of_attorney on file with this office the original of this letter is being sent to taxpayer we are also sending a copy of this letter_ruling to taxpayer’ authorized representatives and to the director sincerely peter c friedman senior technician reviewer branch office of associate chief_counsel passthroughs and special industries


internal_revenue_service index nos number release date cc dom it a plr-102132-99 attention date ein dear this is in reference to a form_1128 application to adopt change or retain a tax_year submitted on behalf of the above- named taxpayer requesting permission to change its accounting_period for federal_income_tax purposes from a taxable_year ending to a taxable_year ending effective the taxpayer has requested that the form_1128 be considered timely filed under the authority contained in sec_301_9100-3 of the procedure and administration regulations the taxpayer's form_1128 requesting a change in accounting_period to a tax_year ending was due on or before the information furnished indicates that the application_for the change in accounting_period was filed late because of an error or misunderstanding on the part of the taxpayer however the form was filed within days of the due_date sec_1_442-1 of the income_tax regulations provides that in order to secure the commissioner's consent to a change in accounting_period the taxpayer must file an application on form_1128 with the commissioner on or before the 15th day of the second calendar month following the close of the short_period sec_301_9100-3 provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions such as the instant case must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government based on the facts and information submitted and the representations made it is held that the taxpayer has acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government accordingly the requirements of the regulations for the granting of relief have been satisfied in this case and taxpayer’s late filed form_1128 requesting permission to change to a tax_year ending effective for the short_period of is considered timely filed pursuant to revproc_93_23 1993_1_cb_538 an additional user_fee is required in order to process the form_1128 the user_fee will be requested in a separate correspondence we will begin processing the taxpayer’s application after the user_fee is received the ruling contained in this letter is based upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as part of an examination process this ruling addresses the granting of sec_301_9100-3 relief only no opinion is expressed regarding the tax treatment of the instant transaction under the provisions of any other sections of the code or regulations that may be applicable thereto or regarding the tax treatment of any conditions existing at the time of or effects resulting from the instant transaction specifically no opinion is expressed as to whether the taxpayer is permitted under the code and applicable regulations to change to the tax_year requested in the subject form_1128 this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent sincerely yours assistant chief_counsel income_tax and accounting s irwin a leib by irwin a leib deputy assistant chief_counsel enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b1-plr-169754-01 date date legend x y state d d this letter responds to your letter dated date and related correspondence written on behalf of x requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election x is requesting a ruling that it be granted an extension of time in which to elect to treat its wholly owned subsidiary y as a qualified_subchapter_s_subsidiary qsub under sec_1361 of the internal_revenue_code facts x was incorporated under the laws of state on d1 x became an s_corporation for federal tax purposes on d2 x purchased all of the stock of y y was also incorporated under the laws of state prior to d2 y was taxed as an s_corporation on d2 y’s s election was terminated as a result of x’s purchase of the stock x represents that it intended to elect to treat y as a qsub but failed to timely plr-169754-01 make the election x requests a ruling that it be granted an extension of time to make the qsub election for y effective as of d2 law and analysis sec_1361 of the internal_revenue_code defines a qsub as a domestic_corporation that is not an ineligible_corporation if percent of the stock of the corporation is owned by an s_corporation and the s_corporation elects to treat the corporation as a qsub a taxpayer makes a qsub election with respect to a subsidiary by filing a form_8869 qualified_subchapter_s_subsidiary election with the appropriate service_center sec_1_1361-3 of the income_tax regulations provides that the election will be effective on the date specified on the election form or on the date the election is filed if no date is specified the effective date specified on the election cannot be more than two months and days prior to the date of filing and cannot be more than months after the date of filing sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election sec_301_9100-1 defines a regulatory election to mean an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 conclusion based solely on the facts submitted and representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 accordingly x is granted an extension of time of sixty days from the date of this letter to elect to treat y as a qsub effective as of d2 the election should be made by filing form_8869 with the appropriate service_center a copy of this letter should be attached to the election except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x is a valid s_corporation or whether y is a valid qsub plr-169754-01 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being mailed to x sincerely paul f kugler associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


t c memo united_states tax_court mike amini petitioner v commissioner of internal revenue respondent docket no filed date john r riley for petitioner david w sorensen for respondent memorandum findings_of_fact and opinion swift judge respondent determined deficiencies in petitioner's federal income taxes additions to tax and penalties as follows additions to tax and penalties year deficiency sec_6653 b a sec_6653 b sec_6653 sec_6663 dollar_figure dollar_figure --t ---t big_number big_number ---- ---- big_number --t --t dollar_figure ---- big_number ---- ---- ---- dollar_figure --- --- --- big_number big_number ---- ---- --- big_number amounts to be calculated pincite percent of interest due on portion of underpayments attributable to fraud unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure the issues for decision involve the amount of embezzled funds that should be charged as gross_income to petitioner and whether the fraud additions to tax and fraud-related penalties apply findings_of_fact some of the facts have been stipulated and are so found when the petition was filed petitioner resided in south jordan utah from until terminated in petitioner was employed as a pharmacist at the outpatient pharmacy opp at lds hospital in salt lake city utah the procedures for the closing each day of the cash register by the opp pharmacists consisted of the following steps the cash register was to be cleared for the day by printing from the register a report of total sales for the opp the cash and the checks were to be removed from the cash register drawer the cash was to be counted an adding machine tape was to be printed reflecting the total amount of the checks the total amount of the cash and the checks was to be calculated the amount of the total sales was to be entered into a written log book maintained by the opp the report of total sales the cash the checks and the adding machine tape were to be placed ina deposit bag that was to be secured overnight in a safe located in the opp and dollar_figure in cash was to be left in the opp cash register drawer for the next day's business the next morning an opp pharmacist would retrieve the deposit bag from the opp safe and would arrange for its delivery to the hospital's main cashier where the cash and the checks in the deposit bag were to be accounted for by the hospital on days when he worked at the opp petitioner consistently volunteered to perform the cash register closing procedures described above from through however petitioner embezzled cash from the opp by modifying the above cash register closing procedures as follows before closing the opp for the day petitioner would take from the opp cash register drawer either cash or a - - check which he would cash at the hospital's main cashier petitioner would keep and use for his own purposes the cash obtained per above petitioner would remove from the cash register drawer the remaining cash and checks reflecting the balance of the opp sales for the day petitioner would clear the cash register for the day by printing from the register a report of total sales for the opp and petitioner would then discard this report in the trash petitioner would print an adding machine tape reflecting the sum of the remaining checks in the register petitioner would calculate the total amount of the remaining cash and checks in the register petitioner would enter a fabricated total sales figure for the day into the written log book reflecting the total amount of the remaining cash and checks petitioner would print an adding machine tape reflecting the fabricated total opp sales figure for the day petitioner would place the remaining cash and checks and the adding machine tapes reflecting the checks and the fabricated total sales in a deposit bag that was secured overnight in the opp safe and petitioner would leave dollar_figure in cash in the opp cash register drawer for the next day's business from through of the big_number days petitioner closed the opp cash register big_number of the original daily sales reports that were to be printed by the cash register are missing in august of another pharmacist became suspicious of petitioner's conduct in closing the opp cash register and - informed hospital administrators of possible irregularities internal auditors for the hospital commenced an investigation and uncovered petitioner's embezzlement confronted with the evidence from the investigation petitioner admitted embezzling from the opp dollar_figure to dollar_figure unknown to petitioner through an internal control mechanism the opp cash register maintained an internal running or cumulative sales figure that did not reset at the end of each day by subtracting from these correct running total sales figures maintained by the cash register the daily total sales figures written in the log book and an average figure for daily returns and void transactions internal auditors from the hospital were able to calculate the total amount petitioner embezzled each year from the opp the schedule below reflects for each year in issue the total amount petitioner embezzled as calculated by the hospital’s ' we note that the hospital's internal auditors were able to calculate only a close estimate of the amount of actual funds petitioner embezzled because petitioner discarded many of the actual daily total sales reports printed by the cash register internal auditors had no way of reconstructing for each day the precise amounts of refunds or void transactions the internal auditors however were able to estimate the refunds and void transactions for each day by averaging for each day the amounts of refunds and void transactions for the days for which the actual cash register daily sales reports were available -- - internal auditors and the total amount of unexplained cash deposits made into bank accounts owned by petitioner and his wife hospital's calculation unexplained cash of total amount deposits to petitioner year embezzled by petitioner and his wife's bank accounts sdollar_figure s big_number big_number big_number big_number big_number big_number big_number big_number total dollar_figure dollar_figure for the years in issue petitioner and his wife timely filed joint federal_income_tax returns reporting their wages interest and dividend income for the years in issue however petitioner and his wife did not report on their joint federal_income_tax returns any of the funds petitioner embezzled from the opp in the notice_of_deficiency for the years in issue utilizing for each year the total of unexplained cash deposits into petitioner and his wife’s bank accounts respondent determined that petitioner and his wife received a cumulative total of dollar_figure in unreported embezzlement income from the opp respondent also determined that petitioner and his wife were both liable for the fraud additions to tax and penalties and that fraud was attributable to the entire resulting underreporting of income petitioner's wife has filed a separate petition in this court docket no which is awaiting our decision herein - on date after a criminal investigation by the u s attorney's office and by respondent and after seizure of bank accounts investment holdings and other assets owned by petitioner and his wife totaling dollar_figure petitioner was indicted and pleaded guilty to theft and to filing a false or fraudulent federal_income_tax return for under the plea agreement petitioner agreed for purposes of sentencing only and without prejudice to claim a different amount in a civil lawsuit with lds hospital to an order of restitution in the amount of dollar_figure relating to the above embezzlement opinion gross_income under sec_61 includes amounts received from illegal activity such as embezzlement see 366_us_213 579_f2d_551 10th cir romer v commissioner tcmemo_1996_287 where taxpayers fail to keep accurate records respondent has considerable discretion in how the taxpayers’ income is to be calculated see 937_f2d_1548 10th cir affg tcmemo_1989_552 394_f2d_366 5th cir when the taxpayer has defaulted in his task of supplying adequate_records he 1s not in a position to be hypercritical of the commissioner's labor affg tcmemo_1966_81 281_f2d_100 9th cir all that the tax_court can do is to 'make as close an approximation as it can bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making' quoting 39_f2d_540 2d cir affg tcmemo_1958_94 respondent's reconstruction_of_income need only be reasonable in light of all the surrounding circumstances and bank_deposits are generally treated as prima facie evidence of taxable_income see eg 94_tc_654 87_tc_74 40_tc_30 generally taxpayers bear the burden of proving that determinations made by respondent are erroneous see rule a 290_us_111 respondent contends that for the years in issue the cash deposits into the bank accounts owned by petitioner and his wife after accounting for wages loans interfund transfers and other nontaxable funds constitute funds petitioner embezzled from the opp and must be included in petitioner and his wife's gross_income petitioner argues that the cash deposits in question relate to family lands seized in the 1940's by the government of iran and as an inheritance to petitioner should be excluded from income under sec_102 also petitioner alleges that each --- - month beginning in cash was brought to his home from iran by foreign students or politicians petitioner contends that respondent has not established a sufficient link between petitioner and the embezzled funds and that respondent's calculations of income are arbitrary and capricious we disagree petitioner has provided no credible_evidence that the unexplained deposits into petitioner and his wife's personal bank accounts constitute anything other than proceeds of petitioner's embezzlement activity we reject as a total fabrication petitioner's allegation that the cash came from iran as an inheritance the evidence in this case establishes among other things petitioner's guilty plea acknowledging a dollar_figure restitution obligation to lds hospital lds hospital's internal investigation showing that petitioner embezzled approximately dollar_figure and detailed bank account statements evidencing significant and regular unexplained cash deposits into petitioner and his wife's bank accounts in light of the ample evidence linking petitioner with the embezzled funds and in the absence of the actual cash register daily sales reports that would establish the precise amounts embezzled by petitioner respondent's determination is sustained - that for the years through petitioner omitted a cumulative total of dollar_figure in embezzlement income we sustain respondent’s determination of petitioner’s income for each year with regard to the fraud additions to tax and fraud-related penalties respondent has the burden of proving fraud by clear_and_convincing evidence see sec_7454 rule b 102_tc_596 indicia of petitioner's fraud in this case include understatements of income illegal activity inadeguate books_and_records dealing in cash and implausible or inconsistent explanations see eg 796_f2d_303 9th cir affg tcmemo_1984_601 102_tc_632 the evidence clearly and convincingly establishes that petitioner realized significant income from embezzlement and that he intentionally failed to report such income on his and his wife's joint federal_income_tax returns for each year in issue petitioner is liable for the fraud additions to tax and fraud- related penalties as determined by respondent to reflect the foregoing decision will be entered for respondent


t c memo united_states tax_court john t barrett jr and jane w a barrett petitioners v commissioner of internal revenue respondent docket no filed date william s barrett for petitioners carmino j santaniello jr for respondent memorandum findings_of_fact and opinion wells judge respondent determined deficiencies and penalties in petitioners’ federal income taxes as follows year deficiency penalty pursuant to sec_6662 dollar_figure big_number dollar_figure big_number unless otherwise indicated all section references are to the internal_revenue_code code in effect for the taxable years in issue and all rule references are to the tax_court rules_of_practice and procedure the issues we must decide in the instant case are whether petitioners for taxable_year must recognize a capital_gain pursuant to the installment_sale provisions of sec_453 on petitioner john t barrett jr ’s petitioner disposition of shares shares of stock in drexel burnham lambert group inc drexel whether petitioners are entitled to a bad_debt deduction for taxable_year for the alleged worthlessness of a certain note issued by drexel to petitioner as partial consideration for the purchase of the shares and whether petitioners are liable for the accuracy-related_penalty pursuant to sec_6662 findings_of_fact some of the facts and certain exhibits have been stipulated for trial pursuant to rule the parties’ stipulations are incorporated in this memorandum opinion by reference and are found accordingly except as noted below general background petitioners resided in providence rhode island when they filed their petition in the instant case petitioners reported their income and deductions for the years in issue on the basis of the cash_receipts_and_disbursements_method of accounting beginning in date and until date petitioner was employed by drexel as a stockbroker in its retail securities operation during petitioner’s employment drexel and its subsidiaries were engaged in the business of providing investment banking securities brokerage trading merchant banking and other financial services during his employment with drexel petitioner was primarily engaged in the trading of corporate bonds for drexel’s individual and corporate clients and was not involved in the high-yield or junk_bond underwriting facet of drexel’s business petitioner’s acquisition and sale of the shares during and drexel privately sold its common_stock to certain employees and drexel insiders by letter dated date drexel offered to sell to petitioner as part of its employee_stock_purchase_plan shares of its common_stock at the date book_value of dollar_figure per share on that date petitioner acquired the shares for a total purchase_price of dollar_figure by letter dated date drexel offered to sell to petitioner an additional shares of its common_stock at the fixed price of dollar_figure per share on that date petitioner acquired the additional shares for a total purchase_price of dollar_figure on two occasions after date petitioner’s big_number shares of drexel stock split 2-for-1 giving petitioner a total of big_number shares petitioner’s original cost_basis in the shares was dollar_figure petitioner never physically possessed the shares which were held in street_name in petitioner’s security account with drexel petitioner’s shares were not registered pursuant to the securities act of and there was no market on which they could be traded in accordance with the buy-back provision contained in drexel’s restated certificate of incorporation certificate the shares were nontransferable and generally could only be sold to drexel upon an employee’s termination from drexel pursuant to the certificate the price drexel would pay for the shares was set at their aggregate net_book_value pursuant to the recommendation of a consultant that its retail securities operation be sold drexel announced on or about date that it was disposing of the operation of which petitioner was an employee to smith barney harris upham inc and the sale occurred on date as a consequence of the sale petitioner’s employment with drexel was terminated which precipitated the mandatory redemption of the shares pursuant to the terms of the certificate drexel notified petitioner by letter dated date that pursuant to the buy-back we accordingly do not accept the suggestion in the parties' stipulation that petitioner owned only big_number shares of drexel stock throughout the period that he held the shares 93_tc_181 provision in the certificate it intended to purchase the shares because of the cessation of his employment with drexel the per- share purchase_price was set at the adjusted book_value on date which was dollar_figure pursuant to the terms of the certificate petitioner was entitled to contest drexel’s determination of the book_value of the shares in date effective date drexel redeemed the shares in exchange for a cash payment of dollar_figure and a subordinated note note dated date in the principal_amount of dollar_figure the note was nonnegotiable and could not be encumbered or disposed of without the consent of drexel the note provided for two principal payments the first in the amount of dollar_figure was payable on date and the second in the amount of dollar_figure was payable on date interest accrued on the unpaid principal balance and was payable semiannually on june and december on august and date drexel paid petitioner interest on the principal_amount of the note pursuant to its terms events preceding the bankruptcy of drexel in date the securities exchange commission sec and the u s department of justice justice_department commenced investigations investigations of alleged violations of the securities exchange act by ivan boesky and drexel insiders and or employees as a result of the investigations in date the sec commenced a civil_action against drexel members of its high yield bond department and other related_persons alleging that those persons engaged in fraudulent conduct with respect to various securities transactions subsequently the justice_department informed drexel that it intended to seek an indictment against drexel unless drexel agreed to settle the proposed charges during that time drexel made frequent disclosures to its employees regarding the potential criminal charges denying that it was guilty of any wrongdoing in date as a result of the investigations and potential indictment drexel agreed to pay dollar_figure million in fines and restitution dollar_figure million of which was to provide a civil disgorgement fund to be distributed in accordance with a court- approved plan in date drexel entered into a formal plea agreement with the justice_department agreeing to plead guilty to six criminal charges thereafter during date michael milken head of drexel’s high yield bond department was indicted on counts of securities fraud and related charges mr milken resigned all positions that he held with drexel on date in date drexel paid dollar_figure million of the fines and restitution the investigations and related negative publicity market developments and the cost associated with the sale of its retail securities operation had a negative effect on drexel’s financial position during drexel however continued to engage in business throughout and into drexel responded to the difficulties facing it by increasing efforts to reduce its securities positions especially in high-yield securities and bridge loans pursuing alternative sources of financing and developing and considering different strategic options for its lines of business drexel developed a business plan that projected significant cuts in operating costs which were in addition to a large reduction of expenses in from levels drexel also completed a series of management changes that were designed to provide new leadership in key business areas despite the adverse developments affecting drexel it projected a profit for during date drexel’s cash_flow from operations was depressed and drexel experienced continuing difficulties in financing its operations relying upon the assets of subsidiaries to fund shortfalls drexel also sought new sources of financing to replace its commercial paper which was unattractive to buyers because of a lowered rating although drexel believed that it could utilize the excess net regulatory capital of its subsidiaries to finance its operations it was informed by the sec on date that it could not borrow any of the subsidiaries' funds without prior sec approval although the sec agreed to permit drexel to borrow funds from a subsidiary to pay off commercial paper maturing on date word of drexel’s liquidity problem spread through the market and some entities refused to trade with drexel drexel’s bankruptcy proceedings on date drexel was advised by the sec and the federal reserve bank of new york to file a petition pursuant to chapter ll of the bankruptcy code chapter drexel’s board_of directors agreed to commence a chapter case and on that date drexel filed a voluntary petition for relief pursuant to chapter in the u s bankruptcy court for the southern district of new york bankruptcy court beginning on the date of the bankruptcy filing drexel began to wind down certain of its affairs and operations and significantly reduced its operating_expenses after the petition was filed drexel began to consider alternatives for the ultimate resolution of its chapter case financial projections for drexel and its subsidiaries were prepared including sales values for assets and an analysis of liabilities the problems presented by growing litigation against drexel including many suits pursuant to the securities laws the need to resolve that litigation potential claims against drexel by the internal_revenue_service irs and the difficulty of quickly disposing of many of drexel’s assets at amounts near their book_value weighed against liquidation of drexel and indicated the need for a reorganization of drexel and an entity to manage drexel’s assets during date a committee of drexel’s creditors began an examination of drexel with a view to establishing bases for possible asset and claim recoveries the bankruptcy court set a deadline of date for filing proofs of claim against drexel but allowed the irs until date to file its proof_of_claim on account of all federal income and other taxes allegedly owed by drexel and its subsidiaries during a settlement agreement was reached between drexel its subsidiaries and the irs with respect to the irs' federal tax claims also during drexel reached a settlement with respect to the securities litigation claims made against it petitioner filed a timely proof_of_claim against drexel’s bankruptcy_estate petitioner’s claim was based on and was equal to the full face_amount of the note petitioner and other former drexel employees who had received notes in redemption of drexel shares were represented in the bankruptcy proceeding by a committee known as the equity committee during petitioner was informed by the equity committee that drexel might have committed technical violations of the employee retirement income security act erisa with respect to the shares and the note a claim pursuant to erisa was made against drexel’s bankruptcy_estate in connection with the subordinated notes held by petitioner and approximately big_number others and after negotiations the claims filed by petitioner and other former drexel employees similarly situated were treated as erisa claims as a result the priority of the claims of petitioner and other former drexel employees against drexel’s bankruptcy_estate was elevated drexel’s plan_of_reorganization plan assigned petitioner and other former drexel employees to dbl group class 6b pursuant to the plan members of that class were to receive marketable_securities known as certificates of beneficial_interest cbi’s in the dbl liquidating_trust trust and limited_partnership interests known as dpi-a’s the distributions to be made to members of group class 6b were based on the face_amount of each noteholder’s note in exchange for the distributions members of the class were to release their erisa claims petitioner voted to approve the plan on date the plan was confirmed by the bankruptcy court pursuant to the plan on that date petitioner received certain cbi’s and dpi-a’s all of which were valued at dollar_figure on date petitioner received certain additional cbi’s and a dpi-a all of which were valued at dollar_figure pursuant to a closing_agreement between drexel and the irs the distributions were treated as wage income for withholding and information reporting purposes a letter dated date sent to petitioner by the trust stated pursuant to the order of the bankruptcy court confirming the plan holders of securities issued under the plan are required to take positions on their tax returns consistent with the tax information provided by the trust and the other plan entities in accordance with the closing_agreement between drexel and the internal_revenue_service petitioner was issued forms w-2 reporting the and distributions as wages petitioners reported the distributions as ordinary_income on respectively their and federal_income_tax returns petitioners’ and federal_income_tax returns petitioners’ and federal_income_tax returns were prepared by a return preparer on their return petitioners reported a long-term_capital_gain with respect to the sale of the shares in the amount of dollar_figure claiming an amount_realized on the sale of dollar_figure and a basis of dollar_figure petitioners did not mention the note on the return because petitioner did not have adequate_records with respect to the shares he incorrectly estimated the basis claimed on the return petitioners did not elect to report the sale of the shares on the installment_method on their return on their federal_income_tax return petitioners reported a long-term_capital_loss with respect to the note in the amount of dollar_figure claiming an amount_realized of dollar_figure and a basis of dollar_figure on date petitioners mailed to the irs an amended federal_income_tax return reporting a capital_loss with respect to the sale of the shares by increasing the basis claimed for the shares from dollar_figure to dollar_figure petitioners subsequently filed an amendment to the amended_return claiming a basis of dollar_figure for the shares opinion the first issue we must decide is whether petitioners for taxable_year must recognize a capital gain2 pursuant to the installment_sale provisions of sec_453 on the disposition of the shares as a general matter an installment_sale is a disposition of property where one payment is to be received after the close of the year in which the disposition occurs sec_453 income from an installment_sale is to be taken into account using the installment_method unless a taxpayer elects not to have the method apply sec_453 d the installment_method requires gain from the disposition to be recognized for payments received in a taxable_year in the same proportion that the gross_profit realized or to be realized when payment is completed bears to the total_contract_price sec_453 respondent does not contest petitioners' characterization of their gain as capital_gain sec_453 provides in general --the term installment_sale means a disposition of property where at least payment is to be received after the close of the taxable_year in which the disposition occurs generally the election not to report a disposition of property on the installment_method is made by the due_date of the taxpayer’s return for the year in which the disposition occurs and in the manner prescribed by the appropriate tax forms for that return sec_15a_453-1 temporary income_tax regs fed reg date see also 92_tc_303 respondent contends that petitioner’s disposition of the shares falls squarely within the definition of an installment_sale and therefore petitioners must report gain pursuant to the installment_method on the disposition of the shares for the year of the sale to wit petitioners contend that the sale was not an installment_sale because no payment was to be received after the close of the year in which the disposition of the shares occurred as required by sec_453 petitioners contend that the note was not a payment as that term is used in sec_453 because sec_453 excludes from the definition of payment the receipt of an evidence_of_indebtedness of the person acquiring the property unless the purchaser’s evidence_of_indebtedness is payable on sec_453 states payment --except as provided in paragraph the term payment does not include the receipt of evidences of indebtedness of the person acquiring the property whether or not payment of such indebtedness is guaranteed by another person demand or is issued by inter alia a corporation and is readily_tradable sec_453 and the note was neither payable on demand nor readily_tradable petitioners argue that the only payment received with respect to the shares was the cash that they received from drexel during accordingly petitioners argue that they were not required to elect out6 of the installment_method in order to preclude its application to petitioner’s disposition of the shares although petitioners are correct in their contention that the note was not a payment within the meaning of the relevant sections because it was neither payable on demand nor readily_tradable petitioners simply misinterpret the code when they conclude that the transaction was not an installment_sale because the note was not a payment by excluding the receipt of a nondemand nonreadily tradable evidence_of_indebtedness from the definition of payment the installment_sale provisions treat sec_453 states purchaser evidences of indebtedness payable on demand or readily_tradable --receipt of a bond or other evidence_of_indebtedness which-- a is payable on demand or b is issued by a corporation or a government or political_subdivision thereof and is readily_tradable shall be treated as receipt of payment petitioners do not argue that they elected out of the installment_method as provided by sec_453 the actual payments made in satisfaction of such an obligation as payments when made consequently because the note provided for payments to be made after the close of the taxable_year during which the disposition of the shares occurred the transaction is an installment_sale within the meaning of sec_453 petitioners argue that the note became worthless during and for that reason the installment_sale provisions of sec_453 do not apply petitioners however have not shown that the note became worthless during the worthlessness of a debt is a question of fact 77_tc_582 a debt is considered worthless when there are reasonable grounds for abandoning any hope that the debt will be paid in the future estate of mann v united_states 731_f2d_267 5th cir although a taxpayer is not required to be an incorrigible optimist with respect to the collection of debts owed to him 274_us_398 neither must a taxpayer be a stygian pessimist riss v we also are not persuaded by petitioners' contention that requiring them to report the sale of the shares on the installment_method causes them to recognize income for taxable_year when the sale actually produced a loss as we discuss below to the extent they suffer an allowable loss petitioners may avail themselves of the provisions of sec_166 in the year that the note becomes worthless 97_tc_579 commissioner 478_f2d_1160 8th cir affg on this issue and remanding on another issue 56_tc_388 the decision must be made in the exercise of sound business judgment based upon as complete information as is reasonably obtainable 54_tc_239 citing 91_f2d_992 2d cir generally the taxpayer must show one or more identifiable events that demonstrate the worthlessness of the debt 97_tc_579 if the debtor is solvent in the sense that its assets exceed its liabilities ordinarily no bad_debt deduction is allowable to the creditor 22_tc_968 20_bta_171 although evidence demonstrating that the debtor is insolvent points to the conclusion that the debt is worthless see 12_tc_1184 insolvency is not conclusive evidence that a debt is worthless 59_tc_195 the fact that the credit of a debtor is not good and that it does not have sufficient cash or other quick_assets to pay its debts immediately does not necessarily make a debt worthless bennett v commissioner supra pincite 18_bta_928 even if a debtor is shown to be insolvent if it is still actively_engaged_in_business its insolvency does not necessarily establish the worthlessness of the debt 22_tc_959 consideration must be given to the debtor’s potential for improving its financial position 53_tc_491 affd 467_f2d_47 9th cir the mere belief of the creditor that the debtor is in bad financial condition is not adequate evidence that the debt is worthless 32_tc_104 affd in part and remanded on another issue 281_f2d_238 4th cir moreover the subjective good_faith opinion of the taxpayer that the debt is uncollectible standing alone is not sufficient evidence that the debt is worthless 50_tc_813 affd per curiam by an unreported order 9th cir date applying the foregoing cases we hold that the record in the instant case fails to establish that the note was worthless during several considerations support our conclusion we begin with the fact that drexel continued to engage in business throughout and into petitioner admitted at trial that based on its continued operations drexel seemed viable as a going concern drexel’s continued business operations through and beyond even though it may have been faltering indicate that the note did not become worthless during riss v commissioner t c pincite where a financially troubled company remains actively_engaged_in_business the potential ability to pay some of its debts may exist 27_tc_330 affd 253_f2d_928 3d cir we also consider the fact that drexel was current on its interest obligations throughout on august and date drexel made interest payments on the note a factor that weighs against worthlessness 871_f2d_64 7th cir affg tcmemo_1987_228 additionally we consider the fact that the record is devoid of any direct evidence of the worthlessness of the note although petitioner testified at trial that he observed certain events which he believed could have impaired drexel’s capital or its ability to do business such as the resignation of michael milken during date drexel’s payment of dollar_figure million in fines and restitution during date and a 216-point drop in the dow jones industrial average on date petitioner’s negative perceptions of drexel’s condition without more are inadequate to support a finding of worthlessness fox v commissioner supra pincite moreover general unfavorable circumstances have less to do with establishing worthlessness than specific facts regarding the debtor’s assets and the amount and validity of claims against it 14_tc_1282 petitioners argue that drexel itself viewed the note as worthless petitioners rely on the fact that the notation n a appears beneath the words market_value in monthly statements dated september and date as evidence of drexel’s affirmation that the note was worthless respondent contends that the notation does not establish worthlessness because there is no conclusive evidence of its meaning respondent posits that the notation might simply have meant that the market_value was not available because the note was not marketable we agree petitioners did not offer the testimony of a drexel employee or other credible_evidence as to the meaning of the notation consequently we do not find the notation to be persuasive evidence that the note was worthless petitioners also contend that drexel's insolvency during is shown by the allegations of drexel’s insolvency made in a complaint filed in a defendant class action by drexel against its employees for recovery_of alleged preferential and or fraudulent transfers however that complaint was admitted into evidence subject_to respondent’s objection to its relevance solely for the purpose of showing that the complaint was filed not for the purpose of allowing the hearsay statements made in the complaint to be admitted for the truth of the matters asserted in the complaint consequently we do not find that it has any bearing on the question of the worthlessness of the note we accordingly sustain respondent’s relevance objection petitioners’ brief makes the following statement about drexel’s financial condition on date drexel’s true financial condition as of december was -- and still is -- anyone’s guess however worthlessness is determined on the basis of objective standards dustin v commissioner t c pincite and a guess as to the debtor’s financial condition does not establish reasonable grounds for abandoning any hope that the debt will be paid in the future see estate of mann v united_states f 2d pincite petitioners cannot satisfy their burden_of_proof by simply showing that petitioner had a good_faith subjective belief that the note was worthless fox v commissioner supra pincite we accordingly sustain respondent’s determination for petitioners’ taxable_year petitioners alternatively argue that the note became worthless during and that they are therefore entitled to a bad_debt deduction pursuant to sec_166 for that year petitioners argue that drexel’s filing for protection pursuant to chapter on date was the single identifiable_event upon which the determination of the worthlessness of the note should be made petitioners argue that the size of the respondent determined the deficiency in petitioners’ federal_income_tax using a basis for the shares of dollar_figure which was also the amount claimed in petitioners’ initial amended_return for respondent however does not seek to modify that determination to take account of the basis of dollar_figure for the shares as reflected in a later amendment to the return claims made against drexel in relation to its assets shows that there was no hope that the note would be paid as respondent points out however a debtor’s petition in bankruptcy is not conclusive of a debt’s total worthlessness estate of mann v united_states supra pincite dallmeyer v commissioner supra pincite3 sec_1_166-2 income_tax regs the debtor may have assets remaining that will permit some amount to be paid to creditors 45_f2d_556 9th cir revg a memorandum opinion of this court dated date the question whether any of drexel’s assets would be available to pay the note depends upon the value of drexel’s assets the amount and validity of secured and priority claims filed and the cost of the bankruptcy administration and not solely on drexel’s financial history which ultimately led to its bankruptcy petition dallmeyer v commissioner supra pincite3 see also patten davies lumber co v commissioner supra pincite petitioners have failed to show the value of drexel’s assets the amount and validity of secured and priority claims filed and the cost of the bankruptcy administration indeed the record indicates to us that those factors could not be determined with any degree of certainty during such uncertainty precludes a conclusion that the note became worthless in that year dallmeyer v commissioner supra pincite during the process of making and evaluating claims against drexel was ongoing and the final deadline for claims was extended until the following year so that the irs could file its proof_of_claim many of the claims against drexel arose from securities litigation and the amount of drexel’s liability in connection with those claims could not be known until the litigation was settled or proceeded to judgment contrary to petitioners’ contention the size of the claims made against drexel are not necessarily probative of the state of its financial condition in for instance we note that the irs filed a federal tax claim against drexel in the amount of dollar_figure billion which apparently was settled for inter alia a payment of dollar_figure million in and a payment of dollar_figure million in interest over the next years finally drexel filed a petition for reorganization pursuant to chapter which absent evidence that the creditors have suggested dismissal often carries a strong presumption that the reorganization was not hopeless 126_f2d_588 2d cir see simon v commissioner tcmemo_1978_485 the record in the instant case indicates to us that the events that occurred in do not require a conclusion that all reasonable hope that the note would be paid at least in part could be abandoned in that year estate of mann v united_states supra pincite petitioner’s subjective perceptions of drexel’s financial condition on date are insufficient to support petitioners’ claim that the note became worthless during fox v commissioner t c pincite we have considered petitioners' remaining arguments and find them to be without merit accordingly we hold that petitioners have failed to prove that the note became worthless during the final issue we consider is whether petitioners are liable for the accuracy-related_penalty provided by sec_6662 sec_6662 imposes a 20-percent penalty on the portion of an underpayment_of_tax that is attributable to inter alia negligence or disregard of rules or regulations the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the code including failure to exercise due care failure to do what a reasonable person would do under the circumstances or failure to keep adequate books_and_records sec_6662 sec_1_6662-3 income_tax regs the term disregard includes any careless reckless or intentional disregard of the code or the temporary and final regulations issued pursuant to the code sec_6662 sec_1_6662-3 income_tax regs the accuracy-related_penalty does not apply to any portion of an underpayment with respect to which it is shown that there was a reasonable_cause and that the taxpayer acted in good_faith sec_6664 the decision as to whether the taxpayer acted with reasonable_cause and in good_faith depends upon all pertinent facts and circumstances sec_1_6664-4 income_tax regs generally the most important factor is the extent of the taxpayer’s efforts to assess the proper tax_liability id an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances including the knowledge and experience of the taxpayer may also indicate reasonable_cause and good_faith id petitioners must establish error in respondent’s determination that they are liable for the penalty provided by sec_6662 rule a 104_tc_352 we conclude however that petitioners are liable for the penalty although petitioners employed a tax_return_preparer to complete the return they admit that they did not give complete information to the preparer concerning the sale of the shares and acknowledge their responsibility for the errors in the return in reporting the sale on their return petitioners included only the cash received dollar_figure and claimed a basis of dollar_figure which petitioner admitted at trial was incorrect petitioners also admit that they did not correctly report the basis of the shares because petitioner did not have adequate_records petitioner testified that he considered the basis claimed on the return to be the basis in the first group of shares that he had purchased in petitioner thus apparently reported the sale of the shares as involving only a portion of the shares even though all big_number of the shares were redeemed by drexel in petitioners contend that they eventually were able to correct the erroneous basis claim in their return by filing an amended_return in but petitioners concede that the amended_return was not filed until after respondent issued the statutory notice determining the deficiencies in the instant case furthermore petitioners did not properly elect out of the installment_method for purposes of reporting the sale of the shares nor did they properly report the sale on that method petitioners claim that petitioner made a good_faith effort to ascertain the worthlessness of the note and that his effort should be sufficient to show that he was not negligent however petitioner’s conclusion as to the worthlessness of the note was based on little other than his subjective opinion which is insufficient to sustain a deduction fox v commissioner t c pincite on schedule d of their return petitioners reported a long-term_capital_loss with respect to the note in the amount of dollar_figure calculated by subtracting the face_amount of the note dollar_figure from a basis of dollar_figure petitioners’ basis in the shares was only dollar_figure petitioners have not attempted to explain how they established the claimed basis in the note or to otherwise justify the amount and nature10 of the loss claimed petitioners argue that the note became worthless during however the code provides for the treatment of a worthless_debt as a deduction sec_166 or in the case of a nonbusiness_bad_debt as a short-term_capital_loss sec_166 petitioners have not attempted to reconcile their argument with the position taken on their return based on the foregoing we sustain respondent’s determination that petitioners are liable for the penalty provided by sec_6662 to reflect the foregoing decision will be entered for respondent


certified department of the treasury internal_revenue_service appeals_office n los angeles street los angeies ca release number release date date date employer_identification_number person to contact kekk employee id number tel fax kkkk uil index a b dear we considered your appeal of the adverse action proposed by the director exempt_organizations rulings and agreements this is our final_determination that you do not qualify for exemption from federal_income_tax under internal_revenue_code the code sec_501 as an organization described in sec_501 of the code your principal activity consists of operating a farmers market you are not a business league described in sec_501 of the code because you have not demonstrated that you are an association of persons having a common business_interest whose purpose is to promote such common interest you operate a market where sellers of goods for a fee payable to you are provided an opportunity to sell goods to the general_public your market operation is the performance of particular services for the vendors of the market thereby precluding recognition of you as an organization described in sec_501 organizations that are not exempt under sec_501 generally are required to file federal income for further instructions forms and information please visit we will make this letter and the proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information we have provided to you in a separate mailing notice notice of intention to disclose please review the notice and the documents attached that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice if you decide to contest this determination you may file an action for declaratory_judgment under the provisions of sec_7428 of the code in one of the following three venues united_states tax_court the united_states court of federal claims or the united_states district_court for the district of columbia a petition or complaint in one of these three courts must be filed within days from the date this determination_letter was mailed to you please contact the clerk of the appropriate court for tax returns and pay tax where applicable www irs gov rules and the appropriate forms for filing petitions for declaratory_judgment by referring to the enclosed publication you may write to the courts at the following addresses united_states tax_court second street n w washington d c u s court of federal claims madison place n w washington d c u s district_court for the district of columbia constitution ave n w washington d c processing of income_tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory_judgment under sec_7428 of the internal_revenue_code you may also be eligible for help from the taxpayer_advocate_service tas tas is an independent organization within the irs that can help protect your taxpayer rights tas can offer you help if your tax problem is causing a hardship or you've tried but haven't been able to resolve your problem with the irs if you qualify for tas assistance which is always free tas will do everything possible to help you visit www taxpayeradvocate irs gov or call if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter appeals team manager sincerely yours kk cc department of the treasury internal_revenue_service p o box rs cincinnati oh legend b geographic area x date y state dear _ date date employer id number contact person id number contact telephone number contact fax number uil we considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code the code based on the information provided we determined that you don’t qualify for exemption under sec_501 of the code this letter explains the basis for our conclusion please keep it for your records issues do you qualify for exemption under sec_501 of the code no for the reasons stated below facts you were incorporated in the state of y on x your articles of incorporation state you were formed to make improvements to and promote the b area to attract visitors and residents increasing the vitality of area businesses and the community and to make improvements to and promote the b improvements and promotion of the b includes the operation of a local farmers market and or other community related market or service organizing and supporting volunteers and or sponsor efforts to make improvements or hold events making physical improvements or providing services for purposes such as accessibility pedestrian friendly access attractions aesthetics and convenience to benefit the community visitors and local businesses providing a venue for local musicians and other performers to perform for and interact with the community and promoting good will and business_enterprise you state you have no membership aspects your bylaws confirm you have no members all of your activities are associated with the ongoing operation of a farmers market at the b the farmers market benefits the area by attracting visitors to support local businesses improving the image of the area supporting a venue for local musicians increasing the desirability of the area by providing access to artisan products and fresh produce from local farmers supporting educational opportunities for local schools and day care centers to make field trips to a farmers market supporting local food banks with donations of excess food and generation of revenue from vendor fees to support funding area improvements such as artwork donated to the city you have a marketing manager who coordinates vendors and farmers market operations otherwise your market relies heavily on volunteers volunteers set up cones and signs direct traffic count visitors and manage set up and take down of the market you state there are no other currently planned activities however you clarified that you are working to improve access to the b with respect to safety walkability and biking you are currently seeking grant funding for these efforts revenues earned from the market have also allowed you to pay for physical improvements to the b like a decorative fence to improve safety you are supported by vendor fees and will apply for music grants to reimburse some of the costs associated with supporting musical entertainment at the market you get no revenue from membership dues your expenses include salaries and expenses related to your activities law sec_501 of the code exempts from federal_income_tax business_leagues chambers_of_commerce real_estate boards boards_of_trade and professional_football_leagues whether or not administering a pension fund for football players which are not organized for profit and no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_6_-1 states in part a business league is an association of persons having some common business_interest the purpose of which is to promote such common interest it is an organization of the same general class as a chamber of commerce or board_of trade thus its activities should be directed to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons revrul_58_224 1958_1_cb_242 held that an organization which operated a trade_show as its sole activity primarily for the purpose of rendering particular services to individual persons was not entitled to exemption as a business league under sec_501 of the code the organization’s sole activity consisted of staging an annual merchandise show primarily exhibits by manufacturers under the sponsorship of the chamber of commerce the ruling concluded that the activities of the organization substantially served the exhibitors and retailers as a convenience and economy in the conduct of their businesses by providing selling opportunities for the distributors which was found to be considered rendering particular services for individuals as distinguished from the improvement of business conditions generally revrul_58_294 1958_1_cb_244 provides that an association of licensed dealers in a certain type of patented product did not qualify as a business league where the association owned the controlling_interest in a corporation holding the basic patent was engaged mainly in furthering the business interests of its member- dealers and did not benefit people who manufacture competing products of the same type covered by the patent revrul_59_391 1959_2_cb_151 describes an organization of individuals firms associations and corporations each representing a different trade business occupation or profession it was created for the purpose of exchanging information on business prospects and has no common business_interest other than a desire to increase sales of members held such an organization is not entitled to exemption from federal_income_tax as a business league under sec_501 of the internal_revenue_code of catalog number 47628k letter rev revrul_68_264 1968_1_cb_264 defined a particular service for the purpose of sec_501 of the code as including an activity that serves as a convenience or economy to members of the organization in the operation of their own businesses in revrul_73_411 1973_2_cb_180 the history of sec_501 of the code was described while discussing the exempt status of a shopping center in the case of a chamber of commerce or similar organization the common business_interest is usually the general economic welfare of a community an organization seeking exemption as a chamber of commerce must be one whose efforts are directed at promoting the common economic interests of all commercial enterprises in a given trade community the ruling also stresses that membership in a sec_501 organization is voluntary and open generally to all businesses and professional persons in the community the american automobile association v commissioner of internal revenue 19_tc_1146 held that an organization whose principal activities consist of performing particular services and securing benefits for its members does not qualify for exemption under sec_501 of the code application of law you do not qualify for exemption under sec_501 of the code because you are not operating as a business league your activities are not aimed at the improvement of business conditions of one or more lines of business as required by sec_1_501_c_6_-1 operating a market for vendors does not improve business conditions of any industry or line_of_business but rather serves only as a convenience to those vendors selling at that market as defined in revrul_73_411 a chamber of commerce’s common business_interest is the economic welfare of the community while you have described goals that may provide some benefit to the local economy around the b such as improving access and pedestrian safety you otherwise do not bear resemblance to a chamber of commerce or a business league you have no membership you are primarily funded by vendor fees your primary purpose is the operation of a farmers market not the promotion of the economic interests of the entire community based on the information submitted your primary purpose is to provide a sales facility for your members similar to the organization in revrul_58_224 an activity such as this is providing a particular service to individuals the facility serves as a convenience and economy to anyone who uses the marketplace to sell their products serving your members in this manner provides a convenience and economy in the conduct of their businesses by providing selling opportunities they otherwise would not have revrul_68_264 defines this as providing a particular service performing services for individuals constitutes a prohibited activity under sec_501 of the code thereby precluding you from exemption you are like the organization in revrul_58_294 in that you were formed to coordinate and operate a farmers market where the sale of products occurs the sales activities at the market are carried on for profit for the vendors like the organization in revrul_58_294 you are engaged in furthering the business interests of the vendors instead of focusing on the improvement of one or more lines of business catalog number 47628k letter rev like the organization in revrul_59_391 your vendors have no common business_interest other than a mutual desire to have a location to increase their individual sales your marketplace activities are not directed at the improvement of business conditions of one or more lines of business but rather to the promotion of the private interests of the vendors at your market you are operating for the benefit of individual vendors rather than the common economic interests of all of the commercial enterprises in a given line_of_business you are simply providing a convenient place for individuals to market their products for their benefit as noted in revrul_73_411 by providing such service you are not exempt under sec_501 of the code you are like the organization in american automobile association v commissioner of internal revenue you provide paid management services and volunteers to facilitate the operation of the market these services aid vendors operations therefore rendering them particular services your position you generate revenue to improve and promote the b area and to increase the vitality of area business and community you are working towards improving access to the b area with respect to safety walkability and biking your farmers market relies heavily on volunteers and you provide free space in the market to nonprofit_organizations our response to your position the fact that you provide market space to other nonprofit_organizations or that your farmers market is staffed in part by volunteers does not change that your operations are not primarily directed at the improvement of business conditions of one or more lines of business while you do have plans to improve the b area which may promote the economy of businesses near the b your primary purpose is the operation of a farmers market operating the market primarily promotes the private interests of those vendors who rent space at your market not the economic interests of the community therefore you do not qualify for exemption under sec_501 of the code conclusion based on the information provided we conclude that you are not operated as a business league described in sec_501 of the code you do not improve business conditions along one or more lines of business or of a certain community but instead you provide services for the convenience of vendors resulting in private economic benefit therefore you do not qualify for exemption under sec_501 if you don’t agree you have a right to file a protest if you don’t agree with our proposed adverse determination to do so you must send a statement to us within days of the date of this letter the statement must include e e e your name address employer_identification_number ein and a daytime phone number acopy of this letter highlighting the findings you disagree with anexplanation of why you disagree including any supporting documents the law or authority if any you are relying on letter rev catalog number 47628k e e e the signature of an officer director trustee or other official who is authorized to sign for the organization or your authorized representative one of the following declarations for an officer director trustee or other official who is authorized to sign for the organization under penalties of perjury i declare that i examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete for authorized representatives under penalties of perjury i declare that i prepared this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete your representative attorney certified_public_accountant or other individual enrolled to practice_before_the_irs must file a form_2848 power_of_attorney and declaration of representative with us if he or she hasn’t already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney we'll review your protest statement and decide if you provided a basis for us to reconsider our determination if so we’ll continue to process your case considering the information you provided if you haven’t provided a basis for reconsideration we’ll forward your case to the office of appeals and notify you you can find more information about the role of the appeals_office in publication how to appeal an irs decision on tax- exempt status if you don’t file a protest within days you can’t seek a declaratory_judgment in court at a later date because the law requires that you use the irs administrative process first sec_7428 of the code where to send your protest please send your protest statement form_2848 if needed and any supporting documents to the applicable address u s mail street address for delivery service internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you can also fax your statement and supporting documents to the fax number listed at the top of this letter if you fax your statement please contact the person listed at the top of this letter to confirm that he or she received it if you agree catalog number 47628k letter rev if you agree with our proposed adverse determination you don’t need to do anything if we don’t hear from you within days we’ll issue a final adverse determination_letter that letter will provide information on your income_tax filing_requirements you can find all forms and publications mentioned in this letter on our website at www irs gov formspubs if you have questions you can contact the person listed at the top of this letter sincerely stephen a martin director exempt_organizations rulings and agreements enclosure publication letter rev catalog number 47628k